INTRODUCTION/ CLASSIFICATIONS OF
That the dacion en pago is void because there was gross undervaluation
PRIVATE CORPORATIONS
UNION GLASS & CONTAINER CORPORATION and
CARLOS PALANCA, JR., in his capacity as President of Union
Glass & Container Corporation, petitioners,
vs.
THE SECURITIES AND EXCHANGE COMMISSION and
CAROLINA HOFILEÑA, respondents.
ESCOLIN, JThis petition for certiorari and prohibition seeks to
annul and set aside the Order of the Securities and Exchange
Commission, dated September 25, 1981, upholding its jurisdiction in
SEC Case No. 2035, entitled "Carolina Hofileña, Complainant,
versus Development Bank of the Philippines, et al., Respondents."
Private respondent Carolina Hofileña, complainant in SEC Case No.
2035, is a stockholder of Pioneer Glass Manufacturing Corporation,
Pioneer Glass for short, a domestic corporation engaged in the
operation of silica mines and the manufacture of glass and glassware.
Since 1967, Pioneer Glass had obtained various loan
accommodations from the Development Bank of the Philippines
[DBP], and also from other local and foreign sources which DBP
guaranteed.
As security for said loan accommodations, Pioneer Glass mortgaged
and/or assigned its assets, real and personal, to the DBP, in addition
to the mortgages executed by some of its corporate officers over their
personal assets. The proceeds of said financial exposure of the DBP
were used in the construction of a glass plant in Rosario, Cavite, and
the operation of seven silica mining claims owned by the
corporation.
It appears that through the conversion into equity of the accumulated
unpaid interests on the various loans amounting to P5.4 million as of
January 1975, and subsequently increased by another P2.2 million in
1976, the DBP was able to gain control of the outstanding shares of
common stocks of Pioneer Glass, and to get two, later three, regular
seats in the corporation's board of directors.
Sometime in March, 1978, when Pioneer Glass suffered serious
liquidity problems such that it could no longer meet its financial
obligations with DBP, it entered into a dacion en pago agreement
with the latter, whereby all its assets mortgaged to DBP were ceded
to the latter in full satisfaction of the corporation's obligations in the
total amount of P59,000,000.00. Part of the assets transferred to the
DBP was the glass plant in Rosario, Cavite, which DBP leased and
subsequently sold to herein petitioner Union Glass and Container
Corporation, hereinafter referred to as Union Glass.
On April 1, 1981, Carolina Hofileña filed a complaint before the
respondent Securities and Exchange Commission against the DBP,
Union Glass and Pioneer Glass, docketed as SEC Case No. 2035. Of
the five causes of action pleaded therein, only the first cause of
action concerned petitioner Union Glass as transferee and possessor
of the glass plant. Said first cause of action was based on the alleged
illegality of the aforesaid dacion en pago resulting from: [1] the
supposed unilateral and unsupported undervaluation of the assets of
Pioneer Glass covered by the agreement; [2] the self-dealing
indulged in by DBP, having acted both as stockholder/director and
secured creditor of Pioneer Glass; and [3] the wrongful inclusion by
DBP in its statement of account of P26M as due from Pioneer Glass
when the same had already been converted into equity.
Thus, with respect to said first cause of action, respondent Hofileña
prayed that the SEC issue an order:têñ.£îhqwâ£
1. Holding that the so called dacion en pago conveying all the assets
of Pioneer Glass and the Hofileña personal properties to Union Glass
be declared null and void on the ground that the said conveyance was
tainted with.têñ.£îhqwâ£
A. Self-dealing on the part of DBP which was acting both as a
controlling stockholder/director and as secured creditor of the
Pioneer Glass, all to its advantage and to that of Union Glass, and to
the gross prejudice of the Pioneer Glass,
B.
of the assets included in the so-called dacion en pago by more than 100% to
the prejudice of Pioneer Glass and to the undue advantage of DBP and
Union Glass;
C. That the DBP unduly favored Union Glass over another buyer, San
Miguel Corporation, notwithstanding the clearly advantageous terms
offered by the latter to the prejudice of Pioneer Glass, its other creditors and
so-called 'Minority stockholders.'
2. Holding that the assets of the Pioneer Glass taken over by DBP and part
of which was delivered to Union Glass particularly the glass plant to be
returned accordingly.
3. That the DBP be ordered to accept and recognize the appraisal conducted
by the Asian Appraisal Inc. in 1975 and again in t978 of the asset of
Pioneer Glass. 1
In her common prayer, Hofileña asked that DBP be sentenced to pay
Pioneer Glass actual, consequential, moral and exemplary damages, for its
alleged illegal acts and gross bad faith; and for DBP and Union Glass to pay
her a reasonable amount as attorney's fees. 2
On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981,
petitioners moved for dismissal of the case on the ground that the SEC had
no jurisdiction over the subject matter or nature of the suit. Respondent
Hofileña filed her opposition to said motion, to which herein petitioners
filed a rejoinder.
On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom the
case was assigned, granted the motion to dismiss for lack of jurisdiction.
However, on September 25, 1981, upon motion for reconsideration filed by
respondent Hofileña, Hearing Officer Reyes reversed his original order by
upholding the SEC's jurisdiction over the subject matter and over the
persons of petitioners. Unable to secure a reconsideration of the Order as
well as to have the same reviewed by the Commission En Banc, petitioners
filed the instant petition for certiorari and prohibition to set aside the order
of September 25, 1981, and to prevent respondent SEC from taking
cognizance of SEC Case No. 2035.
The issue raised in the petition may be propounded thus: Is it the regular
court or the SEC that has jurisdiction over the case?
In upholding the SEC's jurisdiction over the case Hearing Officer Reyes
rationalized his conclusion thus:têñ.£îhqwâ£
As correctly pointed out by the complainant, the present action is in the
form of a derivative suit instituted by a stockholder for the benefit of the
corporation, respondent Pioneer Glass and Manufacturing Corporation,
principally against another stockholder, respondent Development Bank of
the Philippines, for alleged illegal acts and gross bad faith which resulted in
the dacion en pago arrangement now being questioned by complainant.
These alleged illegal acts and gross bad faith came about precisely by virtue
of respondent Development Bank of the Philippine's status as a stockholder
of co-respondent Pioneer Glass Manufacturing Corporation although its
status as such stockholder, was gained as a result of its being a creditor of
the latter. The derivative nature of this instant action can also be gleaned
from the common prayer of the complainant which seeks for an order
directing respondent Development Bank of the Philippines to pay
co-respondent Pioneer Glass Manufacturing Corporation damages for the
alleged illegal acts and gross bad faith as above-mentioned.
As far as respondent Union Glass and Container Corporation is concerned,
its inclusion as a party-respondent by virtue of its being an indispensable
party to the present action, it being in possession of the assets subject of the
dacion en pago and, therefore, situated in such a way that it will be affected
by any judgment thereon, 3
In the ordinary course of things, petitioner Union Glass, as transferee and
possessor of the glass plant covered by the dacion en pago agreement,
should be joined as party-defendant under the general rule which requires
the joinder of every party who has an interest in or lien on the property
subject matter of the dispute. 4 Such joinder of parties avoids multiplicity of
suits as well as ensures the convenient, speedy and orderly administration
of justice.
But since petitioner Union Glass has no intra-corporate relation with
either the complainant or the DBP, its joinder as party-defendant in
SEC Case No. 2035 brings the cause of action asserted against it
outside the jurisdiction of the respondent SEC.
The jurisdiction of the SEC is delineated by Section 5 of PD No.
902-A as follows:têñ.£îhqwâ£
Sec. 5. In addition to the regulatory and adjudicative function of the
Securities and Exchange Commission over corporations, partnerships
and other forms of associations registered with it as expressly granted
under existing laws and devices, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
a] Devices and schemes employed by or any acts, of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest
of the public and/or the stockholders, partners, members of
associations or organizations registered with the Commission
b] Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members or associates;
between any or all of them and the corporation, partnership, or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual
franchise or right to exist as such entity;
c] Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or
associations.
This grant of jurisdiction must be viewed in the light of the nature
and function of the SEC under the law. Section 3 of PD No. 902-A
confers upon the latter "absolute jurisdiction, supervision, and
control over all corporations, partnerships or associations, who are
grantees of primary franchise and/or license or permit issued by the
government to operate in the Philippines ... " The principal function
of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in
these entities may be encouraged and protected, and their activities
pursued for the promotion of economic development. 5
It is in aid of this office that the adjudicative power of the SEC must
be exercised. Thus the law explicitly specified and delimited its
jurisdiction to matters intrinsically connected with the regulation of
corporations, partnerships and associations and those dealing with
the internal affairs of such corporations, partnerships or associations.
Otherwise stated, in order that the SEC can take cognizance of a case,
the controversy must pertain to any of the following relationships: [a]
between the corporation, partnership or association and the public; [b]
between the corporation, partnership or association and its
stockholders, partners, members, or officers; [c] between the
corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned; and [d] among
the stockholders, partners or associates themselves.
The fact that the controversy at bar involves the rights of petitioner
Union Glass who has no intra-corporate relation either with
complainant or the DBP, places the suit beyond the jurisdiction of the
respondent SEC. The case should be tried and decided by the court of
general jurisdiction, the Regional Trial Court. This view is in accord
with the rudimentary principle that administrative agencies, like the
SEC, are tribunals of limited jurisdiction 6 and, as such, could wield
only such powers as are specifically granted to them by their
enabling statutes. 7 As We held in Sunset View Condominium Corp.
vs. Campos, Jr.: 8têñ.£îhqwâ£
Inasmuch as the private respondents are not shareholders of the
petitioner condominium corporation, the instant cases for collection
cannot be a 'controversy arising out of intra-corporate or partnership
relations between and among stockholders, members or associates;
between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively,' which controversies are under the original and
exclusive jurisdiction of the Securities & Exchange Commission, pursuant
to Section 5 [b] of P.D. No. 902-A. ...
As heretofore pointed out, petitioner Union Glass is involved only in the
first cause of action of Hofileñas complaint in SEC Case No, 2035. While
the Rules of Court, which applies suppletorily to proceedings before the
SEC, allows the joinder of causes of action in one complaint, such
procedure however is subject to the rules regarding jurisdiction, venue and
joinder of parties. 9 Since petitioner has no intra-corporate relationship with
the complainant, it cannot be joined as party-defendant in said case as to do
so would violate the rule or jurisdiction. Hofileñas complaint against
petitioner for cancellation of the sale of the glass plant should therefore be
brought separately before the regular court But such action, if instituted,
shall be suspended to await the final outcome of SEC Case No. 2035, for
the issue of the validity of the dacion en pago posed in the last mentioned
case is a prejudicial question, the resolution of which is a logical antecedent
of the issue involved in the action against petitioner Union Glass. Thus,
Hofileñas complaint against the latter can only prosper if final judgment is
rendered in SEC Case No. 2035, annulling the dacion en pago executed in
favor of the DBP.
WHEREFORE, the instant petition is hereby granted, and the questioned
Orders of respondent SEC, dated September 25, 1981, March 25, 1982 and
May 28, 1982, are hereby set aside. Respondent Commission is ordered to
drop petitioner Union Glass from SEC Case No. 2035, without prejudice to
the filing of a separate suit before the regular court of justice. No
pronouncement as to costs.
SO ORDERED.1äwphï1.ñët
Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-Herrera,
Plana, Relova and Gutierrez, Jr., JJ., concur.
Separate Opinions
TEEHANKEE, J., concurring:
I concur in the Court's judgment penned by Mr. Justice Escolin setting aside
the questioned orders of respondent SEC and ordering that petitioner Union
Glass be dropped from SEC Case No. 2035 for lack of SEC jurisdiction
over it as a third party purchaser of the glass plant acquired by the DBP
by dacion en pago from Pioneer Glass, without prejudice to Hofileña filing
a separate suit in the regular courts of justice against Union Glass for
recovery and cancellation of the said sale of the glass plant in favor of
Union Glass.
I concur also with the statement in the Court's opinion that the final
outcome of SEC Case No. 2035 with regard to the validity of the dacion en
pago is a prejudicial case. If Hofileña's complaint against said dacion en
pago fails in the SEC, then it clearly has no cause of action against Union
Glass for cancellation of DBP's sale of the plant to Union Glass.
The purpose of this brief concurrence is with reference to the statement in
the Court's opinion that "Thus, Hofileñas complaint against the latter can
only prosper if final judgment is rendered in SEC Case No. 2035, annulling
the dacion en pago executed in favor of the DBP," to erase any impression
that a favorable judgment secured by Hofileña in SEC Case No. 2035
against the DBP and Pioneer Glass would necessarily mean that its action
against Union Glass in the regular courts of justice for recovery and
cancellation of the DBP sale of the glass plant to Union Glass would
necessarily prosper. It must be borne in mind that as already indicated, the
SEC has no jurisdiction over Union Glass as an outsider. The suit in the
regular courts of justice that Hofileña might bring against Union Glass is of
course subject to all defenses as to the validity of the sale of the glass plant
in its favor as a buyer in good faith and should it successfully substantiate
such defenses, then Hofileñas action against it for cancellation of the sale
might fail as a consequence.
AQUINO, J., dissenting:
I dissent with due deference to Justice Escolin's opinion. What
are belatedly assailed in this certiorari and prohibition case filed on May 17,
1983 are the order of September 25, 1981 of Eugenio E. Reyes, a SEC
hearing officer, and the orders of March 25 and May 28, 1982 of Antonio R.
Manabat, another SEC hearing officer.
Although a jurisdictional issue is raised and jurisdiction over the
subject matter may be raised at any stage of the case, nevertheless,
the petitioners are guilty of laches and nonexhaustion of the remedy
of appeal with the Securities and Exchange Commission en banc.
The petitioners resorted to the special civil actions of certiorari and
prohibition because they assail the orders of mere SEC hearing
officers. This is not a review of the order, decision or ruling of the
SEC sitting en banc which, according to section 6 of Presidential
Decree No. 902-A (1976), may be made by this Court "in accordance
with the pertinent provisions of the Rules of Court."
Rule 43 of the Rules of Court used to allow review by this Court of
the SEC order, ruling or decision. Republic Act 5434 (1968)
substituted the Court of Appeals for this Court in line with the policy
of lightening our heavy jurisdictional burden. But this Court seems to
have been restored as the reviewing authority by Presidential Decree
No. 902-A.
However, section 9 of the Judiciary Reorganization Law returned to
the Intermediate Appellate Court the exclusive jurisdiction to review
the ruling, order or decision of the SEC as a quasi-judicial agency.
The same section 9 granted to the Appellate Court jurisdiction in
certiorari and prohibition cases over the SEC although not
exclusive.têñ.£îhqwâ£
In this case, the SEC seems to have adopted the orders of the two
hearing officers as its own orders as shown by the stand taken by the
Solicitor General in defending the SEC. If that were so, that is, if the
orders of the hearing officers should be treated as the orders of the
SEC itself en banc, this Court would have no jurisdiction over this
case. It should be the Appellate Court that should exercise the power
of review.
Carolina Hofileña has been a stockholder since 1958 of the Pioneer
Glass Manufacturing Corporation. Her personal assets valued at
P6,804,810 were apparently or supposedly mortgaged to the DBP to
secure the obligations of Pioneer Glass (p. 32, Rollo).
Pioneer Glass became indebted to the Development Bank of the
Philippines in the total sum of P59,000,000. Part of the loan was used
by Pioneer Glass to establish its glass plant in Rosario, Cavite. The
unpaid interest on the loan amounting to around seven million pesos
became the DBP's equity in Pioneer Glass. The DBP became a
substantial stockholder of Pioneer Glass. Three members of the
Pioneer Glass' board of directors were from the DBP.
The glass plant commenced operations in 1977. At that time, Pioneer
Glass was heavily indebted to the DBP. Instead of foreclosing its
mortgage, DBP maneuvered to have the mortgaged assets of Pioneer
Glass, including the glass plant, transferred to the DBP by way
of dacion en pago. This transaction was alleged to be an "auto
contract" or a case of the DBP contracting with itself since the DBP
had a dominant position in Pioneer Glass.
Hofileña alleged that although the debt to the DBP of Pioneer Glass
amounted to P59,000,000, the glass plant in 1977 had a "sound
value" of P77,329,000 and a "reproduction cost" of P90,403,000. She
further alleged that San Miguel Corporation was willing to buy the
glass plant for P40,000,000 cash, whereas it was actually sold to
Union Glass & Container Corporation for the same amount under
a 25-year term of payment (pp. 32-34, Rollo).
On March 31, 1981; Carmen Hofileña filed with the SEC a
complaint against the DBP, Union Glass, Pioneer Glass and Rafael
Sison as chairman of the DBP and Pioneer Glass boards of directors.
Union Glass filed a motion to dismiss on the ground that jurisdiction
over the case is lodged in the Court of First Instance. Hofileña
opposed the motion. Hearing Officer Reyes in his order of July 23,
1981 dismissed the complaint on the ground that the case is beyond
the jurisdiction of the SEC.
Hofileña filed a motion for reconsideration which was opposed by
Union Glass. Hearing Officer Reyes in his order of September 25,
1981 reconsidered his dismissal order and ruled that Union Glass is
an indispensable party because it is the transferee of the controverted
assets given by way of dacion en pago to the DBP. He ruled that the SEC
has jurisdiction over the case.
Union Glass filed a motion for reconsideration. Hearing Officer Antonio R.
Manabat denied the motion on the ground "that the present action is
an intra-corporate dispute involving stockholders of the same corporation
(p. 26, Rollo).
Union Glass filed a second motion for reconsideration with the prayer that
the SEC should decide the motion en banc. The hearing officer ruled that
the remedy of Union Glass was to file a timely appeal. Hence, its second
motion for reconsideration was denied by the hearing officer. (This ruling is
a technicality which hinders substantial justice.)
It is clear that Union Glass has no cause of action for certiorari and
prohibition. Its recourse was to appeal to the SEC en banc the denial of its
first motion for reconsideration.
There is no question that the SEC has jurisdiction over the intra-corporate
dispute between Hofileña and the DBP, both stockholders of Pioneer Glass,
over the dacion en pago.
Now, does the SEC lose jurisdiction because of the joinder of Union Glass
which has privity with the DBP since it was the transferee of the assets
involved in the dacion en pago?
Certainly, the joinder of Union Glass does not divest the SEC of jurisdiction
over the case. The joinder of Union Glass is necessary because the DBP, its
transfer or, is being sued regarding the dacion en pago. The defenses of
Union Glass are tied up with the defenses of the DBP in the intra-corporate
dispute. Hofileñas cause of action should not be split.
It would not be judicious and expedient to require Hofileña to sue the DBP
and Union Glass in the Regional Trial Court. The SEC is more competent
than the said court to decide the intra-corporate dispute.
The SEC, as the agency enforcing Presidential Decree No. 902-A, is in the
best position to know the extent of its jurisdiction. Its determination that it
has jurisdiction in this case has persuasive weight.
SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC. TRONIC
SYSTEMS, INC., petitioners,
vs.
HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL
COURT (NATIONAL CAPITAL JUDICIAL REGION, BRANCH
CLX-PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA
BRAGA, VIRGILIO BRAGA AND NORBERTO
BRAGA, respondents.
No. L-68450-51 May 19, 1987
POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA,
VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA
BRAGA, petitioners,
vs.
THE HONORABLE SECURITIES AND EXCHANGE
COMMISSION, TELECTRONIC SYSTEMS, INC., JOSE ABEJO,
JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE, SR., ANDRES T.
VELARDE AND L. QUIDATO BANDOLINO, respondents.
TEEHANKEE, C.J.:
These two cases, jointly heard, are jointly herein decided. They involve the
question of who, between the Regional Trial Court and the Securities and
Exchange Commission (SEC), has original and exclusive jurisdiction over
the dispute between the principal stockholders of the corporation
Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice paging
corporation," namely, the spouses Jose Abejo and Aurora Abejo
(hereinafter referred to as the Abejos) and the purchaser, Telectronic
Systems, Inc. (hereinafter referred to as Telectronics) of their 133,000
minority shareholdings (for P5 million) and of 63,000 shares registered in
the name of Virginia Braga and covered by five stock certificates endorsed
in blank by her (for P1,674,450.00), and the spouses Agapito Braga and
Virginia Braga (hereinafter referred to as the Bragas), erstwhile majority
stockholders. With the said purchases, Telectronics would become the
majority stockholder, holding 56% of the outstanding stock and
voting power of the corporation Pocket Bell.
With the said purchases in 1982, Telectronics requested the corporate
secretary of the corporation, Norberto Braga, to register and transfer
to its name, and those of its nominees the total 196,000 Pocket Bell
shares in the corporation's transfer book, cancel the surrendered
certificates of stock and issue the corresponding new certificates of
stock in its name and those of its nominees.
Norberto Braga, the corporate secretary and son of the Bragas,
refused to register the aforesaid transfer of shares in t e corporate oo
s, asserting that the Bragas claim preemptive rights over the 133,000
Abejo shares and that Virginia Braga never transferred her 63,000
shares to Telectronics but had lost the five stock certificates
representing those shares.
This triggered off the series of intertwined actions between the
protagonists, all centered on the question of jurisdiction over the
dispute, which were to culminate in the filing of the two cases at bar.
The Bragas assert that the regular civil court has original and
exclusive jurisdiction as against the Securities and Exchange
Commission, while the Abejos claim the contrary. A summary of the
actions resorted to by the parties follows:
A. ABEJOS ACTIONS IN SEC
1. The Abejos and Telectronics and the latter's nominees, as new
majority shareholders, filed SEC Cases Nos. 02379 and 02395
against the Bragas on December 17, 1982 and February 14, 1983,
respectively.
2. In SEC Case No. 02379, they prayed for mandamus from the SEC
ordering Norberto Braga, as corporate secretary of Pocket Bell to
register in their names the transfer and sale of the aforesaid 196,000
Pocket Bell shares (of the Abejos 1 and Virginia Braga 2, cancel the
surrendered certificates as duly endorsed and to issue new certificates
in their names.
3. In SEC Case No.02395, they prayed for injunction and a
temporary restraining order that the SEC enjoin the Bragas from
disbursing or disposing funds and assets of Pocket Bell and from
performing such other acts pertaining to the functions of corporate
officers.
4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion
to Dismiss the mandamus case (SEC Case No. 02379) contending
that the SEC has no jurisdiction over the nature of the action since it
does not involve an intracorporate controversy between stockholders,
the principal petitioners therein, Telectronics, not being a stockholder
of record of Pocket Bell.
5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay
denied the motion. On January 14, 1983, the corporate secretary filed
a Motion for Reconsideration. On March 21, 1983, SEC Hearing
Officer Joaquin Garaygay issued an order granting Braga's motion
for reconsideration and dismissed SEC Case No. 02379.
6. On February 11, 1983, the Bragas filed their Motion to Dismiss
the injunction case, SEC Case No. 02395. On April 8, 1985, the SEC
Director, Eugenio Reyes, acting upon the Abejos'ex-parte motion,
created a three-man committee composed of Atty. Emmanuel Sison
as Chairman and Attys. Alfredo Oca and Joaquin Garaygay as
members, to hear and decide the two SEC cases (Nos. 02379 and
02395).
7. On April 13, 1983, the SEC three-man committee issued an order
reconsidering the aforesaid order of March 21, 1983 of the SEC
Hearing Officer Garaygay (dismissing the mandamus petition SEC
Case No. 02379) and directing corporate secretary Norberto Braga to
file his answer to the petitioner therein.
B. BRAGAS' ACTION IN SEC
8. On December 12, 1983, the Bragas filed a petition for certiorari,
prohibition and mandamus with the SEC en banc, SEC Case No. EB #049,
seeking the dismissal of SEC Cases Nos.' 02379 and 02395 for lack of
jurisdiction of the Comn-iission and the setting aside of the various orders
issued by the SEC three-man committee in the course of the proceedings in
the two SEC cases.
9. On May 15, 1984, the SEC en banc issued an order dismissing the
Bragas' petition in SEC Case No. EB#049 for lack of merit and at the same
time ordering the SEC Hearing Committee to continue with the hearings of
the Abejos and Telectronics SEC Cases Nos. 02379 and 02395, ruhng that
the "issue is not the ownership of shares but rather the nonperformance by
the Corporate Secretary of the ministerial duty of recording transfers of
shares of stock of the corporation of which he is secretary."
10. On May 15, 1984 the Bragas filed a motion for reconsideration but the
SEC en banc denied the same on August 9, 1984.
C. BRAGAS' ACTION IN CFI (NOWRTC)
11. On November 25, 1982, following the corporate secretary's refusal to
register the transfer of the shares in question, the Bragas filed a complaint
against the Abejos and Telectronics in the Court of First Instance of Pasig,
Branch 21 (now the Regional Trial Court, Branch 160) docketed as Civil
Case No. 48746 for: (a) rescission and annulment of the sale of the shares
of stock in Pocket Bell made by the Abejos in favor of Telectronics on the
ground that it violated the Bragas' alleged pre-emptive right over the Abej
os' shareholdings and an alleged perfected contract with the Abejos to sell
the same shares in their (Bragas) favor, (Ist cause of action); plus damages
for bad faith; and (b) declaration ofnullity of any transfer, assignment or
endorsement of Virginia Bragas' stock certificates for 63,000 shares in
Pocket Ben to Telectronics for want of consent and consideration, alleging
that said stock certificates, which were intended as security for a loan
application and were thus endorsed by her in blank, had been lost
(2nd cause of action).
12. On January 4, 1983, the Abejos filed a Motion to Dismiss the complaint
on the ground that it is the SEC that is vested under PD 902-A with original
and exclusive jurisdiction to hear and decide cases involving, among others,
controversies "between and among stockholders" and that the Bragas' suit is
such a controversy as the issues involved therein are the stockholders'
alleged pre-emptive rights, the validity of the transfer and endorsement of
certificates of stock, the election of corporate officers and the management
and control of the corporation's operations. The dismissal motion was
granted by Presiding Judge G. Pineda on January 14, 1983.
13. On January 24, 1983, the Bragas filed a motion for reconsideration. The
Abejos opposed. Meanwhile, respondent Judge Rafael de la Cruz was
appointed presiding judge of the court (renamed Regional Trial Court) in
place of Judge G. Pineda.
14. On February 14, 1983, respondent Judge de la Cruz issued an order
rescinding the January 14, 1983 order and reviving the temporary
restraining order previously issued on December 23, 1982 restraining
Telectronics' agents or representatives from enforcing their resolution
constituting themselves as the new set of officers of Pocket Bell and from
assuming control of the corporation and discharging their functions.
15. On March 2, 1983, the Abejos filed a motion for reconsideration, which
motion was duly opposed by the Bragas. On March 11, 1983, respondent
Judge denied the motion for reconsideration.
D. ABEJOS' PETITION AT BAR
16. On March 26, 1983, the Abejos, alleging that the acts of respondent
Judge in refusing to dismiss the complaint despite clear lack of jurisdiction
over the action and in refusing to reconsider his erroneous position were
performed without jurisdiction and with grave abuse of discretion, filed
their herein Petition for certiorari and Prohibition with Preliminary
Injunction. They prayed that the challenged orders of respondent Judge
dated February 14, 1983 and March 11, 1983 be set aside for lack of
jurisdiction and that he be ordered to permanently desist from further
proceedings in Civil Case No. 48746. Respondent judge desisted from
further proceedings in the case, dispensing with the need of issuing any
restraining order.
E. BRAGAS' PETITION AT BAR
17. On August 29, 1984, the Bragas, alleging in turn that the SEC has
no jurisdiction over SEC Cases Nos. 02379 and 02395 and that it
acted arbitrarily, whimsically and capriciously in dismissing their
petition (in SEC Case No. EB #049) for dismissal of the said cases,
filed their herein Petition for certiorari and Prohibition with
Preliminary Injunction or TRO. The petitioner seeks the reversal
and/or setting aside of the SEC Order dated May 15, 1984 dismissing
their petition in said SEC Case No. EB #049 and sustaining its
jurisdiction over SEC Cases Nos. 02379 and 02395, filed by the
Abejos. On September 24, 1984, this Court issued a temporary
restraining order to maintain the status quo and restrained the SEC
and/or any of its officers or hearing committees from further
proceeding with the hearings in SEC Cases Nos. 02379 and 02395
and from enforcing any and all orders and/or resolutions issued in
connection with the said cases.
The cases, having been given due course, were jointly heard by the
Court on March 27, 1985 and the parties thereafter filed on April 16,
1985 their respective memoranda in amplification of oral argument
on the points of law that were crystalled during the hearing,
The Court rules that the SEC has original and exclusive jurisdiction
over the dispute between the principal stockholders of the
corporation Pocket Bell, namely, the Abejos and
Telectronics, the purchasers of the 56% majority stock (supra, at
page 2) on the one hand, and the Bragas, erstwhile majority
stockholders, on the other, and that the SEC, through its en banc
Resolution of May 15, 1984 co"ectly ruled in dismissing the Bragas'
Petition questioning its jurisdiction, that "the issue is not the
ownership of shares but rather the nonperformance by the Corporate
Secretary of the ministerial duty of recording transfers of shares of
stock of the Corporation of which he is secretary."
1. The SEC ruling upholding its primary and exclusive jurisdiction
over the dispute is correctly premised on, and fully supported by, the
applicable provisions of P.D. No. 902-A which reorganized the SEC
with additional powers "in line with the government's policy of
encouraging investments, both domestic and foreign, and more active
publicParticipation in the affairs of private corporations and
enterprises through which desirable activities may be pursued for the
promotion of economic development; and, to promote a wider and
more meaningful equitable distribution of wealth," and accordingly
provided that:
SEC. 3. The Commission shall have absolute jurisdiction,
supervision and control ouer all corporations, partnerships or
associations, who are the grantees of primary franchise and/or a
license or permit issued by the government to operate in the
Philippines; ...
SEC. 5. In addition to the regulatory and adjudicative functions of
the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide
cases involving:
a) Devices or schemes employed by or any acts, of the board of
directors, business associations, its officers or partners, amounting
to fruud and misrepresentation which may be detrimental to the
interest of the public andlor of the stockholder, partners, members of
associations or organizations registered with the Commission.
b) Controversies arising out of intracorporate or partnership
relations, between and among stockholders, members, or associates;
between any andlor all of them and the corporation, partnership or
association of which they are stockholders, members or assmiates,
respectively; and between such corporation, partnership or
assmiation and the state insofar as it concems their individual
franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or
associations. 3
Section 6 further grants the SEC "in order to effectively exercise such
jurisdiction," the power, inter alia, "to issue preliminary or permanent
injunctions, whether prohibitory or mandatory, in all cases in which it has
jurisdiction, and in which cases the pertinent provisions of the Rules of
Court shall apply."
2. Basically and indubitably, the dispute at bar, as held by the SEC, is an
intracorporate dispute that has arisen between and among the principal
stockholders of the corporation Pocket Bell due to the refusal of the
corporate secretary, backed up by his parents as erstwhile majority
shareholders, to perform his "ministerial duty" to record the transfers of the
corporation's controlling (56%) shares of stock, covered by duly endorsed
certificates of stock, in favor of Telectronics as the purchaser thereof.
mandamus in the SEC to compel the corporate secretary to register the
transfers and issue new certificates in favor of Telectronics and its
nominees was properly resorted to under Rule XXI, Section 1 of the SEC's
New Rules of Procedure, 4 which provides for the filing of such petitions
with the SEC. Section 3 of said Rules further authorizes the SEC to "issue
orders expediting the proceedings ... and also [to] grant a preliminary
injunction for the preservation of the rights of the parties pending such
proceedings, "
The claims of the Bragas, which they assert in their complaint in the
Regional Trial Court, praying for rescission and annulment of the sale made
by the Abejos in favor of Telectronics on the ground that they had an
alleged perfected preemptive right over the Abejos' shares as well as for
annulment of sale to Telectronics of Virginia Braga's shares covered by
street certificates duly endorsed by her in blank, may in no way deprive the
SEC of its primary and exclusive jurisdiction to grant or not the writ of
mandamus ordering the registration of the shares so transferred. The Bragas'
contention that the question of ordering the recording of the transfers
ultimately hinges on the question of ownership or right thereto over the
shares notwithstanding, the jurisdiction over the dispute is clearly vested in
the SEC.
3. The very complaint of the Bragas for annulment of the sales and transfers
as filed by them in the regular court questions the validity of the transfer
and endorsement of the certificates of stock, claiming alleged pre-emptive
rights in the case of the Abejos' shares and alleged loss of thio certificates
and lack of consent and consideration in the case of Virginia Braga's shares.
Such dispute c learly involve's controversies "between and among
stockholders, " as to the Abej os' right to sell and dispose of their shares to
Telectronics, the validity of the latter's acquisition of Virginia Braga's
shares, who between the Bragas and the Abejos' transferee should be
recognized as the controlling shareholders of the corporation, with the right
to elect the corporate officers and the management and control of its
operations. Such a dispute and case clearly fag within the original and
exclusive jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A,
above-quoted. The restraining order issued by the Regional Trial Court
restraining Telectronics agents and representatives from enforcing their
resolution constituting themselves as the new set of officers of Pocket Bell
and from assuming control of the corporation and discharging their
functions patently encroached upon the SEC's exclusive jurisdiction over
such specialized corporate controversies calling for its special competence.
As stressed by the Solicitor General on behalf of the SEC, the Court has
held that "Nowhere does the law [PD 902-A] empower any Court of First
Instance [now Regional Trial Court] to interfere with the orders of the
Commission," 5 and consequently "any ruling by the trial court on the issue
of ownership of the shares of stock is not binding on the Commission 6 for
want of jurisdiction.
4. The dispute therefore clearly falls within the general classification of
cases within the SEC's original and exclusive jurisdiction to hear and decide,
under the aforequoted governing section 5 of the law. Insofar as the Bragas
and their corporate secretary's refusal on behalf of the corporation Pocket
Bell to record the transfer of the 56% majority shares to Telectronics may
be deemed a device or scheme amounting to fraud and misrepresentation
emplolyed by them to keep themselves in control of the corporation to the
detriment of Telectronics (as buyer and substantial investor in the corporate
stock) and the Abejos (as substantial stockholders-sellers), the case falls
under paragraph (a). The dispute is likewise an intra-corporate controversy
between and among the majority and minority stockholders as to the
transfer and disposition of the controlling shares of the corporation, failing
under paragraph (b). As stressed by the Court in DMRC Enterprises v. Este
del Sol Mountain Reserve, Inc, 7 Considering the announced policy of PD
902-A, the expanded jurisdiction of the respondent Securities and Exchange
Commission under said decree extends exclusively to matters arising from
contracts involving investments in private corporations, partnerships and
associations." The dispute also concerns the fundamental issue
ofwhether the Bragas or Telectronics have the right to elect the
corporate directors and officers and manage its business and
operations, which falls under paragraph (c).
5. Most of the cases that have come to this Court involve those under
paragraph (b), i.e. whether the controversy is an intra-corporate one,
arising "between and among stockholders" or "between any or allof
them and the corporation." The parties have focused their arguments
on this question. The Bragas' contention in his field must likewise
fail. In Philex Mining Corp. v. Reyes, 8 the Court spelled out that"'an
intra-corporate controversy is one which arises between a
stockholder and the corporation. There is no distinction, qualification,
nor any exemption whatsoever. The provision is broad and covers all
kinds of controversies between stockholders and corporations. The
issue of whether or not a corporation is bound to replace a
stockholder's lost certificate of stock is a matter purely between a
stockholder and the corporation. It is a typical intra-corporate dispute.
The quqsjion of damage's raised is merely incidental to that main
issue. The Court rejected the stockholders' theory of excluding his
complaint (for replacement of a lost stock [dividend] certificate
which he claimed to have never received) from the classification of
intra-corporate controversies as one that "does not square with the
intent of the law, which is to segregate from the general jurisdiction
of regular Courts controversies involving corporations and their
stockholders and to bring them to the SEC for exclusive resolution,
in much the same way that labor disputes are now brought to the
Ministry-of Labor and Employment (MOLE) and the National Labor
Relations Commission (NLRC), and not to the Courts."
(a) The Bragas contend that Telectronics, as buyertransferee of the
56% majority shares is not a registered stockholder, because they,
through their son the corporate secretary, appear to have refused to
perform "the ministerial duty of recording transfers of shares of stock
of the corporation of which he is the secretary," and that the dispute
is therefore, not an intracorporate one. This contention begs the
question which must properly be resolved by the SEC, but which
they would prevent by their own act, through their son, of blocking
the due recording of the transfer and cannot be sanctioned. It can be
seen from their very complaint in the regular courts that they with
their two sons constituting the plaintiffs are all stockholders while the
defendants are the Abejos who are also stockholders whose sale of
the shares to Telectronics they would annul.
(b) There can be no question that the dispute between the Abejos and
the Bragas as to the sale and transfer of the former's shares to
Telectronics for P5 million is an intracorporate one under section 5
(b), prescinding from the applicability of section 5 (a) and (c), (supra,
par. 4) lt is the SEC which must resolve the Bragas' claim in their
own complaint in the court case filed by them of an alleged
pre-emptive right to buy the Abejos' shares by virtue of "on-going
negotiations," which they may submit as their defense to the
mandamus petition to register the sale of the shares to Telectronics.
But asserting such preemptive rights and asking that the same be
enforced is a far cry from the Bragas' claim that "the case relates to
questions of ownership" over the shares in question. 9 (Not to
mention, as pointed out by the Abejos, that the corporation is not a
close corporation, and no restriction over the free transferability of
the shares appears in the Articles of Incorporation, as well as in the
by-laws 10 and the certificates of stock themselves, as required by
law for the enforcement of such restriction. See Go Soc & Sons, etc.
v. IAC, G.R. No. 72342, Resolution of February 19, 1987.)
(c) The dispute between the Bragas and Telectronics as to the sale
and transfer for P1,674,450.00 of Virginia Braga's 63.000 shares
covered by Street certificates duly endorsed in blank by her is within
the special competence and jurisdiction of the SEC, dealing as it does
with the free transferability of corporate shares, particularly street
certificates," as guaranteed by the Corporation Code and its
proclaimed policy of encouraging foreign and domestic investments
in Philippine private corpora. tions and more active public
participation therein for the Promotion of economic development.
Here again, Virginia Braga's claim of loss of her street
certificates 11 or theft thereof (denounced by Telectronics as 11
perjurious" 12 ) must be pleaded by her as a defense against
Telectronics'petition for mandamus and recognition now as the
controlling stockholder of the corporation in the light of the joint
affidavit of Geneml Cerefino S. Carreon of the National
Telecommunications Commission and private respondent Jose Luis
Santiago of Telectronics narrating the facts and circumstances of how the
former sold and delivered to Telectronics on behalf of his compadres, the
Bragas, Virginia Braga's street certificates for 63,000 shares equivalent to
18% of the corporation's outstanding stock and received the cash price
thereof. 13 But as to the sale and transfer of the Abejos' shares, the Bragas
cannot oust the SEC of its original and exclusive jurisdiction to hear and
decide the case, by blocking through the corporate secretary, their son, the
due recording of the transfer and sale of the shares in question and claiming
that Telectronics is not a stockholder of the corporation – which is the very
issue that the SEC is called upon to resolve. As the SEC maintains, "There
is no requirement that a stockholder of a corporation must be a registered
one in order that,the Securities and Exchange Commission may take
cognizance of a suit seeking to enforce his rights as such
stockholder." 14 This is because the SEC by express mandate has "absolute
jurisdiction, supervision and control over all corporations" and is called
upon to enforce the provisions of the Corporation Code, among which is the
stock purchaser's right to secure the corresponding certificate in his name
under the provisions of Section 63 of the Code. Needless to say, any
problem encountered in securing the certificates of stock representing the
investment made by the buyer must be expeditiously dealt with through
administrative mandamus proceedings with the SEC, rather than through
the usual tedious regular court procedure. Furthermore, as stated in the SEC
order of April 13, 1983, notice given to the corporation of the sale of the
shares and presentation of the certificates for transfer is ,equivalent to
registration: "Whether the refusal of the (corporation) to effect the same is
ivalid or not is still subject to the outcome of the hearing on the merits of
the case. 15
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction
in administrative commissions and boards the power to resolve specialized
disputes in the field of labor (as in corporations, public transportation and
public utilities) ruled that Congress in requiring the Industrial Court's
intervention in the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be exclusive, although it
did not so expressly state in the law. The Court held that under the
"sense-making and expeditious doctrine of primary jurisdiction ... the courts
cannot or will n6t determine a controversy involving a question which is
within the jurisdiction of an administrative tribunal, where the question
demands the exercise of sound administrative discretion requiring the
special knowledge, experience, and seruices of the administratiue tribunal
to determine technical and intricate matters of fact, and a uniformity of
ruling is essential to comply uith the purposes of the regulatory statute
administered " 16
In this era of clogged court dockets, the need for specialized administrative
boards or commissions with the special knowledge, experience and
capability to hear and determine promptly disputes on technical matters or
essentially factual matters, subject to judicial review in case of grave abuse
of discretion, has become well nigh indispensable. Thus, in 1984, the Court
noted that "between the power lodged in an administrative body and a court,
the unmistakable trend has been to refer it to the former. 'Increasingly, this
Court has been committed to the view that unless the law speaks clearly and
unequivocably, the choice should fall on [an administrative agency.]'
" 17 The Court in the earlier case of Ebon vs. De Guzman 18 noted that the
lawmaking authority, in restoring to the labor arbiters and the NLRC their
jurisdiction to award all kinds of damages in labor cases, as against the
previous P.D. amendment splitting their jurisdiction with the regular courts,
"evidently ... had second thoughts about depriving the Labor Arbiters and
the NLRC of the jurisdiction to award damages in labor cases because that
setup would mean duplicity of suits, splitting the cause of action and
possible conflicting findings and conclusions by two tribunals on one and
the same claim."
7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980
specifically vests the SEC with the Rule-making power in the discharge of
its task of implementing the provisions of the Code and particularly charges
it with the duty of preventing fraud and abuses on the part of controlling
stockholders, directors and officers, as follows:
SEC. 143. Rule-making power of the Securities and Exchange Commission.
— The Securities and Exchange Commission shall have the power and
authority to implement the provisions of this Code, and to promulgate rules
and regulations reasonably necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud and abuses on the part of
the controlling stockholders, members, directors, trustees or
officers. (Emphasis supplied)
The dispute between the contending parties for control of
thecorporation manifestly fans within the primary and exclusive
jurisdiction of the SEC in whom the law has reserved such
jurisdiction as an administrative agency of special competence to
deal promptly and expeditiously therewith.
As the Court stressed in Union Glass & Container Corp. v.
SEC, 19 "This grant of jurisdiction [in Section 51 must be viewed in
the light of the nature and functions of the SEC under the law.
Section 3 of PD No. 902-A confers upon the latter 'absolute
jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are grantees of primary franchise
and/or license or permit issued by the government to operate in the
Philippines ... The principal function of the SEC is the supervision
and control over corporations, partnerships and associations with the
end in view that investment in these entities may be encouraged and
protected, and their activities pursued for the promotion of economic
development.
"It is in aid of this office that the adjudicative power of the SEC must
be exercised. Thus the law explicitly specified and delin-dted its
jurisdiction to matters intrinsically connected with the regulation of
corporations, partnerships and associations and those dealing with
the internal affairs of such corporations, partnerships or associations.
"Otherwise stated, in order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following
relationships: [al between the corporation, partnership or association
and the public; [b] between the corporation, partnership or
association and its stockholders, partners, members, or officers; [c]
between the corporation, partnership or association and the state in so
far as its franchise, permit or license to operate is concerned; and Id]
among the stockholders, partners or associates themselves." 20
Parenthetically, the cited case of Union Glass illustrates by way of
contrast what disputes do not fall within the special jurisdiction of
the SEC. In this case, the SEC had properly assumed jurisdiction
over the dissenting stockholders' com. Plaint against the corporation
Pioneer Glass questioning its dacion en pago of its glass plant and all
its assets in favor of the DBP which was clearly an intra-corporate
controversy dealing with its internal affairs. But the Court held that
the SEC had no jurisdiction over petitioner Union Glass Corp.,
imPle,aded as third party purchaser of the plant from DBP in the
action to annul the dacion en pago. The Court held that such action
for recovery of the glass plant could be brought by the dissenting
stockholder to the regular courts only if and when the SE C rendered
final judgment annulling the dacion en pago and furthermore subject
to Union Glass' defenses as a third party buyer in good faith.
Similarly, in the DMRC case, therein petitioner's,tomplaint for
collection of the amounts due to it as payment of rentals for the lease
of its heavy equipment in the form mainly of cash and part in shares
of stock of the debtor-defendant corporation was held to be not
covered by the SEC's exclusive jurisdiction over intracorporate
disputes, since "to pass upon a money claim under a lease contract
would be beyond the competence Of the Securities and Exchange
Commission and to separate the claim for money from the claim for
shares of stock would be splitting a single cause of action resulting in
a multiplicity of suitS." 21 Such an action for collection of a debt does
not involve enforcement Of rights and obligations under the
Corporation Code nor the in. temal or intracorporate affairs of the
debtor corporation. But in aR disputes affecting and dealing With the
interests of the corporation and its stockholders, following the trend
and clear legislative intent of entmsting all disputes of a specialized
nature to administrative agencies possessing. the requisite
competence, special knowledge, experience and services and
facilities to expeditiously resolve them and determine the essential
facts including technical and intricate matters, as in labor and public
utilities rates disputes, the SEC has been given "the original and
exclusive jurisdiction to hear anddecide" them (under section 5 of
P.D. 902-A) "in addition to [its] regulatory and adjudicative
functions" (under Section 3, vesting in it "absolute jurisdiction,
supervision and control over all corporations" and the Rule-making
power granted it in Section 143 of the Corporation Code, supra). As
stressed by the Court in the Philex case, supra, "(T)here is no
distinction, qualification, nor any exemption whatsoever. The
provision is broad and covers all kinds of controversies between
stockholders and corporations."
It only remains now to deal with the Order dated April 15, 1983 (Annex H,
Petition) 22 of the SEC's three-member Hearing Conunittee granting
Telectronics' motion for creation of a receivership or management
committee with the ample powers therein enumerated for the
preservation pendente lite of the corporation's assets and in discharge of its
"power and duty to preserve the rights of the parties, the stockholders, the
public availing of the corporation's services and the rights of creditors," as
well as "for reasons of equity and justice ... (and) to prevent possible
paralization of corporate business." The said Order has not been
implemented notwithstanding its having been upheld per the SEC en banc's
Order of May 15, 1984 (Annex "V", Petition) dismissing for lack of merit
the petition for certiorari, prohibition and mandamus with prayer for
restraining order or injunction filed by the Bragas seeking the disbandment
of the Hearing Committee and the setting aside of its Orders, and its
Resolution of August 9, 1984, denying reconsideration (Annex "X",
Petition), due to the Bragas' filing of the petition at bar.
Prescinding from the great concern of damage and prejudice expressed by
Telectronics due to the Bragas having remained in control of the
corporation and having allegedly committed acts of gross mismanagement
and misapplication of funds, the Court finds that under the facts and
circumstances of record, it is but fair and just that the SEC's order creating a
receivership committee be implemented forthwith, in accordance with its
terms, as follows:
The three-man receivership committee shall be composed of a
representative from the commission, in the person of the Director,
Examiners and Appraisers Department or his designated representative, and
a representative from the petitioners and a representative of the respondent.
The petitioners and respondent are therefore directed to sub. mit to the
Commission the name of their designated representative within three (3)
days from receipt of this order. The Conunission shall appoint the other
representatives if either or both parties fafl to comply with the requirement
within the stated time.
ACCORDINGLY, judgment is hereby rendered:
(a) Granting the petition in G.R. No. 63558, annulling the challenged
Orders of respondent Judge clated February 14, 1983 and March i 1, 1983
(Annexes "L" and "P" of the Abejos' petition) and prohibiting respondent
Judge from further proceeding in Civil Case No. 48746 filed in his Court
other than to dismiss the same for lack or jurisdiction over the
subject-matter;
(b) Dismissing the petition in G.R. Nos. 68450-51 and lifting the temporary
restraining order issued on September 24, 1984, effective immediately upon
promulgation hereof,
(c) Directing the SEC through its Hearing Committee to proceed
immediately with hearing and resolving the pending mandamus petition for
recording in the corporate books the transfer to Telectronics and its
nominees of the majority (56%) shares of stock of the corporation Pocket
Bell pertaining to the Abejos and Virginia Braga and all related issues,
taking into consideration, without need of resubmittal to it, the pleadings,
annexes and exhibits filed by the contending parties in the cases at bar; and
(d) Likewise directing the SEC through its Hearing Committee to proceed
immediately with the implementation of its receivership or management
committee Order of April 15, 1983 in SEC Case No. 2379 and for the
purpose, the contending parties are ordered to submit to said Hearing
Committee the name of their designated representatives in the
receivership/management committee within three (3) days from receipt of
this decision, on pain of forfeiture of such right in case of failure to comply
herewith, as provided in the said Order; and ordering theBragas to perform
only caretaker acts in the corporation pending the organization of such
receivership/management committee and assumption of its functions.
This decision shall be immediately executory upon its promulgation.
SO ORDERED.
ALMA MAGALAD, petitioner,
vs.
PREMIERE FINANCING CORP., respondent.
PARAS, J.:
This is an appeal originally filed with the Court of Appeals but
certified to this court for disposition since it involves purely
questions of law from the decision of the Regional Trial Court (RTC),
Branch LXXXV, Quezon City, dated May 22, 1984, in Civil Case
No. Q-40392, ordering the defendant-appellant Premiere Financing
Corporation (Premiere for short) to pay to the plaintiff-appellee Alma
Magalad (Magalad for short) the sum of:
(a) P50,000.00, the principal obligation, plus interest at the legal rate
from September 12, 1983, until the full amount is paid; (b)
P10,000.00, both for moral and exemplary damages; (c) P5,000.00,
for and as attorney's fees and (d) the costs of suit.
The antecedent facts of the case are as follows:
Premiere is a financing company engaged in soliciting and accepting
money market placements or deposits (Original Record, p. 29).
On September 12, 1983 with expired permit to issue commercial
papers (Ibid., p. 8) and with intention not to pay or defraud its
creditors, Premiere induced and misled Magalad into making a
money market placement of P50,000.00 at 22% interest per
annum for which it issued a receipt (Ibid., Exh. "B", p. 8). Aside
from the receipt, Premier likewise issued two (2) post-dated checks
in the total sum of P51,079.00 (Ibid., Exh. "C", p. 9) and assigned to
Magalad its receivable from a certain David Saman for the same
amount (Ibid., Exh. "C", p. 10).
When the said checks were presented for payment on their due dates,
the drawee bank dishonored the checks for lack of sufficient funds to
cover the amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12). Despite
demands by Magalad for the replacement of said checks with cash,
Premiere, for no valid reason, failed and refused to honor such
demands and due to fraudulent acts of Premiere, Magalad suffered
sleepless nights, mental anguish, fright, serious anxiety, considering
the fact that the money she invested is blood money and is the only
source of support for her family (Ibid., p. 4).
Magalad in order to seek redress and retrieve her blood money,
availed of the service of counsel for which she agreed to pay twenty
percent (20%) of the amount due as and for attorney's fees (Ibid.)
On January 10, 1984, Magalad filed a complaint for damages with
prayer for writ of preliminary attachment with the RTC, Branch
LXXXV, Quezon City, docketed as Civil Case No. Q-40392 against
herein Premiere (Ibid., p. 3-6).
Premiere having failed to file an answer and acting on Magalad's
motion, the lower court declared Premiere in default by virtue of an
order dated April 5, 1984 allowing Magalad to present
evidence ex-parte (Ibid., pp. 21; 22)
On May 22, 1984 the lower court rendered a default judgment
against Premiere, the dispositive portion of which reads:
From the foregoing evidence, the court finds that plaintiff has fully
established her claim that defendant had indeed acted fraudulently in
incurring the obligation and considering that no evidence has been
adduced by the defendant to contradict the same, judgment is hereby
rendered ordering the defendant to pay plaintiff as follows:
(a) P50,000.00, the principal obligation, plus interest at the legal rate
from September 12, 1983 until the full amount is paid;
(b) P10,000.00 both for moral and exemplary damages;
(c) P5,000.00 for and as attorney's fees; and
(d) the costs of suit.
SO ORDERED. (Ibid., p. 30)
Premiere filed a motion for reconsideration of the foregoing decision,
based principally on a question of law alleging that the Securities and
Exchange Commission (SEC) has exclusive and original jurisdiction over a
corporation under a state of suspension of payments (Ibid., pp. 32-41).
Magalad filed an opposition to the motion for reconsideration on January 8,
1985 alleging among others that the regular court has jurisdiction over the
case to the exclusion of the SEC. (Ibid., pp. 51-53).
On May 28, 1986 the lower court issued an order denying the motion for
reconsideration (Ibid., p. 61).
On June 11, 1986 Premiere filed his notice of appeal which led to the
issuance of the order of the lower court dated July 29, 1986 elevating the
case to the Court of Appeals (CA) (Ibid., pp. 62-63).
The Court of Appeals in its resolution dated September 8, 1987 dismissed
the case for failure of Premiere to file its brief despite the ninety-day
extension granted to it, which expired on June 10, 1987 (Rollo, p. 16).
An omnibus motion for reconsideration and admission of late filing of
Premiere's brief was filed on September 22, 1987 (Rollo, pp. 17-19; 32).
On September 30, 1987 the Court of Appeals issued a resolution which
reconsidered its previous resolution dated September 5, 1987 and admitted
the Premiere's brief (Rollo, p. 26).
On January 31, 1989 the Court of Appeals issued a resolution certifying the
instant case to this Court on the ground that the case involves a question of
law, the dispositive part of which stating:
ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the Judiciary
Act of 1948, Sec. 17, par. 4(3) (4), the Appeal in this case is hereby
certified to the Supreme Court on the ground that the only issue raised
concerns the jurisdiction of the trial court and only a question of law. (Rollo,
p. 33)
Hence, this appeal.
The pivotal issue in this case is whether or not the court a quo had
jurisdiction to try the instant case.
At the very core of this appeal assailing the aforesaid pronouncement of the
lower court, and around which revolve the arguments of the parties, is the
applicability of Presidential Decree No. 902-A (Reorganization of the SEC
with Additional Powers), as amended by Presidential Decrees Nos. 1653,
1758 and 1799. Magalad submits that the legal suit which she has brought
against Premiere is an ordinary action for damages with the preliminary
attachment cognizable solely by the RTC. Premiere, on the other hand,
espouses the original and exclusive jurisdiction of the Securities and
Exchange Commission.
Presidential Decree No. 902-A, Section 3, provides:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and
control over all corporations, partnerships or associations, who are the
grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines; and in the exercise of its authority,
it shall have the power to enlist the aid and support of and to deputize any
and all enforcement agencies of the government, civil or military as well as
any private institution, corporation, firm, association or person. (As
amended by Presidential Decree No. 1758).
Sec. 3 of Pres. Decree No. 902-A should also be read in conjunction with
Sec. 5 of the same law, providing:
Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under the
existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
a) Devises or schemes employed by or any acts of the Board of Directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the public and/or to the
stockholders, partners, members of associations or organizations registered
with the Commission. (Emphasis supplied)
Considering that Magalad's complaint sufficiently alleges acts
amounting to fraud and misrepresentation committed by Premiere,
the SEC must be held to retain its original and exclusive jurisdiction
over the case, despite the fact that the suit involves collection of
sums of money paid to said corporation, the recovery of which would
ordinarily fall within the jurisdiction of regular courts. The fraud
committed is detrimental to the interest of the public and, therefore,
encompasses a category of relationship within the SEC jurisdiction.
Otherwise stated, in order that the SEC can take cognizance of a case,
the controversy must pertain to any of the following relationships: (a)
between the corporation, partnership or association and the public; (b)
between the corporation, partnership or association and its
stockholders, partners, members or officers; (c) between the
corporation, partnership or association and the state so far as its
franchise, permit or license to operate is concerned; and (d) among
the stockholders, partners or associates themselves (Union Glass &
Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la
Cruz, 149 SCRA 654, 1987).
In this case, the recitals of the complaint sufficiently allege that
devices or schemes amounting to fraud and misrepresentation
detrimental to the interest of the public have been resorted to by
Premiere Corporation. It can not but be conceded, therefore, that the
SEC may exercise its adjudicative powers pursuant to Sec. 5(a) of
Pres. Decree No. 902-A (Supra).
The fact that Premiere's authority to engage in financing already
expired will not have the effect of divesting the SEC of its original
and exclusive jurisdiction. The expanded jurisdiction of the SEC was
conceived primarily to protect the interest of the investing public.
That Magalad's money placements were in the nature of investments
in Premiere can not be gainsaid. Magalad had reasonably expected to
receive returns from moneys she had paid to Premiere. Unfortunately,
however, she was the victim of alleged fraud and misrepresentation.
Reliance by Magalad on the cases of DMRC v. Este del Sol, (132
SCRA 293) and Union Glass & Container Corp. v. SEC (126 SCRA
31), where the jurisdiction of the ordinary Courts was upheld, is
misplaced for, as explicitly stated in those cases, nowhere in the
complaints therein is found any averment of fraud or
misrepresentation committed by the respective corporations involved.
The causes of action, therefore, were nothing more than simple
money claims.
Further bolstering the jurisdiction of the SEC in this case is the fact
that said agency had already appointed a Rehabilitation Receiver for
Premiere and has directed all proceedings or claims against it be
suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A
providing that "upon appointment of a . . . rehabilitation receiver . . .
all actions for claims against corporations . . . under receivership
pending before any court, tribunal, board or body shall be suspended
accordingly."
By so doing, SEC has exercised its original and exclusive jurisdiction
to hear and decide cases involving:
a) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where the
corporation, partnership or association possesses sufficient property
to cover all its debts but foresees the impossibility of meeting them
when they respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its
liabilities but is under the management of a Rehabilitation Receiver
or Management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree. (Section 5(d) of Pres.
Decree No. 902-A as added by Pres. Decree 1758).
In fine, the adjudicative powers of the SEC being clearly defined by
law, its jurisdiction over this case has to be upheld.
PREMISES CONSIDERED, the instant appeal is GRANTED, and
the order of the Presiding Judge of the Regional Trial Court, Quezon
City, Branch LXXXV dated May 22, 1984, in Civil Case No.
Q-40392 is REVERSED and SET ASIDE, without prejudice to the
filing by Alma Magalad of the appropriate complaint against
Premiere Financing Corporation with the Securities and Exchange
Commission.
SO ORDERED.
HE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals,
reversing the decision of the Collector of Internal Revenue, assessing
against and demanding from the "Club Filipino, Inc. de Cebu", the sum of
P12,068.84 as fixed and percentage taxes, surcharge and compromise
penalty, allegedly due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu,"
(Club, for short), is a civic corporation organized under the laws of the
Philippines with an original authorized capital stock of P22,000.00, which
was subsequently increased to P200,000.00, among others, to it
"proporcionar, operar, y mantener un campo de golf, tenis, gimnesio
(gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y
toda clase de juegos no prohibidos por leyes generales y ordenanzas
generales; y desarollar y cultivar deportes de toda clase y denominacion
cualquiera para el recreo y entrenamiento saludable de sus miembros y
accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh.
A). Neither in the articles or by-laws is there a provision relative to
dividends and their distribution, although it is covenanted that upon its
dissolution, the Club's remaining assets, after paying debts, shall be donated
to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club,
Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course
(on a lot leased from the government), and a bar-restaurant where it sells
wines and liquors, soft drinks, meals and short orders to its members and
their guests. The bar-restaurant was a necessary incident to the operation of
the club and its golf-course. The club is operated mainly with funds derived
from membership fees and dues. Whatever profits it had, were used to
defray its overhead expenses and to improve its golf-course. In 1951. as a
result of a capital surplus, arising from the re-valuation of its real properties,
the value or price of which increased, the Club declared stock dividends;
but no actual cash dividends were distributed to the stockholders. In 1952, a
BIR agent discovered that the Club has never paid percentage tax on the
gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and
B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal
Revenue assessed against and demanded from the Club, the following sums:
—
As percentage tax on its gross receipts
during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00
The Club wrote the Collector, requesting for the cancellation of the
assessment. The request having been denied, the Club filed the instant
petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of
12,068.84, as fixed and percentage taxes and surcharges prescribed in
sections 182, 183 and 191 of the Tax Code, under which the assessment
was made, in connection with the operation of its bar and restaurant, during
the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as incorporation or by-laws could be found an authority for the distribution of
compromise penalty. its dividends or surplus profits. Strictly speaking, it cannot, therefore, be
considered a stock corporation, within the contemplation of the corporation
Section 182, of the Tax Code states, "Unless otherwise provided, law.
every person engaging in a business on which the percentage tax is
imposed shall pay in full a fixed annual tax of ten pesos for each A tax is a burden, and, as such, it should not be deemed imposed upon
calendar year or fraction thereof in which such person shall engage in fraternal, civic, non-profit, nonstock organizations, unless the intent to the
said business." Section 183 provides in general that "the percentage contrary is manifest and patent" (Collector v. BPOE Elks Club, et
taxes on business shall be payable at the end of each calendar quarter al., supra), which is not the case in the present appeal.
in the amount lawfully due on the business transacted during each
quarter; etc." And section 191, same Tax Code, provides "Percentage Having arrived at the conclusion that respondent Club is not engaged in the
tax . . . Keepers of restaurants, refreshment parlors and other eating business as an operator of a bar and restaurant, and therefore, not liable for
places shall pay a tax three per centum, and keepers of bar and cafes fixed and percentage taxes, it follows that it is not liable for any penalty,
where wines or liquors are served five per centum of their gross much less of a compromise penalty.
receipts . . .". It has been held that the liability for fixed and
percentage taxes, as provided by these sections, does not ipso WHEREFORE, the decision appealed from is affirmed without costs
facto attach by mere reason of the operation of a bar and restaurant.
For the liability to attach, the operator thereof must be engaged in the
business as a barkeeper and restaurateur. The plain and ordinary
meaning of business is restricted to activities or affairs where profit
is the purpose or livelihood is the motive, and the term business
when used without qualification, should be construed in its plain and
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY
ordinary meaning, restricted to activities for profit or livelihood (The
AND NEPOMUCENO REDOVAN, petitioners,
Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila
vs.
Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29,
THE HONORABLE COURT OF APPEALS, EDGARDO D.
1959, giving full definitions of the word "business"; Coll. of Int. Rev.
PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V.
v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No.
VELOSO AND CASTRENSE C. VELOSO, respondents.
L-12178, Aug. 21, 1959, the facts of which are similar to the ones at
bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27,
1960). Virgilio E. Dulay for petitioners.

Having found as a fact that the Club was organized to develop and Torres, Tobias, Azura & Jocson for private respondents.
cultivate sports of all class and denomination, for the healthful
recreation and entertainment of its stockholders and members; that NOCON, J.:
upon its dissolution, its remaining assets, after paying debts, shall be
donated to a charitable Philippine Institution in Cebu; that it is This is a petition for review on certiorari to annul and set aside the
operated mainly with funds derived from membership fees and dues; decision 1 of the Court of Appeals affirming the decision2 of the Regional
that the Club's bar and restaurant catered only to its members and Trial Court of Pasay, Branch 114 Civil Cases Nos. 8198-P, and 2880-P, the
their guests; that there was in fact no cash dividend distribution to its dispositive portion of which reads, as follows:
stockholders and that whatever was derived on retail from its bar and
restaurant was used to defray its overall overhead expenses and to Wherefore, in view of all the foregoing considerations, in this Court hereby
improve its golf-course (cost-plus-expenses-basis), it stands to reason renders judgment, as follows:
that the Club is not engaged in the business of an operator of bar and
restaurant (same authorities, cited above).
In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay Enterprises,
Inc. and Virgilio E. Dulay for annulment or declaration of nullity of the
It is conceded that the Club derived profit from the operation of its decision of the Metropolitan Trial Court, Branch 46, Pasay City, in its Civil
bar and restaurant, but such fact does not necessarily convert it into a Case No. 38-81 entitled "Edgardo D. Pabalan, et al., vs. Spouses Florentino
profit-making enterprise. The bar and restaurant are necessary Manalastas, et al.," is dismissed for lack of merits;
adjuncts of the Club to foster its purposes and the profits derived
therefrom are necessarily incidental to the primary object of
In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay
developing and cultivating sports for the healthful recreation and
Enterprises, Inc. for cancellation of title of Manuel A. Torres, Jr. (TCT No.
entertainment of the stockholders and members. That a Club makes
24799 of the Register of Deeds of Pasay City) and reconveyance, is
some profit, does not make it a profit-making Club. As has been
dismissed for lack or merit, and,
remarked a club should always strive, whenever possible, to have
surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R.
In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Inc.
No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco
and Virgilio E. Dulay are ordered to surrender and deliver possession of the
Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1äwphï1.ñët
parcel of land, together with all the improvements thereon, described in
Transfer Certificate of Title No. 24799 of the Register of Deeds of Pasay
It is claimed that unlike the two cases just cited (supra), which are
City, in favor of therein plaintiffs Manuel A. Torres, Jr. as owner and
non-stock, the appellee Club is a stock corporation. This is
Edgardo D. Pabalan as real estate administrator of said Manuel A. Torres,
unmeritorious. The facts that the capital stock of the respondent Club
Jr.; to account for and return to said plaintiffs the rentals from dwelling unit
is divided into shares, does not detract from the finding of the trial
No. 8-A of the apartment building (Dulay Apartment) from June 1980 up to
court that it is not engaged in the business of operator of bar and
the present, to indemnify plaintiffs, jointly and severally, expenses of
restaurant. What is determinative of whether or not the Club is
litigation in the amount of P4,000.00 and attorney's fees in the sum of
engaged in such business is its object or purpose, as stated in its
P6,000.00, for all the three (3) cases. Co-defendant Nepomuceno Redovan
articles and by-laws. It is a familiar rule that the actual purpose is not
is ordered to pay the current and subsequent rentals on the premises leased
controlled by the corporate form or by the commercial aspect of the
by him to plaintiffs.
business prosecuted, but may be shown by extrinsic evidence,
including the by-laws and the method of operation. From the
The counterclaim of defendants Virgilio E. Dulay and Manuel R. Dulay
extrinsic evidence adduced, the Tax Court concluded that the Club is
Enterprises, Inc. and N. Redovan, dismissed for lack of merit. With costs
not engaged in the business as a barkeeper and restaurateur.
against the three (3) aforenamed defendants. 3

Moreover, for a stock corporation to exist, two requisites must be

complied with, to wit: (1) a capital stock divided into shares and (2)
an authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the shares held (sec. 3,
Act No. 1459). In the case at bar, nowhere in its articles of
The facts as found by the trial court are as follows:
Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with
the following as members of its Board of Directors: Manuel R. Dulay with
19,960 shares and designated as president, treasurer and general manager,
Atty. Virgilio E. Dulay with 10 shares and designated as
vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza
with 10 shares; and Atty. Plaridel C. Jose with 10 shares and
designated as secretary, owned a property covered by TCT No.
17880 4 and known as Dulay Apartment consisting of sixteen (16)
apartment units on a six hundred eighty-nine (689) square meters lot,
more or less, located at Seventh Street (now Buendia Extension) and
F.B. Harrison Street, Pasay City.
Petitioner corporation through its president, Manuel Dulay, obtained
various loans for the construction of its hotel project, Dulay
Continental Hotel (now Frederick Hotel). It even had to borrow
money from petitioner Virgilio Dulay to be able to continue the hotel
project. As a result of said loan, petitioner Virgilio Dulay occupied
one of the unit apartments of the subject property since property
since 1973 while at the same time managing the Dulay Apartment at
his shareholdings in the corporation was subsequently increased by
his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board Resolution
No 186 of petitioner corporation sold the subject property to private
respondents spouses Maria Theresa and Castrense Veloso in the
amount of P300,000.00 as evidenced by the Deed of Absolute
Sale.7 Thereafter, TCT No. 17880 was cancelled and TCT No. 23225
was issued to private respondent Maria Theresa
Veloso. 8 Subsequently, Manuel Dulay and private respondents
spouses Veloso executed a Memorandum to the Deed of Absolute
Sale of December 23, 1976 9 dated December 9, 1977 giving Manuel
Dulay within (2) years or until December 9, 1979 to repurchase the
subject property for P200,000.00 which was, however, not annotated
either in TCT No. 17880 or TCT No. 23225.
On December 24, 1976, private respondent Maria Veloso, without
the knowledge of Manuel Dulay, mortgaged the subject property to
private respondent Manuel A. Torres for a loan of P250,000.00
which was duly annotated as Entry No. 68139 in TCT No. 23225. 10
Upon the failure of private respondent Maria Veloso to pay private
respondent Torres, the subject property was sold on April 5, 1978 to
private respondent Torres as the highest bidder in an extrajudicial
foreclosure sale as evidenced by the Certificate of Sheriff's
Sale 11 issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed a Deed
of Absolute Assignment of the Right to Redeem 12 in favor of
Manuel Dulay assigning her right to repurchase the subject property
from private respondent Torres as a result of the extra sale held on
April 25, 1978.
As neither private respondent Maria Veloso nor her assignee Manuel
Dulay was able to redeem the subject property within the one year
statutory period for redemption, private respondent Torres filed an
Affidavit of Consolidation of Ownership 13 with the Registry of
Deeds of Pasay City and TCT No. 24799 14 was subsequently issued
to private respondent Manuel Torres on April 23, 1979.
On October 1, 1979, private respondent Torres filed a petition for the
issuance of a writ of possession against private respondents spouses
Veloso and Manuel Dulay in LRC Case No. 1742-P. However, when
petitioner Virgilio Dulay was never authorized by the petitioner
corporation to sell or mortgage the subject property, the trial court
ordered private respondent Torres to implead petitioner corporation
as an indispensable party but the latter moved for the dismissal of his
petition which was granted in an Order dated April 8, 1980.
On June 20, 1980, private respondent Torres and Edgardo Pabalan,
real estate administrator of Torres, filed an action against petitioner
corporation, Virgilio Dulay and Nepomuceno Redovan, a tenant of
Dulay Apartment Unit No. 8-A for the recovery of possession, sum
of money and damages with preliminary injunction in Civil Case, No.
8198-P with the then Court of First Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action against
private respondents spouses Veloso and Torres for the cancellation of
the Certificate of Sheriff's Sale and TCT No. 24799 in Civil Case No.
8278-P with the then Court of First Instance of Rizal.
On January 29, 1981, private respondents Pabalan and Torres filed an
action against spouses Florentino and Elvira Manalastas, a tenant of Dulay
Apartment Unit No. 7-B, with petitioner corporation as intervenor for
ejectment in Civil Case No. 38-81 with the Metropolitan Trial Court of
Pasay City which rendered a decision on April 25, 1985, dispositive portion
of which reads, as follows:
Wherefore, judgment is hereby rendered in favor of the plaintiff (herein
private respondents) and against the defendants:
1. Ordering the defendants and all persons claiming possession under them
to vacate the premises.
2. Ordering the defendants to pay the rents in the sum of P500.000 a month
from May, 1979 until they shall have vacated the premises with interest at
the legal rate;
3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00
and P1,000.00 as other expenses of litigation and for them to pay the costs
of the suit.15
Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay
filed an action against the presiding judge of the Metropolitan Trial Court
of Pasay City, private respondents Pabalan and Torres for the annulment of
said decision with the Regional Trial Court of Pasay in Civil Case No.
2880-P.
Thereafter, the three (3) cases were jointly tried and the trial court rendered
a decision in favor of private respondents.
Not satisfied with said decision, petitioners appealed to the Court of
Appeals which rendered a decision on October 23, 1989, the dispositive
portion of which reads, as follows:
PREMISES CONSIDERED, the decision being appealed should be as it is
hereby AFFIRMED in full. 16
On November 8, 1989, petitioners filed a Motion for Reconsideration which
was denied on January 26, 1990.
Hence, this petition.
During the pendency of this petition, private respondent Torres died on
April 3, 1991 as shown in his death certificate 17 and named Torres-Pabalan
Realty & Development Corporation as his heir in his holographic
will 18 dated October 31, 1986.
Petitioners contend that the respondent court had acted with grave abuse of
discretion when it applied the doctrine of piercing the veil of corporate
entity in the instant case considering that the sale of the subject property
between private respondents spouses Veloso and Manuel Dulay has no
binding effect on petitioner corporation as Board Resolution No. 18 which
authorized the sale of the subject property was resolved without the
approval of all the members of the board of directors and said Board
Resolution was prepared by a person not designated by the corporation to
be its secretary.
We do not agree.
Section 101 of the Corporation Code of the Philippines provides:
Sec. 101. When board meeting is unnecessary or improperly held. Unless
the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by
all the directors, or
2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiese of all the stockholders, or
4. All the directors have express or implied knowledge of the action
in question and none of them makes prompt objection thereto in
writing.
If a directors' meeting is held without call or notice, an action taken
therein within the corporate powers is deemed ratified by a director
who failed to attend, unless he promptly files his written objection
with the secretary of the corporation after having knowledge thereof.
In the instant case, petitioner corporation is classified as a close
corporation and consequently a board resolution authorizing the sale
or mortgage of the subject property is not necessary to bind the
corporation for the action of its president. At any rate, corporate
action taken at a board meeting without proper call or notice in a
close corporation is deemed ratified by the absent director unless the
latter promptly files his written objection with the secretary of the
corporation after having knowledge of the meeting which, in his case,
petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which
has a personality distinct and separate from its individual
stockholders or members, 19 the veil of corporate fiction may be
pierced when it is used to defeat public convenience justify wrong,
protect fraud or defend crime. 20 The privilege of being treated as an
entity distinct and separate from its stockholder or members is
therefore confined to its legitimate uses and is subject to certain
limitations to prevent the commission of fraud or other illegal or
unfair act. When the corporation is used merely as an alter ego or
business conduit of a person, the law will regard the corporation as
the act of that person. 21 The Supreme Court had repeatedly
disregarded the separate personality of the corporation where the
corporate entity was used to annul a valid contract executed by one
of its members.
Petitioners' claim that the sale of the subject property by its president,
Manuel Dulay, to private respondents spouses Veloso is null and
void as the alleged Board Resolution No. 18 was passed without the
knowledge and consent of the other members of the board of
directors cannot be sustained. As correctly pointed out by the
respondent Court of Appeals:
Appellant Virgilio E. Dulay's protestations of complete innocence to
the effect that he never participated nor was even aware of any
meeting or resolution authorizing the mortgage or sale of the subject
premises (see par. 8, affidavit of Virgilio E. Dulay, dated May 31,
1984, p. 14, Exh. "21") is difficult to believe. On the contrary, he is
very much privy to the transactions involved. To begin with, he is a
incorporator and one of the board of directors designated at the time
of the organization of Manuel R. Dulay Enterprise, Inc. In ordinary
parlance, the said entity is loosely referred to as a "family
corporation". The nomenclature, if imprecise, however, fairly reflects
the cohesiveness of a group and the parochial instincts of the
individual members of such an aggrupation of which Manuel R.
Dulay Enterprises, Inc. is typical: four-fifths of its incorporators
being close relatives namely, three (3) children and their father
whose name identifies their corporation (Articles of Incorporation of
Manuel R. Dulay Enterprises, Inc. Exh. "31-A"). 22
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975
executed an affidavit 23 that he was a signatory witness to the
execution of the post-dated Deed of Absolute Sale of the subject
property in favor of private respondent Torres indicates that he was
aware of the transaction executed between his father and private
respondents and had, therefore, adequate knowledge about the sale of
the subject property to private respondents.
Consequently, petitioner corporation is liable for the act of Manuel
Dulay and the sale of the subject property to private respondents by
Manuel Dulay is valid and binding. As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the
spouses Maria Theresa V. Veloso and Castrense C. Veloso, was a
corporate act of the former and not a personal transaction of Manuel
R. Dulay. This is so because Manuel R. Dulay was not only president
and treasurer but also the general manager of the corporation. The
corporation was a closed family corporation and the only
non-relative in the board of directors was Atty. Plaridel C. Jose who
appeared on paper as the secretary. There is no denying the fact, however,
that Maria Socorro R. Dulay at times acted as secretary. . . ., the Court can
not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc. is a
closed family corporation where the incorporators and directors belong to
one single family. It cannot be concealed that Manuel R. Dulay as president,
treasurer and general manager almost had absolute control over the business
and affairs of the corporation. 24
Moreover, the appellate courts will not disturb the findings of the trial judge
unless he has plainly overlooked certain facts of substance and value that, if
considered, might affect the result of the case, 25 which is not present in the
instant case.
Petitioners' contention that private respondent Torres never acquired
ownership over the subject property since the latter was never in actual
possession of the subject property nor was the property ever delivered to
him is also without merit.
Paragraph 1, Article 1498 of the New Civil Code provides:
When the sale is made through a public instrument, the execution thereof
shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary do not appear or cannot clearly be
inferred.
Under the aforementioned article, the mere execution of the deed of sale in
a public document is equivalent to the delivery of the property. Likewise,
this Court had held that:
It is settled that the buyer in a foreclosure sale becomes the absolute owner
of the property purchased if it is not redeemed during the period of one year
after the registration of the sale. As such, he is entitled to the possession of
the said property and can demand it at any time following the consolidation
of ownership in his name and the issuance to him of a new transfer
certificate of title. The buyer can in fact demand possession of the land even
during the redemption period except that he has to post a bond in
accordance with Section 7 of Act No. 3133 as amended. No such bond is
required after the redemption period if the property is not redeemed.
Possession of the land then becomes an absolute right of the purchaser as
confirmed owner. 26
Therefore, prior physical delivery or possession is not legally required since
the execution of the Deed of Sale in deemed equivalent to delivery.
Finally, we hold that the respondent appellate court did not err in denying
petitioner's motion for reconsideration despite the fact that private
respondents failed to submit their comment to said motion as required by
the respondent appellate court from resolving petitioners' motion for
reconsideration without the comment of the private respondent which was
required merely to aid the court in the disposition of the motion. The courts
are as much interested as the parties in the early disposition of cases before
them. To require otherwise would unnecessarily clog the courts' dockets.
WHEREFORE, the petition is DENIED and the decision appealed from is
hereby AFFIRMED. SO ORDERED.
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC.,
Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO
SHERIFF and GODOFREDO QUILING, in his capacity as Deputy
Sheriff of Calamba, Laguna, Respondents.
DECISION
CRUZ, J.:
This case involves the constitutionality of a presidential decree which, like
all other issuances of President Marcos during his regime, was at that time
regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts
are being tested by the touchstone of the fundamental law that even then
was supposed to limit presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717, which
ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company. The law
outlined the procedure for filing claims against the Agrix companies and
created a Claims Committee to process these claims. Especially relevant to
this case, and noted at the outset, is Sec. 4(1) thereof providing that "all
mortgages and other liens presently attaching to any of the assets of
the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of
private respondent Philippine Veterans Bank a real estate mortgage
dated July 7, 1978, over three (3) parcels of land situated in Los
Baños, Laguna. During the existence of the mortgage, AGRIX went
bankrupt. It was for the expressed purpose of salvaging this and the
other Agrix companies that the aforementioned decree was issued by
President Marcos.
Pursuant thereto, the private respondent filed a claim with the
AGRIX Claims Committee for the payment of its loan credit. In the
meantime, the New Agrix, Inc. and the National Development
Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed
a petition with the Regional Trial Court of Calamba, Laguna, for the
cancellation of the mortgage lien in favor of the private respondent.
For its part, the private respondent took steps to extrajudicially
foreclose the mortgage, prompting the petitioners to file a second
case with the same court to stop the foreclosure. The two cases were
consolidated.
After the submission by the parties of their respective pleadings, the
trial court rendered the impugned decision. Judge Francisco Ma.
Guerrero annulled not only the challenged provision, viz., Sec. 4 (1),
but the entire Pres. Decree No. 1717 on the grounds that: (1) the
presidential exercise of legislative power was a violation of the
principle of separation of powers; (2) the law impaired the obligation
of contracts; and (3) the decree violated the equal protection clause.
The motion for reconsideration of this decision having been denied,
the present petition was filed.: rd
The petition was originally assigned to the Third Division of this
Court but because of the constitutional questions involved it was
transferred to the Court en banc. On August 30, 1988, the Court
granted the petitioner's prayer for a temporary restraining order and
instructed the respondents to cease and desist from conducting a
public auction sale of the lands in question. After the Solicitor
General and the private respondent had filed their comments and the
petitioners their reply, the Court gave due course to the petition and
ordered the parties to file simultaneous memoranda. Upon
compliance by the parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped
from contesting the validity of the decree. In support of this
contention, it cites the recent case of Mendoza v. Agrix Marketing,
Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also
raised but not resolved. The Court, after noting that the petitioners
had already filed their claims with the AGRIX Claims Committee
created by the decree, had simply dismissed the petition on the
ground of estoppel.
The petitioners stress that in the case at bar the private respondent
also invoked the provisions of Pres. Decree No. 1717 by filing a
claim with the AGRIX Claims Committee. Failing to get results, it
sought to foreclose the real estate mortgage executed by AGRIX in
its favor, which had been extinguished by the decree. It was only
when the petitioners challenged the foreclosure on the basis of Sec. 4
(1) of the decree, that the private respondent attacked the validity of
the provision. At that stage, however, consistent with Mendoza, the
private respondent was already estopped from questioning the
constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the
AGRIX Claims Committee pursuant to this decree. It must be noted,
however, that this was done in 1980, when President Marcos was the
absolute ruler of this country and his decrees were the absolute law.
Any judicial challenge to them would have been futile, not to say
foolhardy. The private respondent, no less than the rest of the nation,
was aware of that reality and knew it had no choice under the
circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to
question the dictator's decisions before the courts of justice then. The
record will show, however, that not a single act or issuance of
President Marcos was ever declared unconstitutional, not even by the
highest court, as long as he was in power. To rule now that the
private respondent is estopped for having abided with the decree
instead of boldly assailing it is to close our eyes to a cynical fact of
life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after
filing their claims with the AGRIX Claims Committee, received in
settlement thereof shares of stock valued at P40,000.00 without protest or
reservation. The herein private respondent has not been paid a single
centavo on its claim, which was kept pending for more than seven years for
alleged lack of supporting papers. Significantly, the validity of that claim
was not questioned by the petitioner when it sought to restrain the
extrajudicial foreclosure of the mortgage by the private respondent. The
petitioner limited itself to the argument that the private respondent was
estopped from questioning the decree because of its earlier compliance with
its provisions.
Independently of these observations, there is the consideration that an
affront to the Constitution cannot be allowed to continue existing simply
because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted
above, extinguishing all mortgages and other liens attaching to the assets of
AGRIX. It also notes, with equal concern, the restriction in Subsection (ii)
thereof that all "unsecured obligations shall not bear interest" and in
Subsection (iii) that "all accrued interests, penalties or charges as of date
hereof pertaining to the obligations, whether secured or unsecured, shall not
be recognized."
These provisions must be read with the Bill of Rights, where it is clearly
provided in Section 1 that "no person shall be deprived of life, liberty or
property without due course of law nor shall any person be denied the equal
protection of the law" and in Section 10 that "no law impairing the
obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all
rights, are subject to regulation under the police power for the promotion of
the common welfare. The contention is that this inherent power of the state
may be exercised at any time for this purpose so long as the taking of the
property right, even if based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The
police power is not a panacea for all constitutional maladies. Neither does
its mere invocation conjure an instant and automatic justification for every
act of the government depriving a person of his life, liberty or property.
A legislative act based on the police power requires the concurrence of a
lawful subject and a lawful method. In more familiar words, a) the interests
of the public generally, as distinguished from those of a particular class,
should justify the interference of the state; and b) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the
interests of the public are not sufficiently involved to warrant the
interference of the government with the private contracts of AGRIX. The
decree speaks vaguely of the "public, particularly the small investors," who
would be prejudiced if the corporation were not to be assisted. However,
the record does not state how many there are of such investors, and who
they are, and why they are being preferred to the private respondent and
other creditors of AGRIX with vested property rights.:-cralaw
The public interest supposedly involved is not identified or explained. It has
not been shown that by the creation of the New Agrix, Inc. and the
extinction of the property rights of the creditors of AGRIX, the interests of
the public as a whole, as distinguished from those of a particular class,
would be promoted or protected. The indispensable link to the welfare of
the greater number has not been established. On the contrary, it would
appear that the decree was issued only to favor a special group of investors
who, for reasons not given, have been preferred to the legitimate creditors
of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that
the means employed to rehabilitate AGRIX fall far short of the requirement
that they shall not be unduly oppressive. The oppressiveness is patent on the
face of the decree. The right to property in all mortgages, liens, interests,
penalties and charges owing to the creditors of AGRIX is arbitrarily
destroyed. No consideration is paid for the extinction of the mortgage rights.
The accrued interests and other charges are simply rejected by the decree.
The right to property is dissolved by legislative fiat without regard to the
private interest violated and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes
under the protection of the Bill of Rights. So do interests on loans, as well
as penalties and charges, which are also vested rights once they accrue.
Private property cannot simply be taken by law from one person and given
to another without compensation and any known public purpose. This is
plain arbitrariness and is not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as well.
In extinguishing the mortgage and other liens, the decree lumps the
secured creditors with the unsecured creditors and places them on the
same level in the prosecution of their respective claims. In this
respect, all of them are considered unsecured creditors. The only
concession given to the secured creditors is that their loans are
allowed to earn interest from the date of the decree, but that still does
not justify the cancellation of the interests earned before that date.
Such interests, whether due to the secured or the unsecured creditors,
are all extinguished by the decree. Even assuming such cancellation
to be valid, we still cannot see why all kinds of creditors, regardless
of security, are treated alike.
Under the equal protection clause, all persons or things similarly
situated must be treated alike, both in the privileges conferred and the
obligations imposed. Conversely, all persons or things differently
situated should be treated differently. In the case at bar, persons
differently situated are similarly treated, in disregard of the principle
that there should be equality only among equals.- nad
One may also well wonder why AGRIX was singled out for
government help, among other corporations where the stockholders
or investors were also swindled. It is not clear why other companies
entitled to similar concern were not similarly treated. And surely, the
stockholders of the private respondent, whose mortgage lien had
been cancelled and legitimate claims to accrued interests rejected,
were no less deserving of protection, which they did not get. The
decree operated, to use the words of a celebrated case, 3 "with an evil
eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree
notwithstanding the provision of Article XIV, Section 4 of the 1973
Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law,
provide for the formation, organization, or regulation of private
corporations, unless such corporations are owned or controlled by the
Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the
government. The National Development Corporation was merely
required to extend a loan of not more than P10,000,000.00 to New
Agrix, Inc. Pending payment thereof, NDC would undertake the
management of the corporation, but with the obligation of making
periodic reports to the Agrix board of directors. After payment of the
loan, the said board can then appoint its own management. The
stocks of the new corporation are to be issued to the old investors and
stockholders of AGRIX upon proof of their claims against the
abolished corporation. They shall then be the owners of the new
corporation. New Agrix, Inc. is entirely private and so should have
been organized under the Corporation Law in accordance with the
above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the
contract between AGRIX and the private respondent without
justification. While it is true that the police power is superior to the
impairment clause, the principle will apply only where the contract is
so related to the public welfare that it will be considered congenitally
susceptible to change by the legislature in the interest of the greater
number. 5 Most present-day contracts are of that nature. But as
already observed, the contracts of loan and mortgage executed by
AGRIX are purely private transactions and have not been shown to
be affected with public interest. There was therefore no warrant to
amend their provisions and deprive the private respondent of its
vested property rights.
It is worth noting that only recently in the case of the Development
Bank of the Philippines v. NLRC, 6 we sustained the preference in
payment of a mortgage creditor as against the argument that the
claims of laborers should take precedence over all other claims,
including those of the government. In arriving at this ruling, the
Court recognized the mortgage lien as a property right protected by
the due process and contract clauses notwithstanding the argument
that the amendment in Section 110 of the Labor Code was a proper
exercise of the police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid
exercise of the police power, not being in conformity with the
traditional requirements of a lawful subject and a lawful method. The
extinction of the mortgage and other liens and of the interest and
other charges pertaining to the legitimate creditors of AGRIX
constitutes taking without due process of law, and this is compounded by
the reduction of the secured creditors to the category of unsecured creditors
in violation of the equal protection clause. Moreover, the new corporation,
being neither owned nor controlled by the Government, should have been
created only by general and not special law. And insofar as the decree also
interferes with purely private agreements without any demonstrated
connection with the public interest, there is likewise an impairment of the
obligation of the contract.
With the above pronouncements, we feel there is no more need to rule on
the authority of President Marcos to promulgate Pres. Decree No. 1717
under Amendment No. 6 of the 1973 Constitution. Even if he had such
authority, the decree must fall just the same because of its violation of the
Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is
declared UNCONSTITUTIONAL. The temporary restraining order dated
August 30, 1988, is LIFTED. Costs against the petitioners.- nad
SO ORDERED.
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY &
HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M.
MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO
CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation. Sycip,
Salazar, Hernandez & Gatmaitan for Jacob S. Lim. Renato J. Robles for
BORMAHECO, Inc. and Cervanteses. Leonardo B. Lucena for Constancio
Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the
Court of Appeals in CA-G.R. CV No. 66195 which modified the decision
of the then Court of First Instance of Manila in Civil Case No. 66135. The
plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants
(respondents in G.R. No. 84197) was dismissed but in all other respects the
trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim
requiring Lim to pay plaintiff the amount of P311,056.02, with interest at
the rate of 12% per annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney's fees from July 2,1966, until full payment
is made; plus P70,000.00 moral and exemplary damages.
It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further required to pay cross party
plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half,
the amount of Pl84,878.74 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the
Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer
against defendants Bormaheco, the Cervanteses and Constancio B. Maglana,
is dismissed. Instead, plaintiff is required to indemnify the defendants
Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees
and the amount of P4,379.21, per year from 1966 with legal rate of Cervanteses and Maglana, however, filed a third party claim alleging that
interest up to the time it is paid. they are co-owners of the aircrafts,

Furthermore, the plaintiff is required to pay Constancio B. Maglana
the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this
action was filed in good faith. The fact that the properties of the
Bormaheco and the Cervanteses were attached and that they were
required to file a counterbond in order to dissolve the attachment, is
not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its
discretion.
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an
application for a writ of preliminary attachment against Lim and
respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed
cross-claims against Lim alleging that they were not privies to the contracts
signed by Lim and, by way of counterclaim, sought for damages for being
exposed to litigation and for recovery of the sums of money they advanced
to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay
Pioneer but dismissed Pioneer's complaint against all other defendants.

No damage is decided against Malayan Insurance Company, Inc., the As stated earlier, the appellate court modified the trial court's decision in
third-party defendant, for it only secured the attachment prayed for that the plaintiffs complaint against all the defendants was dismissed. In all
by the plaintiff Pioneer. If an insurance company would be liable for other respects the trial court's decision was affirmed.
damages in performing an act which is clearly within its power and
which is the reason for its being, then nobody would engage in the We first resolve G.R. No. 84197.
insurance business. No further claim or counter-claim for or against
anybody is declared by this Court. (Rollo - G.R. No. 24197, pp.
Petitioner Pioneer Insurance and Surety Corporation avers that:
15-16)

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in
IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE
the airline business as owner-operator of Southern Air Lines (SAL) a
GROUND THAT PETITIONER HAD ALREADY COLLECTED THE
single proprietorship.
PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF
THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS
and Lim entered into and executed a sales contract (Exhibit A) for AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p.
the sale and purchase of two (2) DC-3A Type aircrafts and one (1) 10)
set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with
The petitioner questions the following findings of the appellate court:
Registry No. PIC-718, arrived in Manila on June 7,1965 while the
other aircraft, arrived in Manila on July 18,1965.
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer
had reinsured its risk of liability under the surety bond in favor of JDA and
On May 22, 1965, Pioneer Insurance and Surety Corporation
subsequently collected the proceeds of such reinsurance in the sum of
(Pioneer, petitioner in G.R. No. 84197) as surety executed and issued
P295,000.00. Defendants' alleged obligation to Pioneer amounts to
its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
P295,000.00, hence, plaintiffs instant action for the recovery of the amount
principal, Lim, for the balance price of the aircrafts and spare parts.
of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action as it does not stand
It appears that Border Machinery and Heavy Equipment Company, to be benefited or injured by the judgment.
Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses)
and Constancio Maglana (respondents in both petitions) contributed
Plaintiff Pioneer's contention that it is representing the reinsurer to recover
some funds used in the purchase of the above aircrafts and spare
the amount from defendants, hence, it instituted the action is utterly devoid
parts. The funds were supposed to be their contributions to a new
of merit. Plaintiff did not even present any evidence that it is the
corporation proposed by Lim to expand his airline business. They
attorney-in-fact of the reinsurance company, authorized to institute an
executed two (2) separate indemnity agreements (Exhibits D-1 and
action for and in behalf of the latter. To qualify a person to be a real party in
D-2) in favor of Pioneer, one signed by Maglana and the other jointly
interest in whose name an action must be prosecuted, he must appear to be
signed by Lim for SAL, Bormaheco and the Cervanteses. The
the present real owner of the right sought to be enforced (Moran, Vol. I,
indemnity agreements stipulated that the indemnitors principally
Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the
agree and bind themselves jointly and severally to indemnify and
real party in interest is the party who would be benefited or injured by the
hold and save harmless Pioneer from and against any/all damages,
judgment or the party entitled to the avails of the suit (Salonga v. Warner
losses, costs, damages, taxes, penalties, charges and expenses of
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a
whatever kind and nature which Pioneer may incur in consequence of
present substantial interest as distinguished from a mere expectancy or a
having become surety upon the bond/note and to pay, reimburse and
future, contingent, subordinate or consequential interest (Garcia v. David,
make good to Pioneer, its successors and assigns, all sums and
67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III,
amounts of money which it or its representatives should or may pay
414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d
or cause to be paid or become liable to pay on them of whatever kind
667, 669, quoting 47 C.V. 35).
and nature.

Based on the foregoing premises, plaintiff Pioneer cannot be considered as

On June 10, 1965, Lim doing business under the name and style of
SAL executed in favor of Pioneer as deed of chattel mortgage as
security for the latter's suretyship in favor of the former. It was
stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed (Exhibit D) was duly registered with the Office of
the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law
and the Civil Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting
JDA to request payments from the surety. Pioneer paid a total sum of
P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the
said chattel mortgage before the Sheriff of Davao City. The
the real party in interest as it has already been paid by the reinsurer the sum
of P295,000.00 — the bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff
Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total amount
of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of
P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it
is patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment
as it has already been paid by the reinsurance company of the amount
plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant
Lim's liability to JDA. Well settled is the rule that no person should
unjustly enrich himself at the expense of another (Article 22, New
Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court
based its finding that petitioner was paid by its reinsurer in the
aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their
respective briefs with respondent court; (Rollo, p. 11) (2) even
assuming hypothetically that it was paid by its reinsurer, still none of
the respondents had any interest in the matter since the reinsurance is
strictly between the petitioner and the re-insurer pursuant to section
91 of the Insurance Code; (3) pursuant to the indemnity agreements,
the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable
considering that whatever amount he would recover from the
co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the
reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two
of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so
much of its obligations to JDA as has been paid with reinsurance
money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the amount it
has realized from the sale of the mortgaged properties? (Record on
Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the proceeds
of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety
bond, it is plain that on this score it no longer has any right to collect
to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic),
that is suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer
says: The reinsurers opted instead that the Pioneer Insurance &
Surety Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the reinsurers to
recover the amount.' In other words, insofar as the amount paid to it
by the reinsurers Pioneer is suing defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the reinsurers
for any amount. Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an action for the
benefit of the reinsurers. It is well-settled that an action brought by
an attorney-in-fact in his own name instead of that of the principal
will not prosper, and this is so even where the name of the principal
is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party
who would be benefitted or injured by the judgment or is the party
entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a
real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L-
22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it
paid to JDA is the difference between the two amounts, or P3,666.28. This
is the amount for which Pioneer may sue defendants, assuming that the
indemnity agreement is still valid and effective. But since the amount
realized from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more
claim against defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in
the appellate court. Considering this admitted payment, the only issue that
cropped up was the effect of payment made by the reinsurers to the
petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner
as insured and the reinsuring company pursuant to Section 91 (should be
Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same rights by
subrogation as are acquired in similar cases where the original insurer pays
a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd
925).
The rules of practice in actions on original insurance policies are in general
applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v.
Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company shall
be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines,
Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently
applied in Manila Mahogany Manufacturing Corporation v. Court of
Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from
the insurer, it is provided in said article that the insurer is deemed
subrogated to the rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss, then the aggrieved
party is the one entitled to recover the deficiency. Evidently, under this
legal provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in
dismissing the petitioner's complaint as against the respondents for the
reason that the petitioner was not the real party in interest in the complaint
and, therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the
evidence on record shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except its allegation
that respondent "Maglanas defense and evidence are certainly incredible" (p.
12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete
with evidence to substantiate its finding that the counter-indemnitors are not
liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be
valid and effective after the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts
involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were
still in Japan and could not be mortgaged here in the Philippines. As
soon as the aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this
indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there
is no other security for the claim sought to be enforced by this action,
which necessarily means that the indemnity agreement had ceased to
have any force and effect at the time this action was instituted. Sec 2,
Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso jure
extinguished upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be subrogated to the
right of Pioneer should they make payments to the latter. Articles
2067 and 2080 of the New Civil Code of the Philippines.
Independently of the preceding proposition Pioneer's election of the
remedy of foreclosure precludes any further action to recover any
unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code, known as the Recto
Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage
both by extrajudicial foreclosure and the instant suit. Such being the
case, as provided by the aforementioned provisions, Pioneer shall
have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v.
Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968,
23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change
of their maturity dates discharged these defendants from any liability
as alleged indemnitors. The change of the maturity dates of the
obligations of Lim, or SAL extinguish the original obligations thru
novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum
executed by SAL or Lim and JDA, modifying the maturity dates of
the obligations, as follows:
The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and
payable 4 September 1965, the remainder of which ... shall be due
and payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes
bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each succeeding
three months, that of the last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates,
effected twice, were done without the knowledge, much less, would have it
believed that these defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But
if that were so, there would have been the corresponding documents in the
form of a written notice to as well as written conformity of these defendants,
and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by the
indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan
Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum
Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty The mere failure on the
part of the creditor to demand payment after the debt has become due does
not of itself constitute any extension time referred to herein, (New Civil
Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer
paid the same. Consequently, Pioneer has no more cause of action to
recover from these defendants, as supposed indemnitors, what it has paid to
JDA. By virtue of an express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days from default of Lim or
SAL on every installment, released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these
defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from
Pioneer and its surety by reason of the filing of the instant case against them
and the attachment and garnishment of their properties. The instant action is
clearly unfounded insofar as plaintiff drags these defendants and defendant
Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not
meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose
agreement was to do business through the corporate vehicle but who failed
to incorporate the entity in which they had chosen to invest? How are the
losses to be treated in situations where their contributions to the intended
'corporation' were invested not through the corporate form? This Petition
presents these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the
failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana
and petitioner Lim to incorporate, a de facto partnership among them was
created, and that as a consequence of such relationship all must share in the
losses and/or gains of the venture in proportion to their contribution. The
petitioner, therefore, questions the appellate court's findings ordering him to
reimburse certain amounts given by the respondents to the petitioner
as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his
co-defendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v. Perryman, 119 P.
229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase property to
carry on a business, and their organization is so defective as to come
short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be recognized
(Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555;
Whipple v. Parker, 29 Mich. 369). So, where certain persons
associated themselves as a corporation for the development of land
for irrigation purposes, and each conveyed land to the corporation,
and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was
ever issued in the corporation, it was treated as a trustee for the
associates in an action between them for an accounting, and its
capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such
a relation does not necessarily exist, for ordinarily persons cannot be
made to assume the relation of partners, as between themselves,
when their purpose is that no partnership shall exist (London Assur.
Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.
688), and it should be implied only when necessary to do justice
between the parties; thus, one who takes no part except to subscribe
for stock in a proposed corporation which is never legally formed
does not become a partner with other subscribers who engage in
business under the name of the pretended corporation, so as to be
liable as such in an action for settlement of the alleged partnership
and contribution (Ward v. Brigham, 127 Mass. 24). A partnership
relation between certain stockholders and other stockholders, who
were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment
of debts illegally contracted by the latter (Heald v. Owen, 44 N.W.
210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).
In the instant case, it is to be noted that the petitioner was declared
non-suited for his failure to appear during the pretrial despite
notification. In his answer, the petitioner denied having received any
amount from respondents Bormaheco, the Cervanteses and Maglana.
The trial court and the appellate court, however, found through
Exhibit 58, that the petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty. Constancio B.
Maglana in the ownership of the subject airplanes and spare parts.
The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form
a corporation with the respondents despite his representations to
them. This gives credence to the cross-claims of the respondents to
the effect that they were induced and lured by the petitioner to make
contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his
cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes
and Maglana to expand his airline business. Lim was to procure two DC-3's
from Japan and secure the necessary certificates of public convenience and
necessity as well as the required permits for the operation thereof. Maglana
sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery
to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, promised to incorporate
his airline in accordance with their agreement and proceeded to acquire the
planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the
money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which the
latter considered as their lawful contribution and participation in the
proposed corporation to be known as SAL. Arrangements and negotiations
were undertaken by defendant Lim. Down payments were advanced by
defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh.
E- 1). Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel
mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time
of this trickery and misrepresentation of the other, Jacob Lim, when the
herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim,
thereby forcing them to file an adverse claim in the form of third party
claim. Notwithstanding repeated oral demands made by defendants
Bormaheco and Cervanteses, to defendant Lim, to surrender the possession
of the two planes and their accessories and or return the amount advanced
by the former amounting to an aggregate sum of P 178,997.14 as evidenced
by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which
would entitle the petitioner to a reimbursement of the supposed losses of the
proposed corporation. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be incorporators in transacting
the sale of the airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned
decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
FORMATION AND ORGANIZATION OF OFFICERS
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and
PHILIPS INDUSTRIAL DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE
COMMISSION and STANDARD PHILIPS
CORPORATION, respondents.
Emeterio V. Soliven & Associates for petitioners. Narciso A. Manantan for
private respondent.
MELENCIO-HERRERA, J.:
Petitioners challenge the Decision of the Court of Appeals, dated 31 July
1990, in CA-GR Sp. No. 20067, upholding the Order of the Securities and
Exchange Commission, dated 2 January 1990, in SEC-AC No. 202,
dismissing petitioners' prayer for the cancellation or removal of the word
"PHILIPS" from private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign corporation organized
under the laws of the Netherlands, although not engaged in business here, is
the registered owner of the trademarks PHILIPS and PHILIPS SHIELD
EMBLEM under Certificates of Registration Nos. R-1641 and R-1674,
respectively issued by the Philippine Patents Office (presently known as the
Bureau of Patents, Trademarks and Technology Transfer). Petitioners
Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and
Philips Industrial Developments, Inc. (Philips Industrial, for short),
authorized users of the trademarks PHILIPS and PHILIPS SHIELD
EMBLEM, were incorporated on 29 August 1956 and 25 May 1956,
respectively. All petitioner corporations belong to the PHILIPS
Group of Companies.
Respondent Standard Philips Corporation (Standard Philips), on the
other hand, was issued a Certificate of Registration by respondent
Commission on 19 May 1982.
On 24 September 1984, Petitioners filed a letter complaint with the
Securities & Exchange Commission (SEC) asking for the
cancellation of the word "PHILIPS" from Private Respondent's
corporate name in view of the prior registration with the Bureau of
Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD
EMBLEM" in the name of Petitioner, PEBV, and the previous
registration of Petitioners Philips Electrical and Philips Industrial
with the SEC.
As a result of Private Respondent's refusal to amend its Articles of
Incorporation, Petitioners filed with the SEC, on 6 February 1985, a
Petition (SEC Case No. 2743) praying for the issuance of a Writ of
Preliminary Injunction, alleging, among others, that Private
Respondent's use of the word PHILIPS amounts to an infringement
and clear violation of Petitioners' exclusive right to use the same
considering that both parties engage in the same business.
In its Answer, dated 7 March 1985, Private Respondent countered
that Petitioner PEBV has no legal capacity to sue; that its use of its
corporate name is not at all similar to Petitioners' trademark PHILIPS
when considered in its entirety; and that its products consisting of
chain rollers, belts, bearings and cutting saw are grossly different
from Petitioners' electrical products.
After conducting hearings with respect to the prayer for Injunction;
the SEC Hearing Officer, on 27 September 1985, ruled against the
issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed the Petition
for lack of merit. In so ruling, the latter declared that inasmuch as the
SEC found no sufficient ground for the granting of injunctive relief
on the basis of the testimonial and documentary evidence presented,
it cannot order the removal or cancellation of the word "PHILIPS"
from Private Respondent's corporate name on the basis of the same
evidence adopted in toto during trial on the merits. Besides, Section
18 of the Corporation Code (infra) is applicable only when the
corporate names in question are identical. Here, there is no confusing
similarity between Petitioners' and Private Respondent's corporate
names as those of the Petitioners contain at least two words different
from that of the Respondent. Petitioners' Motion for Reconsideration
was likewise denied on 17 June 1987.
On appeal, the SEC en banc affirmed the dismissal declaring that the
corporate names of Petitioners and Private Respondent hardly breed
confusion inasmuch as each contains at least two different words and,
therefore, rules out any possibility of confusing one for the other.
On 30 January 1990, Petitioners sought an extension of time to file a
Petition for Review on Certiorari before this Court, which Petition
was later referred to the Court of Appeals in a Resolution dated 12
February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court of
Appeals1 swept aside Petitioners' claim that following the ruling
in Converse Rubber Corporation v. Universal Converse Rubber
Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147
SCRA 154), the word PHILIPS cannot be used as part of Private
Respondent's corporate name as the same constitutes a dominant part
of Petitioners' corporate names. In so holding, the Appellate Court
observed that the Converse case is not four-square with the present
case inasmuch as the contending parties in Converse are engaged in a
similar business, that is, the manufacture of rubber shoes. Upholding
the SEC, the Appellate Court concluded that "private respondents'
products consisting of chain rollers, belts, bearings and cutting saw
are unrelated and non-competing with petitioners'
products i.e. electrical lamps such that consumers would not in any
probability mistake one as the source or origin of the product of the other."
The Appellate Court denied Petitioners' Motion for Reconsideration on 20
November 1990, hence, this Petition which was given due course on 22
April 1991, after which the parties were required to submit their
memoranda, the latest of which was received on 2 July 1991. In December
1991, the SEC was also required to elevate its records for the perusal of this
Court, the same not having been apparently before respondent Court of
Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115
(1927), the Court declared that a corporation's right to use its corporate and
trade name is a property right, a right in rem, which it may assert and
protect against the world in the same manner as it may protect its tangible
property, real or personal, against trespass or conversion. It is regarded, to a
certain extent, as a property right and one which cannot be impaired or
defeated by subsequent appropriation by another corporation in the same
field (Red Line Transportation Co. vs. Rural Transit Co., September 8,
1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of a
corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed
317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First
National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its
name is one of its attributes, an element of its existence, and essential to its
identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations
is that each corporation must have a name by which it is to sue and be sued
and do all legal acts. The name of a corporation in this respect designates
the corporation in the same manner as the name of an individual designates
the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538;
Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use
its corporate name is as much a part of the corporate franchise as any other
privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375,
276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association,
18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name
identical with or similar to one already appropriated by a senior corporation
while an individual's name is thrust upon him (See Standard Oil Co. of New
Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A
corporation can no more use a corporate name in violation of the rights of
others than an individual can use his name legally acquired so as to mislead
the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18, expressly provides that:
No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing
law. Where a change in a corporate name is approved, the commission shall
issue an amended certificate of incorporation under the amended name.
(Emphasis supplied)
The statutory prohibition cannot be any clearer. To come within its scope,
two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of
such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by
law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom from
infringement by similarity is determined by priority of adoption (1
Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63, 88 Atl.
30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac.
921). In this regard, there is no doubt with respect to Petitioners'
prior adoption of' the name ''PHILIPS" as part of its corporate name.
Petitioners Philips Electrical and Philips Industrial were incorporated
on 29 August 1956 and 25 May 1956, respectively, while
Respondent Standard Philips was issued a Certificate of Registration
on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner
PEBV has also used the trademark "PHILIPS" on electrical lamps of
all types and their accessories since 30 September 1922, as evidenced
by Certificate of Registration No. 1651.
The second requisite no less exists in this case. In determining the
existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person, using ordinary
care and discrimination. In so doing, the Court must look to the
record as well as the names themselves (Ohio Nat. Life Ins. Co. v.
Ohio Life Ins. Co., 210 NE 2d 298). While the corporate names of
Petitioners and Private Respondent are not identical, a reading of
Petitioner's corporate names, to wit: PHILIPS EXPORT B.V.,
PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to
conclude that "PHILIPS" is, indeed, the dominant word in that all the
companies affiliated or associated with the principal corporation,
PEBV, are known in the Philippines and abroad as the PHILIPS
Group of Companies.
Respondents maintain, however, that Petitioners did not present an
iota of proof of actual confusion or deception of the public much less
a single purchaser of their product who has been deceived or
confused or showed any likelihood of confusion. It is settled,
however, that proof of actual confusion need not be shown. It
suffices that confusion is probably or likely to occur (6 Fletcher
[Perm Ed], pp. 107-108, enumerating a long line of cases).
It may be that Private Respondent's products also consist of chain
rollers, belts, bearing and the like, while petitioners deal principally
with electrical products. It is significant to note, however, that even
the Director of Patents had denied Private Respondent's application
for registration of the trademarks "Standard Philips & Device" for
chain, rollers, belts, bearings and cutting saw. That office held that
PEBV, "had shipped to its subsidiaries in the Philippines equipment,
machines and their parts which fall under international class where
"chains, rollers, belts, bearings and cutting saw," the goods in
connection with which Respondent is seeking to register
'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No.
2010, June 17, 1988, SEC Rollo).
Furthermore, the records show that among Private Respondent's
primary purposes in its Articles of Incorporation (Annex D, Petition
p. 37, Rollo) are the following:
To buy, sell, barter, trade, manufacture, import, export, or otherwise
acquire, dispose of, and deal in and deal with any kind of goods,
wares, and merchandise such as but not limited to plastics, carbon
products, office stationery and supplies, hardware parts, electrical
wiring devices, electrical component parts, and/or complement
of industrial, agricultural or commercial machineries, constructive
supplies, electrical supplies and other merchandise which are or may
become articles of commerce except food, drugs and cosmetics and
to carry on such business as manufacturer, distributor, dealer,
indentor, factor, manufacturer's representative capacity for domestic
or foreign companies. (emphasis ours)
For its part, Philips Electrical also includes, among its primary
purposes, the following:
To develop manufacture and deal in electrical products, including
electronic, mechanical and other similar products . . . (p. 30, Record
of SEC Case No. 2743)
Given Private Respondent's aforesaid underlined primary purpose,
nothing could prevent it from dealing in the same line of business of
electrical devices, products or supplies which fall under its primary
purposes. Besides, there is showing that Private Respondent not only
manufactured and sold ballasts for fluorescent lamps with their
corporate name printed thereon but also advertised the same as,
among others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26,
37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by
Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its
corporate name [STANDARD PHILIPS CORPORATION] . . . tends to
show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" (Rollo, p. 137).
The subsequent appropriator of the name or one confusingly similar thereto
usually seeks an unfair advantage, a free ride of another's goodwill
(American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et
al, 89 App DC 269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the
SEC maintains that the corporate names of Petitioners PHILIPS
ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC. contain at least two words different from that of
the corporate name of respondent STANDARD PHILIPS CORPORATION,
which words will readily identify Private Respondent from Petitioners and
vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership
Names formulated by the SEC, the proposed name "should not be similar to
one already used by another corporation or partnership. If the proposed
name contains a word already used as part of the firm name or style of a
registered company; the proposed name must contain two other words
different from the company already registered" (Emphasis ours). It is then
pointed out that Petitioners Philips Electrical and Philips Industrial have
two words different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark or trade name
which was registered as far back as 1922. Petitioners, therefore, have the
exclusive right to its use which must be free from any infringement by
similarity. A corporation has an exclusive right to the use of its name,
which may be protected by injunction upon a principle similar to that upon
which persons are protected in the use of trademarks and tradenames (18
C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on the
corporation which has acquired a right to that name and perhaps carried on
its business thereunder, that another should attempt to use the same name,
or the same name with a slight variation in such a way as to induce persons
to deal with it in the belief that they are dealing with the corporation which
has given a reputation to the name (6 Fletcher [Perm Ed], pp.
39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F
510). Notably, too, Private Respondent's name actually contains only a
single word, that is, "STANDARD", different from that of Petitioners
inasmuch as the inclusion of the term "Corporation" or "Corp." merely
serves the Purpose of distinguishing the corporation from partnerships and
other business organizations.
The fact that there are other companies engaged in other lines of business
using the word "PHILIPS" as part of their corporate names is no defense
and does not warrant the use by Private Respondent of such word which
constitutes an essential feature of Petitioners' corporate name previously
adopted and registered and-having acquired the status of a well-known
mark in the Philippines and internationally as well (Bureau of Patents
Decision No. 88-35 [TM], June 17, 1988, SEC Records).
In support of its application for the registration of its Articles of
Incorporation with the SEC, Private Respondent had submitted an
undertaking "manifesting its willingness to change its corporate name in the
event another person, firm or entity has acquired a prior right to the use of
the said firm name or one deceptively or confusingly similar to it." Private
respondent must now be held to its undertaking.
As a general rule, parties organizing a corporation must choose a name at
their peril; and the use of a name similar to one adopted by another
corporation, whether a business or a nonbusiness or non-profit organization
if misleading and likely to injure it in the exercise in its corporate functions,
regardless of intent, may be prevented by the corporation having the prior
right, by a suit for injunction against the new corporation to prevent the use
of the name (American Gold Star Mothers, Inc. v. National Gold Star
Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948).
WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990,
and its Resolution dated 20 November 1990, are SET ASIDE and a new
one entered ENJOINING private respondent from using "PHILIPS" as a
feature of its corporate name, and ORDERING the Securities and Exchange
Commission to amend private respondent's Articles of Incorporation by
deleting the word PHILIPS from the corporate name of private respondent.
No costs.
SO ORDERED.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT
OF APPEALS, LYCEUM OF APARRI, LYCEUM OF
CABAGAN, LYCEUM OF CAMALANIUGAN, INC.,
LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI
LYCEUM, CENTRAL LYCEUM OF CATANDUANES,
LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF
EASTERN MINDANAO, INC. and WESTERN PANGASINAN
LYCEUM, INC., respondents.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES;
REGISTRATION OF PROPOSED NAME WHICH IS IDENTICAL
OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING
CORPORATION, PROHIBITED; CONFUSION AND
DECEPTION EFFECTIVELY PRECLUDED BY THE
APPENDING OF GEOGRAPHIC NAMES TO THE WORD
"LYCEUM". — The Articles of Incorporation of a corporation must,
among other things, set out the name of the corporation. Section 18
of the Corporation Code establishes a restrictive rule insofar as
corporate names are concerned: "Section 18. Corporate name. — No
corporate name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of
incorporation under the amended name." The policy underlying the
prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of
any existing corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of fraud
upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision over
corporations. We do not consider that the corporate names of private
respondent institutions are "identical with, or deceptively or
confusingly similar" to that of the petitioner institution. True enough,
the corporate names of private respondent entities all carry the word
"Lyceum" but confusion and deception are effectively precluded by
the appending of geographic names to the word "Lyceum." Thus, we
do not believe that the "Lyceum of Aparri" can be mistaken by the
general public for the Lyceum of the Philippines, or that the
"Lyceum of Camalaniugan" would be confused with the Lyceum of
the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF
WORD "LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. —
It is claimed, however, by petitioner that the word "Lyceum" has
acquired a secondary meaning in relation to petitioner with the result
that word, although originally a generic, has become appropriable by
petitioner to the exclusion of other institutions like private
respondents herein. The doctrine of secondary meaning originated in
the field of trademark law. Its application has, however, been
extended to corporate names sine the right to use a corporate name to
the exclusion of others is based upon the same principle which
underlies the right to use a particular trademark or tradename. In
Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of
secondary meaning was elaborated in the following terms: " . . . a
word or phrase originally incapable of exclusive appropriation with
reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long and
so exclusively by one producer with reference to his article that, in
that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product." The
question which arises, therefore, is whether or not the use by
petitioner of "Lyceum" in its corporate name has been for such
length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of
the general public (or at least that portion of the general public which
has to do with schools). The Court of Appeals recognized this issue
and answered it in the negative: "Under the doctrine of secondary
meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because
geographical or otherwise descriptive might nevertheless have been used so
long and so exclusively by one producer with reference to this article that,
in that trade and to that group of the purchasing public, the word or phrase
has come to mean that the article was his produce (Ana Ang vs. Toribio
Teodoro, 74 Phil. 56). This circumstance has been referred to as the
distinctiveness into which the name or phrase has evolved through the
substantial and exclusive use of the same for a considerable period of
time. . . . No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word 'Lyceum' has indeed
acquired secondary meaning in favor of the appellant. If there was any of
this kind, the same tend to prove only that the appellant had been using the
disputed word for a long period of time. . . . In other words, while the
appellant may have proved that it had been using the word 'Lyceum' for a
long period of time, this fact alone did not amount to mean that the said
word had acquired secondary meaning in its favor because the appellant
failed to prove that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that
confusion will surely arise if the same word were to be used by other
educational institutions. Consequently, the allegations of the appellant in its
first two assigned errors must necessarily fail." We agree with the Court of
Appeals. The number alone of the private respondents in the case at bar
suggests strongly that petitioner's use of the word "Lyceum" has not been
attended with the exclusivity essential for applicability of the doctrine of
secondary meaning. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western Pangasinan Lyceum and
a little later with other private respondent institutions which registered with
the SEC using "Lyceum" as part of their corporation names. There may
well be other schools using Lyceum or Liceo in their names, but not
registered with the SEC because they have not adopted the corporate form
of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO
DETERMINE WHETHER THEY ARE CONFUSINGLY OR
DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. — petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that
other institutions may use "Lyceum" as part of their corporate names. To
determine whether a given corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate name, it is not enough
to ascertain the presence of "Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when the name of petitioner
is juxtaposed with the names of private respondents, they are not reasonably
regarded as "identical" or "confusingly or deceptively similar" with each
other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities
and Exchange Commission ("SEC"). When it first registered with the SEC
on 21 September 1950, it used the corporate name Lyceum of the
Philippines, Inc. and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to
compel the private respondents, which are also educational institutions, to
delete the word "Lyceum" from their corporate names and permanently to
enjoin them from using "Lyceum" as part of their respective names.
Some of the private respondents actively participated in the proceedings
before the SEC. These are the following, the dates of their original SEC
registration being set out below opposite their respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in default for
failure to file an answer despite service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3)
other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum
of Malacanay and the Lyceum of Marbel, for failure to serve
summons upon these two (2) entities. The case against the Liceum of
Araullo was dismissed when that school motu proprio change its
corporate name to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner
had sometime before commenced in the SEC a proceeding
(SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require
it to change its corporate name and to adopt another name not
"similar [to] or identical" with that of petitioner. In an Order dated 20
April 1977, Associate Commissioner Julio Sulit held that the
corporate name of petitioner and that of the Lyceum of Baguio, Inc.
were substantially identical because of the presence of a "dominant"
word, i.e., "Lyceum," the name of the geographical location of the
campus being the only word which distinguished one from the other
corporate name. The SEC also noted that petitioner had registered as
a corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1
and ordered the latter to change its name to another name "not
similar or identical [with]" the names of previously registered
entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the
Supreme Court in a case docketed as G.R. No. L-46595. In a Minute
Resolution dated 14 September 1977, the Court denied the Petition
for Review for lack of merit. Entry of judgment in that case was
made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595,
petitioner then wrote all the educational institutions it could find
using the word "Lyceum" as part of their corporate name, and
advised them to discontinue such use of "Lyceum." When, with the
passage of time, it became clear that this recourse had failed,
petitioner instituted before the SEC SEC-Case No. 2579 to enforce
what petitioner claims as its proprietary right to the word "Lyceum."
The SEC hearing officer rendered a decision sustaining petitioner's
claim to an exclusive right to use the word "Lyceum." The hearing
officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case
(SEC-Case No. 1241) and held that the word "Lyceum" was capable
of appropriation and that petitioner had acquired an enforceable
exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the
decision of the hearing officer was reversed and set aside. The SEC
En Banc did not consider the word "Lyceum" to have become so
identified with petitioner as to render use thereof by other institutions
as productive of confusion about the identity of the schools
concerned in the mind of the general public. Unlike its hearing
officer, the SEC En Banc held that the attaching of geographical
names to the word "Lyceum" served sufficiently to distinguish the
schools from one another, especially in view of the fact that the
campuses of petitioner and those of the private respondents were
physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its
Decision dated 28 June 1991, however, the Court of Appeals
affirmed the questioned Orders of the SEC En Banc. 4 Petitioner filed a
motion for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed
the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme
Court in G.R. No. L-46595 did not constitute stare decisis as to apply to this
case and in not holding that said Resolution bound subsequent
determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western
Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not
acquired a secondary meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word
cannot be appropriated by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily
seriatim. We begin by noting that the Resolution of the Court in G.R. No.
L-46595 does not, of course, constitute res adjudicata in respect of the case
at bar, since there is no identity of parties. Neither is stare decisis pertinent,
if only because the SEC En Banc itself has re-examined Associate
Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute
Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption
of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set
out the name of the corporation. 6 Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate names are concerned:
"SECTION 18. Corporate name. — No corporate name may be allowed by
the Securities an Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing
or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of
incorporation under the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration
of a corporate name which is "identical or deceptively or confusingly
similar" to that of any existing corporation or which is "patently deceptive"
or "patently confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of
difficulties of administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar" to that
of the petitioner institution. True enough, the corporate names of private
respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names
to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri"
can be mistaken by the general public for the Lyceum of the Philippines, or
that the "Lyceum of Camalaniugan" would be confused with the Lyceum of
the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion
which in turn referred to a locality on the river Ilissius in ancient Athens
"comprising an enclosure dedicated to Apollo and adorned with fountains
and buildings erected by Pisistratus, Pericles and Lycurgus frequented by
the youth for exercise and by the philosopher Aristotle and his followers for
teaching." 8 In time, the word "Lyceum" became associated with schools
and other institutions providing public lectures and concerts and public
discussions. Thus today, the word "Lyceum" generally refers to a school or
an institution of learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also found in Spanish
(liceo) and in French (lycee). As the Court of Appeals noted in its Decision,
Roman Catholic schools frequently use the term; e.g., "Liceo de Manila,"
"Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de
Albay." 9 "Lyceum" is in fact as generic in character as the word
"university." In the name of the petitioner, "Lyceum" appears to be a
substitute for "university;" in other places, however, "Lyceum," or "Liceo"
or "Lycee" frequently denotes a secondary school or a college. It may be
(though this is a question of fact which we need not resolve) that the
use of the word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number of
educational institutions have adopted "Lyceum" or "Liceo" as part of
their corporate names. Since "Lyceum" or "Liceo" denotes a school
or institution of learning, it is not unnatural to use this word to
designate an entity which is organized and operating as an
educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has
acquired a secondary meaning in relation to petitioner with the result
that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like
private respondents herein.
The doctrine of secondary meaning originated in the field of
trademark law. Its application has, however, been extended to
corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies
the right to use a particular trademark or tradename. 10 In Philippine
Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of
secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation
with reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long and
so exclusively by one producer with reference to his article that, in
that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product." 12
The question which arises, therefore, is whether or not the use by
petitioner of "Lyceum" in its corporate name has been for such
length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of
the general public (or at least that portion of the general public which
has to do with schools). The Court of Appeals recognized this issue
and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference to an
article in the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that
group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74
Phil. 56). This circumstance has been referred to as the
distinctiveness into which the name or phrase has evolved through
the substantial and exclusive use of the same for a considerable
period of time. Consequently, the same doctrine or principle cannot
be made to apply where the evidence did not prove that the business
(of the plaintiff) has continued for so long a time that it has become
of consequence and acquired a good will of considerable value such
that its articles and produce have acquired a well-known reputation,
and confusion will result by the use of the disputed name (by the
defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92
Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to
satisfy the aforementioned requisites. No evidence was ever
presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary
meaning in favor of the appellant. If there was any of this kind, the
same tend to prove only that the appellant had been using the
disputed word for a long period of time. Nevertheless, its (appellant)
exclusive use of the word (Lyceum) was never established or proven
as in fact the evidence tend to convey that the cross-claimant was
already using the word 'Lyceum' seventeen (17) years prior to the
date the appellant started using the same word in its corporate name.
Furthermore, educational institutions of the Roman Catholic Church
had been using the same or similar word like 'Liceo de Manila,'
'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de
Albay' long before appellant started using the word 'Lyceum'. The
appellant also failed to prove that the word 'Lyceum' has become so
identified with its educational institution that confusion will surely
arise in the minds of the public if the same word were to be used by
other educational institutions.
In other words, while the appellant may have proved that it had been using
the word 'Lyceum' for a long period of time, this fact alone did not amount
to mean that the said word had acquired secondary meaning in its favor
because the appellant failed to prove that it had been using the same word
all by itself to the exclusion of others. More so, there was no evidence
presented to prove that confusion will surely arise if the same word were to
be used by other educational institutions. Consequently, the allegations of
the appellant in its first two assigned errors must necessarily fail." 13
(Underscoring partly in the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's use of the
word "Lyceum" has not been attended with the exclusivity essential for
applicability of the doctrine of secondary meaning. It may be noted also that
at least one of the private respondents, i.e., the Western Pangasinan Lyceum,
Inc., used the term "Lyceum" seventeen (17) years before the petitioner
registered its own corporate name with the SEC and began using the word
"Lyceum." It follows that if any institution had acquired an exclusive right
to the word "Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western Pangasinan
Lyceum, Inc. failed to reconstruct its records before the SEC in accordance
with the provisions of R.A. No. 62, which records had been destroyed
during World War II, Western Pangasinan Lyceum should be deemed to
have lost all rights it may have acquired by virtue of its past registration. It
might be noted that the Western Pangasinan Lyceum, Inc. registered with
the SEC soon after petitioner had filed its own registration on 21 September
1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to
have lost its rights under its original 1933 registration, appears to us to be
quite secondary in importance; we refer to this earlier registration simply to
underscore the fact that petitioner's use of the word "Lyceum" was neither
the first use of that term in the Philippines nor an exclusive use thereof.
Petitioner's use of the word "Lyceum" was not exclusive but was in truth
shared with the Western Pangasinan Lyceum and a little later with other
private respondent institutions which registered with the SEC using
"Lyceum" as part of their corporation names. There may well be other
schools using Lyceum or Liceo in their names, but not registered with the
SEC because they have not adopted the corporate form of organization.
We conclude and so hold that petitioner institution is not entitled to a
legally enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use "Lyceum" as part of
their corporate names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with another entity's
corporate name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their entirety
and when the name of petitioner is juxtaposed with the names of private
respondents, they are not reasonably regarded as "identical" or "confusingly
or deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on
the part of the public respondent Court of Appeals, the Petition for Review
is DENIED for lack of merit, and the Decision of the Court of Appeals
dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR. and
ROSALINA F. JAVIER, Petitioners, v. HON. COURT OF APPEALS,
PAIC SAVINGS & MORTGAGE BANK, INC., SHERIFFS GRACE
BELVIS, SOFRONIO VILLARIN, PIO MARTINEZ and NICANOR
BLANCO, Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is an appeal by certiorari under Rule 45 of the Rules of Court
which seeks to set aside the decision1 of the Court of Appeals dated 31
January 1997 which affirmed in toto the decision of Branch 62 of the
Regional Trial Court (RTC) of Makati City, dismissing the complaint for
Annulment of Mortgage and Foreclosure with Preliminary Injunction,
Prohibition and Damages filed by petitioners, and its Resolution 2 dated 20
June 1997 denying petitioners' motion for reconsideration.
A complaint3 for Annulment of Mortgage and Foreclosure with
Preliminary Injunction, Prohibition and Damages was filed by
petitioners P.C. Javier & Sons, Inc. and spouses Pablo C. Javier, Sr.
and Rosalina F. Javier against PAIC Savings & Mortgage Bank, Inc.,
Grace S. Belvis, Acting Ex Officio Regional Sheriff of Pasig, Metro
Manila and Sofronio M. Villarin, Deputy Sheriff-in-Charge, before
Branch 62 of the RTC of Makati City, on 07 May 1984. The case
was docketed as Civil Case No. 7184.
On 10 May 1984, a Supplemental Complaint4 was filed to include
additional defendants, namely: Pio Martinez, Acting
Ex Officio Regional Sheriff of Antipolo, Rizal, and Nicanor D.
Blanco, Deputy Sheriff-in-Charge.
The facts that gave rise to the aforesaid complaint, as found by
Branch 62 of the RTC of Makati City, and adopted by the respondent
court, are as follows:
In February, 1981, Plaintiff P.C. Javier and Sons Services, Inc.,
Plaintiff Corporation, for short, applied with First Summa Savings
and Mortgage Bank, later on renamed as PAIC Savings and
Mortgage Bank, Defendant Bank, for short, for a loan
accommodation under the Industrial Guarantee Loan Fund (IGLF)
for P1.5 Million. On March 21, 1981, Plaintiff Corporation through
Plaintiff Pablo C. Javier, Plaintiff Javier for short, was advised that
its loan application was approved and that the same shall be
forwarded to the Central Bank (CB) for processing and release
(Exhibit A also Exhibit 8).
The CB released the loan to Defendant Bank in two (2) tranches
of P750,000 each. The first tranche was released to the Plaintiff
Corporation on May 18, 1981 in the amount of P750,000.00 and the
second tranche was released to Plaintiff Corporation on November
21, 1981 in the amount of P750,000.00. From the second tranche
release, the amount of P250,000.00 was deducted and deposited in
the name of Plaintiff Corporation under a time deposit.
Plaintiffs claim that the loan releases were delayed; that the amount
of P250,000.00 was deducted from the IGLF loan of P1.5 Million
and placed under time deposit; that Plaintiffs were never allowed to
withdraw the proceeds of the time deposit because Defendant Bank
intended this time deposit as automatic payments on the accrued
principal and interest due on the loan. Defendant Bank, however,
claims that only the final proceeds of the loan in the amount
of P750,000.00 was delayed the same having been released to
Plaintiff Corporation only on November 20, 1981, but this was
because of the shortfall in the collateral cover of Plaintiff's loan; that
this second tranche of the loan was precisely released after a firm
commitment was made by Plaintiff Corporation to cover the
collateral deficiency through the opening of a time deposit using a
portion of the loan proceeds in the amount of P250,000.00 for the
purpose; that in compliance with their commitment to submit
additional security and open time deposit, Plaintiff Javier in fact
opened a time deposit for P250,000.00 and on February 15, 1983,
executed a chattel mortgage over some machineries in favor of
Defendant Bank; that thereafter, Plaintiff Corporation defaulted in
the payment of its IGLF loan with Defendant Bank hence Defendant
Bank sent a demand letter dated November 22, 1983, reminding
Plaintiff Javier to make payments because their accounts have been
long overdue; that on May 2, 1984, Defendant Bank sent another
demand letter to Plaintiff spouses informing them that since they
have defaulted in paying their obligation, their mortgage will now be
foreclosed; that when Plaintiffs still failed to pay, Defendant Bank
initiated extrajudicial foreclosure of the real estate mortgage
executed by Plaintiff spouses and accordingly the auction sale of the
property covered by TCT No. 473216 was scheduled by the Ex
Officio Sheriff on May 9, 1984.5
The instant complaint was filed to forestall the extrajudicial
foreclosure sale of a piece of land covered by Transfer Certificate of
Title (TCT) No. 4732166 mortgaged by petitioner corporation in
favor of First Summa Savings and Mortgage Bank which bank was
later renamed as PAIC Savings and Mortgage Bank, Inc. 7 It likewise
asked for the nullification of the Real Estate Mortgages it entered
into with First Summa Savings and Mortgage Bank. The
supplemental complaint added several defendants who scheduled for
public auction other real estate properties contained in the same real
estate mortgages and covered by TCTs No. N-5510, No. 426872, No.
506346 and Original Certificate of Title No. 10146.8
Several extrajudicial foreclosures of the mortgaged properties were
scheduled but were temporarily restrained by the RTC notwithstanding the
denial9 of petitioners' prayer for a writ of preliminary injunction. In an
Order10 dated 10 December 1990, the RTC ordered respondents-sheriffs to
maintain the status quo and to desist from further proceeding with the
extrajudicial foreclosure of the mortgaged properties.
Among the issues raised by petitioners at the RTC are whether or not First
Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank,
Inc. are one and the same entity, and whether or not their obligation is
already due and demandable at the time respondent bank commenced to
extrajudicially foreclose petitioners' properties in April 1984.
The RTC declared that First Summa Savings and Mortgage Bank and PAIC
Savings and Mortgage Bank, Inc. are one and the same entity and that
petitioner corporation is liable to respondent bank for the unpaid balance of
its Industrial Guarantee Loan Fund (IGLF) loans. The RTC further ruled
that respondent bank was justified in extrajudicially foreclosing the real
estate mortgages executed by petitioner corporation in its favor because the
loans were already due and demandable when it commenced foreclosure
proceedings in April 1984.
In its decision dated 06 July 1993, the RTC disposed of the case as follows:
Premises considered, judgment is hereby rendered dismissing the
Complaint against Defendant Bank and ordering Plaintiffs to pay Defendant
Bank jointly and severally, the following:
1. The principal amount of P700,453.45 under P.N. No.
713 plus all the accrued interests, liquidated damages
and other fees due thereon from March 18, 1983 until
fully paid as provided in said PN;
2. The principal amount of P749,879.38 under P.N. No.
841 plus all the accrued interests, liquidated damages
and other fees due thereon from September 1, 1982
until fully paid as provided in such PN;
3. The amount of P40,000.00 as actual damages;
4. The amount of P30,000.00 as exemplary damages;
5. The amount of P50,000.00 as attorney's fees; plus
6. Cost of suit.11
Petitioners filed a Motion for Reconsideration12 which was opposed13 by
respondent bank. The motion was denied in an Order dated 11 May 1994.
Petitioners appealed the decision to the Court of Appeals. The latter
affirmed in toto the decision of the lower court. It also denied petitioners'
motion for reconsideration.
Hence, this appeal by certiorari.
Petitioners assigned the following as errors:
A. PUBLIC RESPONDENT COURT GRAVELY
ERRED WHEN IT SUSTAINED THE DISMISSAL
OF PETITIONERS' COMPLAINT AND IN
AFFIRMING THE RIGHT OF THE RESPONDENT
BANK TO COLLECT THE IGLF LOANS IN LIEU
OF FIRST SUMMA SAVINGS AND MORTGAGE
BANK WHICH ORIGINALLY GRANTED SAID
LOANS.
COROLLARY TO THE ABOVE ARGUMENT, THE
PUBLIC RESPONDENT COURT ALSO GRAVELY
ERRED WHEN IT RULED THAT THE
PETITIONERS CANNOT WITHHOLD THEIR
PAYMENT TO THE RESPONDENT BANK
NOTWITHSTANDING THE ADMITTED
 INABILITY OF THE RESPONDENT BANK
TO FURNISH THE PETITIONERS THE SAID
REQUESTED DOCUMENTS.
b. PUBLIC RESPONDENT COURT
GRAVELY ERRED WHEN IT SUSTAINED
THE COLLECTION OF THE ENTIRE
PROCEEDS OF THE IGLF LOANS OF
P1,500,000.00 DESPITE THE FACT THAT
THE P250,000.00 OF THIS LOAN WAS
WITHHELD BY THE FIRST SUMMA
SAVINGS AND MORTGAGE BANK TO
BECOME PART OF THE COLLATERALS TO
THE SAID P1,500,000.00 LOAN.
c. PUBLIC RESPONDENT COURT
GRAVELY ERRED WHEN IT SUSTAINED
THE DAMAGES AWARDED TO THE
RESPONDENT BANK DESPITE THE
ABSENCE OF MALICE OR BAD FAITH ON
THE PART OF THE PETITIONERS IN FILING
THIS CASE AGAINST THE RESPONDENT
BANK.
On the first assigned error, petitioners argue that they are legally
justified to withhold their amortized payments to the respondent bank
until such time they would have been properly notified of the change
in the corporate name of First Summa Savings and Mortgage Bank.
They claim that they have never received any formal notice of the
alleged change of corporate name of First Summa Savings and
Mortgage Bank to PAIC Savings & Mortgage Bank, Inc. They
further claim that the only and first time they received formal
evidence of a change in the corporate name of First Summa Savings
and Mortgage Bank surfaced when respondent bank presented its
witness, Michael Caguioa, on 03 April 1990, where he presented the
Securities and Exchange Commission (SEC) Certificate of Filing of
the Amended Articles of Incorporation of First Summa Savings and
Mortgage Bank,14 the Central Bank (CB) Certificate of Authority15 to
change the name of First Summa Savings and Mortgage Bank to
PAIC Savings and Mortgage Bank, Inc., and the CB Circular
Letter16 dated 27 June 1983.
Their argument does not hold water. Their defense that they should
first be formally notified of the change of corporate name of First
Summa Savings and Mortgage Bank to PAIC Savings and Mortgage
Bank, Inc., before they will continue paying their loan obligations to
respondent bank presupposes that there exists a requirement under a
law or regulation ordering a bank that changes its corporate name to
formally notify all its debtors. After going over the Corporation Code
and Banking Laws, as well as the regulations and circulars of both
the SEC and the Bangko Sentral ng Pilipinas (BSP), we find that
there is no such requirement. This being the case, this Court cannot
impose on a bank that changes its corporate name to notify a debtor
of such change absent any law, circular or regulation requiring it.
Such act would be judicial legislation. The formal notification is,
therefore, discretionary on the bank. Unless there is a law, regulation
or circular from the SEC or BSP requiring the formal notification of
all debtors of banks of any change in corporate name, such
notification remains to be a mere internal policy that banks may or
may not adopt.
In the case at bar, though there was no evidence showing that
petitioners were furnished copies of official documents showing the
First Summa Savings and Mortgage Bank's change of corporate
name to PAIC Savings and Mortgage Bank, Inc., evidence abound
that they had notice or knowledge thereof. Several documents
establish this fact. First, letter17 dated 16 July 1983 signed by
Raymundo V. Blanco, Accountant of petitioner corporation,
addressed to PAIC Savings and Mortgage Bank, Inc. Part of said
letter reads: "In connection with your inquiry as to the utilization of
funds we obtained from the former First Summa Savings and
Mortgage Bank, . . ." Second, Board Resolution 18 of petitioner
corporation signed by Pablo C. Javier, Sr. on 24 August 1983
authorizing him to execute a Chattel Mortgage over certain
machinery in favor of PAIC Savings and Mortgage Bank, Inc. Third,
Secretary's Certificate19 signed by Fortunato E. Gabriel, Corporate
Secretary of petitioner corporation, on 01 September 1983, certifying
that a board resolution was passed authorizing Mr. Pablo C. Javier, Sr. to
execute a chattel mortgage on the corporation's equipment that will serve as
collateral to cover the IGLF loan with PAIC Savings and Mortgage Bank,
Inc. Fourth, undated letter20 signed by Pablo C. Javier, Sr. and addressed to
PAIC Savings and Mortgage Bank, Inc., authorizing Mr. Victor F. Javier,
General Manager of petitioner corporation, to secure from PAIC Savings
and Mortgage Bank, Inc. certain documents for his signature.
From the foregoing documents, it cannot be denied that petitioner
corporation was aware of First Summa Savings and Mortgage Bank's
change of corporate name to PAIC Savings and Mortgage Bank, Inc.
Knowing fully well of such change, petitioner corporation has no valid
reason not to pay because the IGLF loans were applied with and obtained
from First Summa Savings and Mortgage Bank. First Summa Savings and
Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and
the same bank to which petitioner corporation is indebted. A change in the
corporate name does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the identity of the
corporation, or on its property, rights, or liabilities. 21 The corporation, upon
such change in its name, is in no sense a new corporation, nor the successor
of the original corporation. It is the same corporation with a different name,
and its character is in no respect changed.22
Anent the second assigned error, this Court rules that respondent court did
not err when it sustained the collection of the entire proceeds of the IGLF
loans amounting to P1,500,000.00 despite the withholding of P250,000.00
to become part of the collaterals to the said P1,500,000.00 IGLF loan.
Petitioners contend that the collaterals they submitted were more than
sufficient to cover the P1,500,000.00 IGLF loan. Such contention is
untenable. Petitioner corporation was required to place P250,000.00 in a
time deposit with respondent bank for the simple reason that the collateral it
put up was insufficient to cover the IGLF loans it has received. It admitted
the shortfall of its collateral when it authorized petitioner Pablo C. Javier,
Sr., via a board resolution,23 to execute a chattel mortgage over certain
machinery in favor of PAIC Savings and Mortgage Bank, Inc. which was
certified by its corporate secretary.24 If the collateral it put up was sufficient,
why then did it execute another chattel
mortgage?chanroblesvirtualawlibrary
In his order dated 07 September 1984, Hon. Rafael T. Mendoza found that
the loanable value of the lands, buildings, machinery and equipment
amounted only to P934,000.00. The order reads in part:
The terms and conditions of the IGLF loan extended to plaintiff corporation
are governed by the loan and security documents evidencing said loan.
Although the loan agreement was approved by the defendant bank, the
same has to be processed and be finally approved by the Central Bank of
the Philippines, in pursuance to the IGLF program, of which the defendant
bank is an accredited participant. The defendant had to await Central Bank's
advise (sic) regarding the final approval of the loan before the release of the
proceeds thereof. The proceeds of the loan was released to the plaintiff on 6
April and November 20, 1981, and the final proceeds was released only on
November 20, 1981, on account of short fall in the collateral covered by the
lands and buildings as well as the machineries and equipment then subject
of the existing mortgages in favor of the defendant bank, having only a
loanable value of P934,000.00, and only after a firm commitment made by
plaintiff corporation to the defendant bank to correct the collateral
deficiency thru the execution of a chattel mortgage on additional
machineries, equipment and tools and thru the opening of a time deposit
with PAIC Bank using a portion of the loan proceeds in the amount of
P250,000.00 to answer for its obligation to the defendant bank under the
IGLF loan was the final proceeds of the loan released in favor of the
plaintiffs. The delay in the release of the final proceeds of the IGLF loan
was due to the aforestated collateral deficiency.25
As declared by the respondent court, the finding in said order was not
disputed in the appeal before it. It said that what was contained in
petitioners' brief was that "their loans were 'overcollateralized,' and fail to
specify why or in what manner it was so."26 Having failed to raise this issue
before the respondent court, petitioners thus cannot raise this issue before
this Court. Moreover, since the issue of whether or not the collateral put up
by petitioners is sufficient is factual, the same is not proper for this Court's
consideration. The basic rule is that factual questions are beyond the
province of the Supreme Court in a Petition for Review . 27
 Petitioners maintain that to collect the P250,000.00 from them would
be a clear case of unjust enrichment because they have not availed or
used said amount for the same was unlawfully withheld from them.
Date
(Per PN Schedule)
We do not agree. The fundamental doctrine of unjust enrichment is
the transfer of value without just cause or consideration. The
elements of this doctrine are: enrichment on the part of the defendant;
impoverishment on the part of the plaintiff; and lack of cause. The
main objective is to prevent one to enrich himself at the expense of 20, 1982
February
another.28 It is commonly accepted that this doctrine simply means
that a person shall not be allowed to profit or enrich himself
inequitably at another's expense.29 In the instant case, thereMayis20,
no1982
unjust enrichment to speak of. The amount of P225,905.79 was
applied as payment for petitioner corporation's loan which was taken
from the P250,000.00, together with its accrued interest, August
that was20, 1982
placed in time deposit with First Summa Savings and Mortgage Bank.
The use of said amount as payment was approved by petitioner Pablo
C. Javier, Sr. on 17 March 1983.30 As further found by the RTC in its
decision, the balance of the time deposit was withdrawn by
petitioners.31
Petitioner corporation faults respondent bank, then known as First
Summa Savings and Mortgage Bank, for requiring it to put up as
additional collateral the amount of P250,000.00 inasmuch as the CB
never required it to do so. It added that respondent bank took
advantage of its urgent and immediate need at the time for the
proceeds of the IGLF loans that it had no choice but to comply with
respondent bank's requirement to put in time deposits the said
amount as additional collateral.
We agree with respondent court that the questioning of the propriety
of the placing of the P250,000.00 in time deposits32 with respondent
bank as additional collateral was belatedly made. As above-discussed,
the requirement to give additional collateral was warranted because
the collateral petitioner corporation put up failed to cover its IGLF
loans. If petitioner corporation was really bent on questioning the
reasonableness of putting up the aforementioned amount as
additional collateral, it should have done immediately after it made
the time deposits on 26 November 1981. This, it did not do. It
questioned the placing of the time deposits only on 08 February
198433 or long after defendant bank had already demanded full
payment of the loans, then amounting to P2,045,401.79 as of 22
November 1983. It is too late in the day for petitioner corporation to
question the placing of the P250,000.00 in time deposits after it
failed to pay its loan obligations as scheduled, making them due and
demandable, and after a demand for full payment has been made. We
will not allow petitioner corporation to have one's cake and eat it too.
As regards the payments made by petitioner corporation, respondent
court has this to say:
The trial court held, based on plaintiffs' own exhibits, that plaintiff[s]
made the following payments:
On Promissory Note No. 713:
Actual Date of
Amount
PN Schedule) Payment
, 1981 August 3, 1981 P 28,125.00
er 6, 1981 October 28, 1981 28,836.13
ry 6, 1982 January 22, 1982 29,227.38
225,905.79
March 17, 1983
TOTAL P 312,094.30
And on Promissory Note No. 841:
Actual Date of
Amount
Payment
April 13, 1982 P 28,569.30
July 7, 1982 29,254.31
36,795.44
August 31, 1982
TOTAL P 94,619.05
Plaintiff-appellant[s] does not dispute the finding, which is obvious from
the foregoing summary, that plaintiff[s] stopped payments on March 17,
1983 on Promissory Note No. 713, and on August 31, 1982 on Promissory
Note No. 841.
By simply looking at the amortization schedule attached to the two
promissory notes, it is clear that plaintiff[s] already defaulted on its loan
obligations when the defendant Bank gave notice of the foreclosure
proceedings on April 28, 1984. On amortization payments alone, plaintiff[s]
should have paid a total of P459,339 as of April 6, 1984 on Promissory
[Note] No. 713, and a total of P328,173.00 as of February 20, 1984 on
Promissory Note [No.] 841. No extended computation is necessary to
demonstrate that, even without imputing the liquidated damages equivalent
to 2% a month on the delayed payments (see second paragraph of the
promissory notes), the plaintiffs were grossly deficient in amortization
payments, and already in default when the foreclosure proceedings were
commenced. Further, we note that under the terms of the promissory note,
"failure to pay an installment when due shall entitle the bank or its assign to
declare all the obligations as immediately due and payable" (second
paragraph).34
As to the third assigned error, petitioners argue that there being no malice
or bad faith on their part when they filed the instant case, no damages
should have been awarded to respondent bank.
We cannot sustain such argument. The presence of malice or bad faith is
very evident in the case before us. By the documents it executed, petitioner
corporation was well aware that First Summa Savings and Mortgage Bank
changed its corporate name to PAIC Savings and Mortgage Bank, Inc.
Despite knowledge that First Summa Savings and Mortgage Bank and
PAIC Savings and Mortgage Bank, Inc., are one and the same entity, it
pretended otherwise. It used this purported ignorance as an excuse to renege
on its obligation to pay its loans after they became due and after demands
for payment were made, claiming that it never obtained the loans from
respondent bank.
No good faith was shown by petitioner corporation. If it were in good faith
in complying with its loan obligations since it believed that respondent bank
had no right to the payment, it should have made a valid consignation in
court. This, it did not do. If petitioner corporation were at a loss as to who
should receive the payment, it could have easily taken steps and inquired
from the SEC, CB of the Philippines or from the bank itself from which it
received the loans and to where it made previous payments. Further, the
fact that it was respondent bank that was demanding payment for loans
already due and demandable and not First Summa Savings and Mortgage
Bank is sufficient to make petitioner corporation wonder why this is so. It
never took any initiative to clear the matter. Instead, it paid no attention to
the valid demands of respondent bank.
The awarding of actual and compensatory damages, as well as attorney's
fees, is justified under the circumstances. We quote with approval the
reasons given by the RTC for the grant of the same:
Considering that Defendant Bank had been prevented at least four (4) times
from foreclosing the mortgages (i.e., Temporary Restraining Orders of May
9 and 19 and October 22, 1984 and status quo order of December 10, 1990
enjoining the extrajudicial foreclosure sales of May 9 and 16 and
October 23, 1984 and December 20, 1990, respectively), it is proper
that Defendant Bank be reimbursed its actual expenses. The amount
of P40,000.00 is reasonable reimbursement for the publication and
other expenses incurred in the four (4) extrajudicial foreclosures
which were enjoined by the Court. Considering the wanton and
reckless filing of this clearly unfounded and baseless legal action and
the fact that Defendant Bank had to defend itself against such suit,
attorney's fees in the amount of P50,000.00 should be paid by the
Plaintiffs to the Defendant Bank. Defendant Bank failed to adduce
indubitable proof on the moral and exemplary damages that it seeks.
Nevertheless, since such proof is not absolutely necessary and
primarily as an example for the public good to deter others from
filing a similar clearly unfounded legal action, Defendant Bank
should be entitled to an award of exemplary damages.35
This Court finds that petitioners failed to comply with what is
incumbent upon them - to pay their loans when they became due.
The lame excuse they belatedly advanced for their non-payment
cannot and should not prevent respondent bank from exercising its
right to foreclose the real estate mortgages executed in its favor.
WHEREFORE, premises considered, the Court of Appeals decision
dated 31 January 1997 and its resolution dated 20 June 1997 are
hereby AFFIRMED in toto. Costs against petitioners.
SO ORDERED.
PHILIPPINE FIRST INSURANCE COMPANY,
INC., plaintiff-appellant,
vs.
MARIA CARMEN HARTIGAN, CGH, and O.
ENGKEE, defendants-appellees.
BARREDO, J.:
Appeal from the decision dated 6 October 1962 of the Court of First
Instance of Manila — dismissing the action in its Civil Case No.
48925 — brought by the herein plaintiff-appellant Philippine First
Insurance Co., Inc. to the Court of Appeals which could, upon
finding that the said appeal raises purely questions of law, declared
itself without jurisdiction to entertain the same and, in its resolution
dated 15 July 1966, certified the records thereof to this Court for
proper determination.
The antecedent facts are set forth in the pertinent portions of the
resolution of the Court of Appeals referred to as follows:
According to the complaint, plaintiff was originally organized as an
insurance corporation under the name of 'The Yek Tong Lin Fire and
Marine Insurance Co., Ltd.' The articles of incorporation originally
presented before the Security and Exchange Commissioner and
acknowledged before Notary Public Mr. E. D. Ignacio on June 1,
1953 state that the name of the corporation was 'The Yek Tong Lin
Fire and Marine Insurance Co., Ltd.' On May 26, 1961 the articles of
incorporation were amended pursuant to a certificate of the Board of
Directors dated March 8, 1961 changing the name of the corporation
to 'Philippine First Insurance Co., Inc.'.
The complaint alleges that the plaintiff Philippine First Insurance Co.,
Inc., doing business under the name of 'The Yek Tong Lin Fire and
Marine Insurance Co., Lt.' signed as co-maker together with
defendant Maria Carmen Hartigan, CGH, a promissory note for
P5,000.00 in favor of the China Banking Corporation payable within
30 days after the date of the promissory note with the usual banking
interest; that the plaintiff agreed to act as such co-maker of the
promissory note upon the application of the defendant Maria Carmen
Hartigan, CGH, who together with Antonio F. Chua and Chang Ka
Fu, signed an indemnity agreement in favor of the plaintiff,
undertaking jointly and severally, to pay the plaintiff damages, losses
or expenses of whatever kind or nature, including attorney's fees and
legal costs, which the plaintiff may sustain as a result of the
execution by the plaintiff and co-maker of Maria Carmen Hartigan,
CGH, of the promissory note above-referred to; that as a result of the
execution of the promissory note by the plaintiff and Maria Carmen
Hartigan, CGH, the China Banking Corporation delivered to the
defendant Maria Carmen Hartigan, CGH, the sum of P5,000.00
which said defendant failed to pay in full, such that on August 31, 1961 the
same was. renewed and as of November 27, 1961 there was due on account
of the promissory note the sum of P4,559.50 including interest. The
complaint ends with a prayer for judgment against the defendants, jointly
and severally, for the sum of P4,559.50 with interest at the rate of 12% per
annum from November 23, 1961 plus P911.90 by way of attorney's fees and
costs.
Although O. Engkee was made as party defendant in the caption of the
complaint, his name is not mentioned in the body of said complaint.
However, his name Appears in the Annex A attached to the complaint
which is the counter indemnity agreement supposed to have been signed
according to the complaint by Maria Carmen Hartigan, CGH, Antonio F.
Chua and Chang Ka Fu.
In their answer the defendants deny the allegation that the plaintiff formerly
conducted business under the name and style of 'The Yek Tong Lin Fire and
Marine Insurance Co., Ltd.' They admit the execution of the indemnity
agreement but they claim that they signed said agreement in favor of the
Yek Tong Lin Fire and Marine Insurance Co., Ltd.' and not in favor of the
plaintiff. They likewise admit that they failed to pay the promissory note
when it fell due but they allege that since their obligation with the China
Banking Corporation based on the promissory note still subsists, the surety
who co-signed the promissory note is not entitled to collect the value
thereof from the defendants otherwise they will be liable for double amount
of their obligation, there being no allegation that the surety has paid the
obligation to the creditor.
By way of special defense, defendants claim that there is no privity of
contract between the plaintiff and the defendants and consequently, the
plaintiff has no cause of action against them, considering that the complaint
does not allege that the plaintiff and the 'Yek Tong Lin Fire and Marine
Insurance Co., Ltd.' are one and the same or that the plaintiff has acquired
the rights of the latter. The parties after the admission of Exhibit A which is
the amended articles of incorporation and Exhibit 1 which is a demand
letter dated August 16, 1962 signed by the manager of the loans and
discount department of the China Banking Corporation showing that the
promissory note up to said date in the sum of P4,500.00 was still unpaid,
submitted the case for decision based on the pleadings.
Under date of 6 October 1962, the Court of First Instance of Manila
rendered the decision appealed. It dismissed the action with costs against
the plaintiff Philippine First Insurance Co., Inc., reasoning as follows:
... With these undisputed facts in mind, the parties correctly concluded that
the issues for resolution by this Court are as follows:
(a) Whether or not the plaintiff is the real party in interest that may validly
sue on the indemnity agreement signed by the defendants and the Yek Tong
Lin Fire & Marine Insurance Co., Ltd. (Annex A to plaintiff's complaint );
and
(b) Whether or not a suit for indemnity or reimbursement may under said
indemnity agreement prosper without plaintiff having yet paid the amount
due under said promissory note.
In the first place, the change of name of the Yek Tong Lin Fire & Marine
Insurance Co., Ltd. to the Philippines First Insurance Co., Inc. is of dubious
validity. Such change of name in effect dissolved the original corporation
by a process of dissolution not authorized by our corporation law (see Secs.
62 and 67, inclusive, of our Corporation Law). Moreover, said change of
name, amounting to a dissolution of the Yek Tong Lin Fire & Marine
Insurance Co., Ltd., does not appear to have been effected with the written
note or assent of stockholders representing at least two-thirds of the
subscribed capital stock of the corporation, a voting proportion required not
only for the dissolution of a corporation but also for any amendment of its
articles of incorporation (Secs. 18 and 62, Corporation Law). Furthermore,
such change of corporate name appears to be against public policy and may
be effected only by express authority of law (Red Line Transportation Co. v.
Rural Transit Co., Ltd., 60 Phil. 549, 555; Cincinnati Cooperage Co., Ltd.
vs. Vate, 26 SW 538, 539; Pilsen Brewing Co. vs. Wallace, 125 NE 714),
but there is nothing in our corporation law authorizing the change of
corporate name in this jurisdiction.
In the second place, assuming that the change of name of the Yek Tong Lin
Fire & Marine Insurance Co. Ltd., to Philippines pine First Insurance Co.,
Inc., as accomplished on March 8, 1961, is valid, that would mean that the
original corporation, the Yek Tong Lin Fire & Marine Insurance Co.,
Ltd., became dissolved and of no further existence since March 8,
1961, so that on May 15, 1961, the date the indemnity agreement,
Annex A, was executed, said original corporation bad no more power
to enter into any agreement with the defendants, and the agreement
entered into by it was ineffective for lack of capacity of said
dissolved corporation to enter into said agreement. At any rate, even
if we hold that said change of name is valid, the fact remains that
there is no evidence showing that the new entity, the Philippine First
Insurance Co., Inc. has with the consent of the original parties,
assumed the obligations or was assigned the rights of action in the
original corporation, the Yek Tong Lin Fire & Marine Insurance Co.,
Ltd. In other words, there is no evidence of conventional subrogation
of the Plaintiffs in the rights of the Yek Tong Lin Fire & Marine
Insurance Co., Ltd. under said indemnity agreement (Arts. 1300,
1301, New Civil Code). without such subrogation assignment of
rights, the herein plaintiff has no cause of action against the
defendants, and is, therefore, not the right party in interest as
plaintiff.
Last, but not least, assuming that the said change of name was legal
and operated to dissolve the original corporation, the dissolved
corporation, must pursuant to Sec. 77 of our corporation law, be
deemed as continuing as a body corporate for three (3) years from
March 8, 1961 for the purpose of prosecuting and defending suits. It
is, therefore, the Yek Tong Lin Fire & Marine Insurance Co., Ltd.
that is the proper party to sue the defendants under said indemnity
agreement up to March 8, 1964.
Having arrived at the foregoing conclusions, this Court need not
squarely pass upon issue (b) formulated above.
WHEREFORE, plaintiff's action is hereby dismissed, with costs
against the plaintiff.
In due time, the Philippine First Insurance Company, Inc. moved for
reconsideration of the decision aforesaid, but said motion was denied
on December 3, 1962 in an order worded thus:
The motion for reconsideration, dated November 8, 1962, raises no
new issue that we failed to consider in rendering our decision of
October 6, 1962. However, it gives us an opportunity to amplify our
decision as regards the question of change of name of a corporation
in this jurisdiction.
We find nothing in our Corporation Law authorizing a change of
name of a corporation organized pursuant to its provisions. Sec. 18 of
the Corporation Law authorizes, in our opinion, amendment to the
Articles of Incorporation of a corporation only as to matters other
than its corporate name. Once a corporation is organized in this
jurisdiction by the execution and registration of its Articles of
Incorporation, it shall continue to exist under its corporate name for
the lifetime of its corporate existence fixed in its Articles of
Incorporation, unless sooner legally dissolved (Sec. 11, Corp. Law).
Significantly, change of name is not one of the methods of
dissolution of corporations expressly authorized by our Corporation
Law. Also significant is the fact that the power to change its
corporate name is not one of the general powers conferred on
corporations in this jurisdiction (Sec. 13, Corp. Law). The
enumeration of corporate powers made in our Corporation Law
implies the exclusion of all others (Thomas v. West Jersey R. Co.,
101 U.S. 71, 25 L. ed. 950). It is obvious, in this connection, that
change of name is not one of the powers necessary to the exercise of
the powers conferred on corporations by said Sec. 13 (see Sec. 14,
Corp. Law).
To rule that Sec. 18 of our Corporation Law authorizes the change of
name of a corporation by amendment of its Articles of Incorporation
is to indulge in judicial legislation. We have examined the cases cited
in Volume 13 of American Jurisprudence in support of the
proposition that the general power to alter or amend the charter of a
corporation necessarily includes the power to alter the name of a
corporation, and find no justification for said conclusion arrived at by
the editors of American Jurisprudence. On the contrary, the
annotations in favor of plaintiff's view appear to have been based on
decisions in cases where the statute itself expressly authorizes change
of corporate name by amendment of its Articles of Incorporation.
The correct rule in harmony with the provisions of our Corporation Law is
well expressed in an English case as follows:
After a company has been completely register without defect or omission,
so as to be incorporated by the name set forth in the deed of settlement,
such incorporated company has not the power to change its name ...
Although the King by his prerogative might incorporate by a new name,
and the newly named corporation might retain former rights, and sometimes
its former name also, ... it never appears to be such an act as the corporation
could do by itself, but required the same power as created the corporation.
(Reg. v. Registrar of Joint Stock Cos 10 Q.B. 839, 59 E.C.L. 839).
The contrary view appears to represent the minority doctrine, judging from
the annotations on decided cases on the matter.
The movant invokes as persuasive precedent the action of the Securities
Commissioner in tacitly approving the Amended, Articles of Incorporation
on May 26, 1961. We regret that we cannot in good conscience lend
approval to this action of the Securities and Exchange Commissioner. We
find no justification, legal, moral, or practical, for adhering to the view
taken by the Securities and Exchange Commissioner that the name of a
corporation in the Philippines may be changed by mere amendment of its
Articles of Incorporation as to its corporate name. A change of corporate
name would serve no useful purpose, but on the contrary would most
probably cause confusion. Only a dubious purpose could inspire a change
of a corporate. name which, unlike a natural person's name, was chosen by
the incorporators themselves; and our Courts should not lend their
assistance to the accomplishment of dubious purposes.
WHEREFORE, we hereby deny plaintiff's motion for reconsideration,
dated November 8, 1962, for lack of merit.
In this appeal appellant contends that —
I
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS
JURISDICTION, THERE IS NOTHING IN OUR CORPORATION LAW
AUTHORIZING THE CHANGE OF CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A CHANGE OF
CORPORATE NAME APPEARS TO BE AGAINST PUBLIC POLICY;
III
THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE OF
CORPORATE NAME HAS THE LEGAL EFFECT OF DISSOLVING
THE ORIGINAL CORPORATION:
IV
THE TRIAL COURT ERRED IN HOLDING THAT THE CHANGE OF
NAME OF THE YEK TONG LIN FIRE & MARINE INSURANCE CO.,
LTD. IS OF DUBIOUS VALIDITY;
V
THE TRIAL COURT ERRED IN HOLDING THAT THE APPELLANT
HEREIN IS NOT THE RIGHT PARTY INTEREST TO SUE
DEFENDANTS-APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE
COMPLAINT.
Appellant's Position is correct; all the above assignments of error are well
taken. The whole case, however, revolves around only one question. May a
Philippine corporation change its name and still retain its original
personality and individuality as such?
The answer is not difficult to find. True, under Section 6 of the Corporation
Law, the first thing required to be stated in the Articles of Incorporation of
any corn corporation is its name, but it is only one among many
matters equally if not more important, that must be stated therein.
Thus, it is also required, for example, to state the number and names
of and residences of the incorporators and the residence or location
of the principal office of the corporation, its term of existence, the
amount of its capital stock and the number of shares into which it is
divided, etc., etc.
On the other hand, Section 18 explicitly permits the articles of
incorporation to be amended thus:
Sec. 18. — Any corporation may for legitimate corporate purpose or
purposes, amend its articles of incorporation by a majority vote of its
board of directors or trustees and the vote or written assent of
two-thirds of its members, if it be a nonstock corporation or, if it be a
stock corporation, by the vote or written assent of the stockholders
representing at least two-thirds of the subscribed capital stock of the
corporation Provided, however, That if such amendment to the
articles of incorporation should consist in extending the corporate
existence or in any change in the rights of holders of shares of any
class, or would authorize shares with preferences in any respect
superior to those of outstanding shares of any class, or would restrict
the rights of any stockholder, then any stockholder who did not vote
for such corporate action may, within forty days after the date upon
which such action was authorized, object thereto in writing and
demand Payment for his shares. If, after such a demand by a
stockholder, the corporation and the stockholder cannot agree upon
the value of his share or shares at the time such corporate action was
authorized, such values all be ascertained by three disinterested
persons, one of whom shall be named by the stockholder, another by
the corporation, and the third by the two thus chosen. The findings of
the appraisers shall be final, and if their award is not paid by the
corporation within thirty days after it is made, it may be recovered in
an action by the stockholder against the corporation. Upon payment
by the corporation to the stockholder of the agreed or awarded price
of his share or shares, the stockholder shall forthwith transfer and
assign the share or shares held by him as directed by the
corporation: Provided, however, That their own shares of stock
purchased or otherwise acquired by banks, trust companies, and
insurance companies, should be disposed of within six months after
acquiring title thereto.
Unless and until such amendment to the articles of incorporation
shall have been abandoned or the action rescinded, the stockholder
making such demand in writing shall cease to be a stockholder and
shall have no rights with respect to such shares, except the right to
receive payment therefor as aforesaid.
A stockholder shall not be entitled to payment for his shares under
the provisions of this section unless the value of the corporate assets
which would remain after such payment would be at least equal to
the aggregate amount of its debts and liabilities and the aggregate par
value and/or issued value of the remaining subscribed capital stock.
A copy of the articles of incorporation as amended, duly certified to
be correct by the president and the secretary of the corporation and a
majority of the board of directors or trustees, shall be filed with the
Securities and Exchange Commissioner, who shall attach the same to
the original articles of incorporation, on file in his office. From the
time of filing such copy of the amended articles of incorporation, the
corporation shall have the same powers and it and the members and
stockholders thereof shall thereafter be subject to the same liabilities
as if such amendment had been embraced in the original articles of
incorporation: Provided, however, That should the amendment
consist in extending the corporate life, the extension shall not exceed
50 years in any one instance. Provided, further, That the original
articles and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation: And
provided, further, That nothing in this section shall be construed to
authorize any corporation to increase or diminish its capital stock or
so as to effect any rights or actions which accrued to others between
the time of filing the original articles of incorporation and the filing
of the amended articles.
The Securities and, Exchange Commissioner shall be entitled to
collect and receive the sum of ten pesos for filing said copy of the
amended articles of incorporation. Provided, however, That when the
amendment consists in extending the term of corporate existence, the
Securities and Exchange Commissioner shall be entitled to collect and
receive for the filing of its amended articles of incorporation the same fees
collectible under existing law for the filing of articles of incorporation. The
Securities & Exchange Commissioner shall not hereafter file any
amendment to the articles of incorporation of any bank, banking institution,
or building and loan association unless accompanied by a certificate of the
Monetary Board (of the Central Bank) to the effect that such amendment is
in accordance with law. (As further amended by Act No. 3610, Sec. 2 and
Sec. 9. R.A. No. 337 and R.A. No. 3531.)
It can be gleaned at once that this section does not only authorize
corporations to amend their charter; it also lays down the procedure for
such amendment; and, what is more relevant to the present discussion, it
contains provisos restricting the power to amend when it comes to the term
of their existence and the increase or decrease of the capital stock. There is
no prohibition therein against the change of name. The inference is clear
that such a change is allowed, for if the legislature had intended to enjoin
corporations from changing names, it would have expressly stated so in this
section or in any other provision of the law.
No doubt, "(the) name (of a corporation) is peculiarly important as
necessary to the very existence of a corporation. The general rule as to
corporations is that each corporation shall have a name by which it is to sue
and be sued and do all legal acts. The name of a corporation in this respect
designates the corporation in the same manner as the name of an individual
designates the person."1 Since an individual has the right to change his
name under certain conditions, there is no compelling reason why a
corporation may not enjoy the same right. There is nothing sacrosanct in a
name when it comes to artificial beings. The sentimental considerations
which individuals attach to their names are not present in corporations and
partnerships. Of course, as in the case of an individual, such change may
not be made exclusively. by the corporation's own act. It has to follow the
procedure prescribed by law for the purpose; and this is what is important
and indispensably prescribed — strict adherence to such procedure.
Local well known corporation law commentators are unanimous in the view
that a corporation may change its name by merely amending its charter in
the manner prescribed by law.2 American authorities which have persuasive
force here in this regard because our corporation law is of American origin,
the same being a sort of codification of American corporate law,3 are of the
same opinion.
A general power to alter or amend the charter of a corporation necessarily
includes the power to alter the name of the corporation. Ft. Pitt Bldg., etc.,
Assoc. v. Model Plan Bldg., etc., Assoc., 159 Pa. St. 308, 28 Atl. 215; In
re Fidelity Mut. Aid Assoc., 12 W.N.C. (Pa.) 271; Excelsior Oil Co., 3 Pa.
Co. Ct. 184; Wetherill Steel Casting Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec. 7, relating to an
increase of the capital stock of a corporation, it is provided that 'such
agreement may be amended in any other particular, excepting as provided
in the following section', which relates to a decrease of the capital stock
This section has been held to authorize a change in the name of a
corporation. Armington v. Palmer, 21 R.I. 109, 42 Atl. 308, 43, L.R.A. 95,
79 Am. St. Rep. 786. (Vol. 19, American and English Annotated Cases, p.
1239.)
Fletcher, a standard authority on American an corporation law also says:
Statutes are to be found in the various jurisdictions dealing with the matter
of change in corporate names. Such statutes have been subjected to judicial
construction and have, in the main, been upheld as constitutional. In direct
terms or by necessary implication, they authorize corporations new
names and prescribe the mode of procedure for that purpose. The same
steps must be taken under some statutes to effect a change in a corporate
name, as when any other amendment of the corporate charter is sought ....
When the general law thus deals with the subject, a corporation can change
its name only in the manner provided. (6 Fletcher, Cyclopedia of the Law of
Private Corporations, 1968 Revised Volume, pp. 212-213.) (Emphasis
supplied)
The learned trial judge held that the above-quoted proposition are not
supported by the weight of authority because they are based on decisions in
cases where the statutes expressly authorize change of corporate name by
amendment of the articles of incorporation. We have carefully
examined these authorities and We are satisfied of their relevance.
Even Lord Denman who has been quoted by His Honor from In Reg.
v. Registrar of Joint Stock Cos. 10, Q.B., 59 E.C.L. maintains merely
that the change of its name never appears to be such an act as the
corporation could do for itself, but required ;the same Power as
created a corporation." What seems to have been overlooked,
therefore, is that the procedure prescribes by Section 18 of our
Corporation Law for the amendment of corporate charters is
practically identical with that for the incorporation itself of a
corporation.
In the appealed order of dismissal, the trial court, made the
observation that, according to this Court in Red Line Transportation
Co. v. Rural Transit Co., Ltd., 60 Phil, 549, 555, change of name of a
corporation is against public policy. We must clarify that such is not
the import of Our said decision. What this Court held in that case is
simply that:
We know of no law that empowers the Public Service Commission
or any court in this jurisdiction to authorize one corporation to
assume the name of another corporation as a trade name. Both the
Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc., are
Philippine corporations and the very law of their creation and
continued existence requires each to adopt and certify a distinctive
name. The incorporators 'constitute a body politic and
corporate under the name stated in the certificate.' (Section 11, Act
No. 1459, as amended.) A corporation has the power 'of succession
by its corporate name.' (Section 13, ibid.) The name of a corporation
is therefore essential to its existence. It cannot change its name
except in the manner provided by the statute. By that name alone is it
authorized to transact business. The law gives a corporation no
express or implied authority to assume another name that is
unappropriated; still less that of another corporation, which is
expressly set apart for it and protected by the law. If any corporation
could assume at pleasure as an unregistered trade name the name of
another corporation, this practice would result in confusion and open
the door to frauds and evasions and difficulties of administration and
supervision. The policy of the law as expressed our corporation
statute and the Code of Commerce is clearly against such a practice.
(Cf. Scarsdale Pub. Co. — Colonial Press vs. Carter, 116 New York
Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205
Illinois [Appellate Courts], 428, 434.)
In other words, what We have held to be contrary to public policy is
the use by one corporation of the name of another corporation as its
trade name. We are certain no one will disagree that such an act can
only "result in confusion and open the door to frauds and evasions
and difficulties of administration and supervision." Surely, the Red
Line case was not one of change of name.
Neither can We share the posture of His Honor that the change of
name of a corporation results in its dissolution. There is unanimity of
authorities to the contrary.
An authorized change in the name of a corporation has no more
effect upon its identity as a corporation than a change of name of a
natural person has upon his identity. It does not affect the rights of
the corporation or lessen or add to its obligations. After a corporation
has effected a change in its name it should sue and be sued in its new
name .... (13 Am. Jur. 276-277, citing cases.)
A mere change in the name of a corporation, either by the legislature
or by the corporators or stockholders under legislative authority, does
not, generally speaking, affect the identity of the corporation, nor in
any way affect the rights, privileges, or obligations previously
acquired or incurred by it. Indeed, it has been said that a change of
name by a corporation has no more effect upon the identity of the
corporation than a change of name by a natural person has upon the
identity of such person. The corporation, upon such change in its
name, is in no sense a new corporation, nor the successor of the
original one, but remains and continues to be the original corporation.
It is the same corporation with a different name, and its character is
in no respect changed. ... (6 Fletcher, Cyclopedia of the Law of
Private Corporations, 224-225, citing cases.)
The change in the name of a corporation has no more effect upon its
identity as a corporation than a change of name of a natural person has upon
his identity. It does not affect the rights of the corporation, or lessen or add
to its obligations.
England. — Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L. J. Exch. 418.
United States. — Metropolitan Nat. Bank v. Claggett, 141 U.S. 520, 12 S.
Ct. 60, 35 U.S. (L. ed.) 841.
Alabama. — Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So.
670; North Birmingham Lumber Co. v. Sims, 157 Ala. 595, 48 So. 84.
Connecticut. — Trinity Church v. Hall, 22 Com. 125.
Illinois. — Mt. Palatine Academy v. Kleinschnitz 28 III, 133; St. Louis etc.
R. Co. v. Miller, 43 Ill. 199; Reading v. Wedder, 66 III. 80.
Indiana. — Rosenthal v. Madison etc., Plank Road Co., 10 Ind. 358.
Kentucky. — Cahill v. Bigger, 8 B. Mon. 211; Wilhite v. Convent of Good
Shepherd, 177 Ky. 251, 78 S. W. 138.
Maryland. — Phinney v. Sheppard & Enoch Pratt Hospital, 88 Md. 633, 42
Atl. 58, writ of error dismissed, 177 U.S. 170, 20 S. Ct. 573, 44 U.S. (L. ed.)
720.
Missouri. — Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. — Carlon v. City Sav. Bank, 82 Neb. 582, 188 N. W. 334. New
York First Soc of M.E. Church v. Brownell, 5 Hun 464.
Pennsylvania. — Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. — South Carolina Mut Ins. Co. v. Price 67 S.C. 207, 45
S.E. 173.
Virginia. — Wilson v. Chesapeake etc., R. Co., 21 Gratt
654; Wright-Caesar Tobacco Co. v. Hoen, 105 Va. 327, 54 S.E. 309.
Washington. — King v. Ilwaco R. etc., Co., 1 Wash. 127. 23 Pac. 924.
Wisconsin. — Racine Country Bank v. Ayers, 12 Wis. 512.
The fact that the corporation by its old name makes a format transfer of its
property to the corporation by its new name does not of itself show that the
change in name has affected a change in the identity of the
corporation. Palfrey v. Association for Relief, etc., 110 La. 452, 34 So. 600.
The fact that a corporation organized as a state bank afterwards becomes a
national bank by complying with the provisions of the National Banking
Act, and changes its name accordingly, has no effect on its right to sue upon
obligations or liabilities incurred to it by its former name. Michigan Ins.
Bank v. Eldred 143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has been held not to be
affected by the fact that the church afterwards took a different name. Cahill
v. Bigger, 8 B. Mon (ky) 211.
A change in the name of a corporation is not a divestiture of title or such a
change as requires a regular transfer of title to property, whether real or
personal, from the corporation under one name to the same corporation
under another name. McCloskey v. Doherty, 97 Ky. 300, 30 S. W. 649. (19
American and English Annotated Cases 1242-1243.)
As was very aptly said in Pacific Bank v. De Ro 37 Cal. 538, "The changing
of the name of a corporation is no more the creation of a corporation than
the changing of the name of a natural person is the begetting of a natural
person. The act, in both cases, would seem to be what the language which
we use to designate it imports — a change of name, and not a change of
being.
Having arrived at the above conclusion, We have agree with appellant's
pose that the lower court also erred in holding that it is not the right party in
interest to sue defendants-appellees.4 As correctly pointed out by appellant,
the approval by the stockholders of the amendment of its articles of
incorporation changing the name "The Yek Tong Lin Fire & Marine
Insurance Co., Ltd." to "Philippine First Insurance Co., Inc." on
March 8, 1961, did not automatically change the name of said
corporation on that date. To be effective, Section 18 of the
Corporation Law, earlier quoted, requires that "a copy of the articles
of incorporation as amended, duly certified to be correct by the
president and the secretary of the corporation and a majority of the
board of directors or trustees, shall be filed with the Securities &
Exchange Commissioner", and it is only from the time of such filing,
that "the corporation shall have the same powers and it and the
members and stockholders thereof shall thereafter be subject to the
same liabilities as if such amendment had been embraced in the
original articles of incorporation." It goes without saying then that
appellant rightly acted in its old name when on May 15, 1961, it
entered into the indemnity agreement, Annex A, with the
defendant-appellees; for only after the filing of the amended articles
of incorporation with the Securities & Exchange Commission on
May 26, 1961, did appellant legally acquire its new name; and it was
perfectly right for it to file the present case In that new name on
December 6, 1961. Such is, but the logical effect of the change of
name of the corporation upon its actions.
Actions brought by a corporation after it has changed its name should
be brought under the new name although for the enforcement of
rights existing at the time the change was made. Lomb v. Pioneer
Sav., etc., Co., 106 Ala. 591, 17 So. 670: Newlan v. Lombard
University, 62 III. 195; Thomas v. Visitor of Frederick County School,
7 Gill & J (Md.) 388; Delaware, etc., R. Co. v. Trick, 23 N. J. L.
321; Northumberland Country Bank v. Eyer, 60 Pa. St. 436; Wilson v.
Chesapeake etc., R. Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not affect its right to
bring an action on a note given to the corporation under its former
name. Cumberland College v. Ish, 22. Cal. 641; Northwestern
College v. Schwagler, 37 Ia. 577. (19 American and English
Annotated Cases 1243.)
In consequence, We hold that the lower court erred in dismissing
appellant's complaint. We take this opportunity, however, to express
the Court's feeling that it is apparent that appellee's position is more
technical than otherwise. Nowhere in the record is it seriously
pretended that the indebtedness sued upon has already been paid. If
appellees entertained any fear that they might again be made liable to
Yek Tong Lin Fire & Marine Insurance Co. Ltd., or to someone else
in its behalf, a cursory examination of the records of the Securities &
Exchange Commission would have sufficed to clear up the fact that
Yek Tong Lin had just changed its name but it had not ceased to be
their creditor. Everyone should realize that when the time of the
courts is utilized for cases which do not involve substantial questions
and the claim of one of the parties, therein is based on pure
technicality that can at most delay only the ultimate outcome
necessarily adverse to such party because it has no real cause on the
merits, grave injustice is committed to numberless litigants whose
meritorious cases cannot be given all the needed time by the courts.
We address this appeal once more to all members of the bar, in
particular, since it is their bounden duty to the profession and to our
country and people at large to help ease as fast as possible the
clogged dockets of the courts. Let us not wait until the people resort
to other means to secure speedy, just and inexpensive determination
of their cases.
WHEREFORE, judgment of the lower court is reversed, and this
case is remanded to the trial court for further proceedings consistent
herewith With costs against appellees.
ZUELLIG FREIGHT AND CARGO
SYSTEMS, Petitioner, v. NATIONAL LABOR RELATIONS
COMMISSION AND RONALDO V. SAN
MIGUEL, Respondents.
DECISION
BERSAMIN, J.:
The mere change in the corporate name is not considered under the
law as the creation of a new corporation; hence, the renamed
corporation remains liable for the illegal dismissal of its employee
separated under that guise.
The Case
Petitioner employer appeals the decision promulgated on November 6,
2002,1 whereby the Court of Appeals (CA) dismissed its petition
for certiorari and upheld the adverse decision of the National Labor
Relations Commission (NLRC) finding respondent Ronaldo V. San Miguel
to have been illegally dismissed.
Antecedents
San Miguel brought a complaint for unfair labor practice, illegal dismissal,
non-payment of salaries and moral damages against petitioner, formerly
known as Zeta Brokerage Corporation (Zeta).2 He alleged that he had been
a checker/customs representative of Zeta since December 16, 1985; that in
January 1994, he and other employees of Zeta were informed that Zeta
would cease operations, and that all affected employees, including him,
would be separated; that by letter dated February 28, 1994, Zeta informed
him of his termination effective March 31, 1994; that he reluctantly
accepted his separation pay subject to the standing offer to be hired to his
former position by petitioner; and that on April 15, 1994, he was summarily
terminated, without any valid cause and due process.
San Miguel contended that the amendments of the articles of incorporation
of Zeta were for the purpose of changing the corporate name, broadening
the primary functions, and increasing the capital stock; and that such
amendments could not mean that Zeta had been thereby dissolved. 3
On its part, petitioner countered that San Miguel’s termination from Zeta
had been for a cause authorized by the Labor Code; that its non-acceptance
of him had not been by any means irregular or discriminatory; that its
predecessor-in-interest had complied with the requirements for termination
due to the cessation of business operations; that it had no obligation to
employ San Miguel in the exercise of its valid management prerogative;
that all employees had been given sufficient time to make their decision
whether to accept its offer of employment or not, but he had not responded
to its offer within the time set; that because of his failure to meet the
deadline, the offer had expired; that he had nonetheless been hired on a
temporary basis; and that when it decided to hire another employee instead
of San Miguel, such decision was not arbitrary because of seniority
considerations.4
Decision of the Labor Arbiter
On November 15, 1999, Labor Arbiter Francisco A. Robles rendered a
decision holding that San Miguel had been illegally dismissed, 5 to
wit:cralavvonlinelawlibrary
Contrary to respondents’ claim that Zeta ceased
operations and closed its business, we believe that there
was merely a change of business name and primary
purpose and upgrading of stocks of the corporation.
Zuellig and Zeta are therefore legally the same person
and entity and this was admitted by Zuellig’s counsel in
its letter to the VAT Department of the Bureau of
Internal Revenue on 08 June 1994 (Reply, Annex “A”).
As such, the termination of complainant’s services
allegedly due to cessation of business operations of
Zeta is deemed illegal. Notwithstanding his receipt of
separation benefits from respondents, complainant is
not estopped from questioning the legality of his
dismissal.6
xxx x
WHEREFORE, in view of the foregoing, complainant
is found to have been illegally dismissed. Respondent
Zuellig Freight and Cargo Systems, Inc. is hereby
ordered to pay complainant his backwages from April 1,
1994 up to November 15, 1999, in the amount of
THREE HUNDRED TWENTY FOUR THOUSAND
SIX HUNDRED FIFTEEN PESOS (P324,615.00).
The same respondent is ordered to pay the complainant
Ronaldo San Miguel attorney’s fees equivalent to ten
percent (10%) of the total award.
 All other claims are dismissed.
SO ORDERED.7
Decision of the NLRC
Petitioner appealed, but the NLRC issued a resolution on April 4,
2001,8 affirming the decision of the Labor Arbiter.
The NLRC later on denied petitioner’s motion for reconsideration via
its resolution dated June 15, 2001.9
Decision of the CA
Petitioner then filed a petition for certiorari in the CA, imputing to
the NLRC grave abuse of discretion amounting to lack or excess of
jurisdiction, as follows:cralavvonlinelawlibrary
1. In failing to consider the circumstances
attendant to the cessation of business of
Zeta;chanroblesvirtualawlibrary
2. In failing to consider that San Miguel
failed to meet the deadline Zeta fixed
for its employees to accept the offer of
petitioner for
re-employment;chanroblesvirtualawlibr
ary
3. In failing to consider that San Miguel’s
employment with petitioner from April
1 to 15, 1994 could in no way be
interpreted as a continuation of
employment with
Zeta;chanroblesvirtualawlibrary
4. In admitting in evidence the letter
dated January 21, 1994 of petitioner’s
counsel to the Bureau of Internal
Revenue; and
5. In awarding attorney’s fees to San
Miguel based on Article 2208 of
the Civil Code and Article 111 of
the Labor Code.
On November 6, 2002, the CA promulgated its assailed decision
dismissing the petition for certiorari,10viz:cralavvonlinelawlibrary
A careful perusal of the records shows that the
closure of business operation was not validly
made. Consider the Certificate of Filing of the
Amended Articles of Incorporation which clearly
shows that petitioner Zuellig is actually the
former Zeta as per amendment dated January 21,
1994. The same observation can be deduced with
respect to the Certificate of Filing of Amended
By-Laws dated May 10, 1994. As aptly pointed
out by private respondent San Miguel, the
amendment of the articles of incorporation
merely changed its corporate name, broadened its
primary purpose and increased its authorized
capital stocks. The requirements contemplated in
Article 283 were not satisfied in this case. Good
faith was not established by mere registration
with the Securities and Exchange Commission
(SEC) of the Amended Articles of Incorporation
and By-Laws. The factual milleu of the case,
considered in its totality, shows that there was no
closure to speak of. The termination of services
allegedly due to cessation of business operations
of Zeta was illegal. Notwithstanding private
respondent San Miguel’s receipt of separation
benefits from petitioner Zuellig, the former is not
estopped from questioning the legality of his
dismissal.
Petitioner Zuellig’s allegation that the five employees
who refused to receive the termination letters
were verbally informed that they had until 6:00 p.m.
of March 1, 1994 to receive the termination letters and
sign the employment contracts, otherwise the former
would be constrained to withdraw its offer of
employment and seek for replacements in order to
ensure the smooth operations of the new company from
its opening date, is of no moment in view of the
foregoing circumstances. There being no valid closure
of business operations, the dismissal of private
respondent San Miguel on alleged authorized cause of
cessation of business pursuant to Article 283 of the
Labor Code, was utterly illegal. Despite verbal notice
that the employees had until 6:00 p.m. of March 1,
1994 to receive the termination letters and sign the
employment contracts, the dismissal was still illegal for
the said condition is null and void. In point of facts and
law, private respondent San Miguel remained an
employee of petitioner Zuellig. If at all, the alleged
closure of business operations merely operates to
suspend employment relation since it is not permanent
in character.
Where there is no showing of a clear, valid, and legal
cause for the termination of employment, the law
considers the matter a case of illegal dismissal and the
burden is on the employer to prove that the termination
was for a valid or authorized cause.
Findings of facts of the NLRC, particularly when both
the NLRC and Labor Arbiter are in agreement, are
deemed binding and conclusive upon the Supreme
Court.
As regards the second and last argument advanced by
petitioner Zuellig that private respondent San Miguel is
not entitled to attorney’s fees, this Court finds no reason
to disturb the ruling of the public respondent
NLRC. Petitioner Zuellig maintains that the factual
backdraft (sic) of this petition does not call for the
application of Article 2208 of the Civil Code and
Article 111 of the Labor Code as private respondent’s
wages were not withheld. On the other hand, public
respondent NLRC argues that paragraphs 2 and 3,
Article 2208 of the Civil Code and paragraph (a),
Article 111 of the Labor Code justify the award of
attorney’s fees. NLRC was saying to the effect that
by petitioner Zuellig’s act of illegally dismissing private
respondent San Miguel, the latter was compelled to
litigate and thus incurred expenses to protect his
interest. In the same passion, private respondent San
Miguel contends that petitioner Zuellig acted in gross
and evident bad faith in refusing to satisfy his plainly
valid, just and demandable claim.
After careful and judicious evaluation of the arguments
advanced to support the propriety or impropriety of the
award of attorney’s fees to private respondent San
Miguel, this Court finds the resolutions of public
respondent NLRC supported by laws and
jurisprudence. It does not need much imagination to
see that by reason of petitioner Zuellig’s feigned
closure of business operations, private respondent San
Miguel incurred expenses to protect his rights and
interests. Therefore, the award of attorney’s fees is in
order.
WHEREFORE, in view of the foregoing, the
resolutions dated April 4, 2001 and June 15, 2001 of the
National Labor Relations Commission affirming the
November 15, 1999 decision of the Labor Arbiter in
NLRC NCR 05-03639-94 (CA No. 022861-00) are
hereby AFFIRMED and the instant petition for
certiorari is hereby DENIED and ordered DISMISSED.
SO ORDERED.
Hence, petitioner appeals.
Issues
Petitioner asserts that the CA erred in holding that the NLRC did not
act with grave abuse of discretion in ruling that the closure of the
business operation of Zeta had not been bona fide, thereby resulting
in the illegal dismissal of San Miguel; and in holding that the NLRC
did not act with grave abuse of discretion in ordering it to pay San
Miguel attorney’s fees.11
In his comment,12 San Miguel counters that the CA correctly found
no grave abuse of discretion on the part of the NLRC because the
ample evidence on record showed that he had been illegally
terminated; that such finding accorded with applicable laws and
jurisprudence; and that he was entitled to back wages and attorney’s
fees.
In its reply,13 petitioner reiterates that the cessation of Zeta’s business,
which resulted in the severance of San Miguel from his employment,
was valid; that the CA erred in upholding the NLRC’s finding that
San Miguel had been illegally terminated; that his acknowledgment
of the validity of his separation from Zeta by signing a quitclaim and
waiver estopped him from claiming that it had subsequently
employed him; and that the award of attorney’s fees had no basis in
fact and in law.
Ruling
The petition for review on certiorari is denied for its lack of merit.
First of all, the outcome reached by the CA that the NLRC did not
commit any grave abuse of discretion was borne out by the records of
the case. We cannot undo such finding without petitioner making a
clear demonstration to the Court now that the CA gravely erred in
passing upon the petition for certiorari of petitioner.
Indeed, in a special civil action for certiorari brought against a court
or quasi-judicial body with jurisdiction over a case, petitioner carries
the burden of proving that the court or quasi-judicial body committed
not a merely reversible error but a grave abuse of discretion
amounting to lack or excess of jurisdiction in issuing the impugned
order.14 Showing mere abuse of discretion is not enough, for it is
necessary to demonstrate that the abuse of discretion was
grave. Grave abuse of discretion means either that the judicial or
quasi-judicial power was exercised in an arbitrary or despotic manner
by reason of passion or personal hostility, or that the respondent
judge, tribunal or board evaded a positive duty, or virtually refused to
perform the duty enjoined or to act in contemplation of law, such as
when such judge, tribunal or board exercising judicial or
quasi-judicial powers acted in a capricious or whimsical manner as to
be equivalent to lack of jurisdiction.15 Under the circumstances, the
CA committed no abuse of discretion, least of all grave, because its
justifications were supported by the records and by the applicable
laws and jurisprudence.
Secondly, it is worthy to point out that the Labor Arbiter, the NLRC,
and the CA were united in concluding that the cessation of business
by Zeta was not a bona fide closure to be regarded as a valid ground
for the termination of employment of San Miguel within the ambit of
Article 283 of the Labor Code. The provision pertinently
reads:cralavvonlinelawlibrary
Article 283. Closure of establishment and
reduction of personnel. — The employer may
also terminate the employment of any employee
due to the installation of labor-saving devices,
redundancy, retrenchment to prevent losses or
the closing or cessation of operation of the
establishment or undertaking unless the
closing is for the purpose of circumventing the
provisions of this Title, by serving a written
notice on the workers and the Department of
Labor and Employment at least one (1) month
before the intended date thereof. x x x.
The unanimous conclusions of the CA, the NLRC and the Labor Arbiter,
being in accord with law, were not tainted with any abuse of discretion,
least of all grave, on the part of the NLRC. Verily, the amendments of the
articles of incorporation of Zeta to change the corporate name to Zuellig
Freight and Cargo Systems, Inc. did not produce the dissolution of the
former as a corporation. For sure, the Corporation Code defined and
delineated the different modes of dissolving a corporation, and amendment
of the articles of incorporation was not one of such modes. The effect of the
change of name was not a change of the corporate being, for, as well stated
in Philippine First Insurance Co., Inc. v. Hartigan:16 “The changing of the
name of a corporation is no more the creation of a corporation than the
changing of the name of a natural person is begetting of a natural person.
The act, in both cases, would seem to be what the language which we use to
designate it imports – a change of name, and not a change of being.”
The consequences, legal and otherwise, of the change of name were
similarly dealt with in P.C. Javier & Sons, Inc. v. Court of Appeals,17 with
the Court holding thusly:cralavvonlinelawlibrary
From the foregoing documents, it cannot be denied that
petitioner corporation was aware of First Summa
Savings and Mortgage Bank’s change of corporate
name to PAIC Savings and Mortgage Bank, Inc.
Knowing fully well of such change, petitioner
corporation has no valid reason not to pay because the
IGLF loans were applied with and obtained from First
Summa Savings and Mortgage Bank. First Summa
Savings and Mortgage Bank and PAIC Savings and
Mortgage Bank, Inc., are one and the same bank to
which petitioner corporation is indebted. A change in
the corporate name does not make a new
corporation, whether effected by a special act or
under a general law. It has no effect on the identity
of the corporation, or on its property, rights, or
liabilities. The corporation, upon such change in its
name, is in no sense a new corporation, nor the
successor of the original corporation. It is the same
corporation with a different name, and its character
is in no respect changed. (Bold underscoring supplied
for emphasis)
In short, Zeta and petitioner remained one and the same corporation. The
change of name did not give petitioner the license to terminate employees
of Zeta like San Miguel without just or authorized cause. The situation was
not similar to that of an enterprise buying the business of another company
where the purchasing company had no obligation to rehire terminated
employees of the latter.18 Petitioner, despite its new name, was the mere
continuation of Zeta’s corporate being, and still held the obligation to honor
all of Zeta’s obligations, one of which was to respect San Miguel’s security
of tenure. The dismissal of San Miguel from employment on the pretext that
petitioner, being a different corporation, had no obligation to accept him as
its employee, was illegal and ineffectual.
And, lastly, the CA rightfully upheld the NLRC’s affirmance of the grant of
attorney’s fees to San Miguel. Thereby, the NLRC did not commit any
grave abuse of its discretion, considering that San Miguel had been
compelled to litigate and to incur expenses to protect his rights and
interest. In Producers Bank of the Philippines v. Court of Appeals,19 the
Court ruled that attorney’s fees could be awarded to a party whom an
unjustified act of the other party compelled to litigate or to incur expenses
to protect his interest. It was plain that petitioner’s refusal to reinstate San
Miguel with backwages and other benefits to which he had been legally
entitled was unjustified, thereby entitling him to recover attorney’s fees.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals
promulgated on November 6, 2002; and ORDERS petitioner to pay the
costs of suit.
SO ORDERED.
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and
AMER MACAORAO BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG,
HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE
MONDACO ONTAL, MARONSONG ANDOY, MACALABA
INDAR LAO. respondents.
L. Amores and R. Gonzales for petitioners.
Jose W. Diokno for respondents.
CASTRO, J.:
The petitioner Amer Macaorao Balindong is the mayor of
Malabang, Lanao del Sur, while the respondent Pangandapun Bonito
is the mayor, and the rest of the respondents are the councilors, of the
municipality of Balabagan of the same province. Balabagan was
formerly a part of the municipality of Malabang, having been created
on March 15, 1960, by Executive Order 386 of the then President
Carlos P. Garcia, out of barrios and sitios 1 of the latter municipality.
The petitioners brought this action for prohibition to nullify
Executive Order 386 and to restrain the respondent municipal
officials from performing the functions of their respective office
relying on the ruling of this Court in Pelaez v. Auditor
General 2 and Municipality of San Joaquin v. Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief Justice)
Concepcion, ruled: (1) that section 23 of Republic Act 2370 [Barrio
Charter Act, approved January 1, 1960], by vesting the power to
create barrios in the provincial board, is a "statutory denial of the
presidential authority to create a new barrio [and] implies a negation
of the bigger power to create municipalities," and (2) that section 68
of the Administrative Code, insofar as it gives the President the
power to create municipalities, is unconstitutional (a) because it
constitutes an undue delegation of legislative power and (b) because
it offends against section 10 (1) of article VII of the Constitution,
which limits the President's power over local governments to mere
supervision. As this Court summed up its discussion: "In short, even
if it did not entail an undue delegation of legislative powers, as it
certainly does, said section 68, as part of the Revised Administrative
Code, approved on March 10, 1917, must be deemed repealed by the
subsequent adoption of the Constitution, in 1935, which is utterly
incompatible and inconsistent with said statutory enactment."
On the other hand, the respondents, while admitting the facts
alleged in the petition, nevertheless argue that the rule announced
in Pelaez can have no application in this case because unlike the
municipalities involved in Pelaez, the municipality of Balabagan is at
least a de facto corporation, having been organized under color of a
statute before this was declared unconstitutional, its officers having
been either elected or appointed, and the municipality itself having
discharged its corporate functions for the past five years preceding
the institution of this action. It is contended that as a de
facto corporation, its existence cannot be collaterally attacked,
although it may be inquired into directly in an action for quo
warranto at the instance of the State and not of an individual like the
petitioner Balindong.
It is indeed true that, generally, an inquiry into the legal existence
of a municipality is reserved to the State in a proceeding for quo
warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of
government. 4 But the rule disallowing collateral attacks applies only
where the municipal corporation is at least a de
facto corporations. 5 For where it is neither a corporation de
jure nor de facto, but a nullity, the rule is that its existence may be,
questioned collaterally or directly in any action or proceeding by any
one whose rights or interests ate affected thereby, including the
citizens of the territory incorporated unless they are estopped by their
conduct from doing so. 6
And so the threshold question is whether the municipality of
Balabagan is a de facto corporation. As earlier stated, the claim that it
is rests on the fact that it was organized before the promulgation of
this Court's decision in Pelaez. 7
Accordingly, we address ourselves to the question whether a statute
can lend color of validity to an attempted organization of a
municipality despite the fact that such statute is subsequently
declared unconstitutional.lawphi1.ñet
This has been a litigiously prolific question, sharply dividing courts in the
United States. Thus, some hold that a de facto corporation cannot exist
where the statute or charter creating it is unconstitutional because there can
be no de facto corporation where there can be no de jure one, 8 while others
hold otherwise on the theory that a statute is binding until it is condemned
as unconstitutional. 9
An early article in the Yale Law Journal offers the following analysis:
It appears that the true basis for denying to the corporation a de
facto status lay in the absence of any legislative act to give vitality to its
creation. An examination of the cases holding, some of them unreservedly,
that a de facto office or municipal corporation can exist under color of an
unconstitutional statute will reveal that in no instance did the invalid act
give life to the corporation, but that either in other valid acts or in the
constitution itself the office or the corporation was potentially created....
The principle that color of title under an unconstitutional statute can exist
only where there is some other valid law under which the organization may
be effected, or at least an authority in potentia by the state constitution, has
its counterpart in the negative propositions that there can be no color of
authority in an unconstitutional statute that plainly so appears on its face or
that attempts to authorize the ousting of a de jure or de facto municipal
corporation upon the same territory; in the one case the fact would imply
the imputation of bad faith, in the other the new organization must be
regarded as a mere usurper....
As a result of this analysis of the cases the following principles may be
deduced which seem to reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de
facto municipal corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a) been
upheld for a time by the courts or (b) not yet been declared
void; provided that a warrant for its creation can be found in some other
valid law or in the recognition of its potential existence by the general laws
or constitution of the state.
II. There can be no de facto municipal corporation unless either directly or
potentially, such a de jure corporation is authorized by some legislative fiat.
III. There can be no color of authority in an unconstitutional statute alone,
the invalidity of which is apparent on its face.
IV. There can be no de facto corporation created to take the place of an
existing de jure corporation, as such organization would clearly be a
usurper.10
In the cases where a de facto municipal corporation was recognized as
such despite the fact that the statute creating it was later invalidated, the
decisions could fairly be made to rest on the consideration that there was
some other valid law giving corporate vitality to the organization. Hence, in
the case at bar, the mere fact that Balabagan was organized at a time when
the statute had not been invalidated cannot conceivably make it a de
facto corporation, as, independently of the Administrative Code provision
in question, there is no other valid statute to give color of authority to its
creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court
granted a similar petition for prohibition and nullified an executive order
creating the municipality of Lawigan in Iloilo on the basis of
the Pelaez ruling, despite the fact that the municipality was created in 1961,
before section 68 of the Administrative Code, under which the President
had acted, was invalidated. 'Of course the issue of de facto municipal
corporation did not arise in that case.
In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional
act is not a law; it confers no rights; it imposes no duties; it affords no
protection; it creates no office; it is, in legal contemplation, as inoperative
as though it had never been passed." Accordingly, he held that bonds issued
by a board of commissioners created under an invalid statute were
unenforceable.
Executive Order 386 "created no office." This is not to say, however, that
the acts done by the municipality of Balabagan in the exercise of its
corporate powers are a nullity because the executive order "is, in
legal contemplation, as inoperative as though it had never been
passed." For the existence of Executive, Order 386 is "an operative
fact which cannot justly be ignored." As Chief Justice Hughes
explained in Chicot County Drainage District v. Baxter State
Bank: 13
The courts below have proceeded on the theory that the Act of
Congress, having been found to be unconstitutional, was not a law;
that it was inoperative, conferring no rights and imposing no duties,
and hence affording no basis for the challenged decree. Norton v.
Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v.
Hackett, 228 U.S. 559, 566. It is quite clear, however, that such
broad statements as to the effect of a determination of
unconstitutionality must be taken with qualifications. The actual
existence of a statute, prior to such a determination, is an operative
fact and may have consequences which cannot justly be ignored. The
past cannot always be erased by a new judicial declaration. The
effect of the subsequent ruling as to invalidity may have to be
considered in various aspects — with respect to particular relations,
individual and corporate, and particular conduct, private and official.
Questions of rights claimed to have become vested, of status of prior
determinations deemed to have finality and acted upon accordingly,
of public policy in the light of the nature both of the statute and of its
previous application, demand examination. These questions are
among the most difficult of those which have engaged the attention
of courts, state and federal, and it is manifest from numerous
decisions that an all-inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.
There is then no basis for the respondents' apprehension that the
invalidation of the executive order creating Balabagan would have
the effect of unsettling many an act done in reliance upon the validity
of the creation of that municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386 is
declared void, and the respondents are hereby permanently restrained
from performing the duties and functions of their respective offices.
No pronouncement as to costs.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano,
JJ., concur.
Teehankee and Barredo, JJ., took no part.
Separate Opinions
FERNANDO, J., concurring:
I concur fully with the well-written opinion of Justice Castro. It
breaks new ground; it strikes out new paths. It is precisely because of
its impact on the power of judicial review of executive acts that I
deem a few additional words would not be amiss.
1. Insofar as the effect of a declaration of unconstitionality is
concerned, the latter and more realistic trend reflected in Chicot
County Drainage District v. Baxter State Bank 1 had previously
elicited our approval. Thus: "'Rutter vs. Esteban (93 Phil. 68) may be
construed to mean that at the time of the decision the Moratorium
law could no longer be validly applied because of the prevailing
circumstances. At any rate, although the general rule is that an
unconstitutional statute — 'confers no right, creates no office, affords
no protection and justifies no acts performed under it.' ... there are
several instances wherein courts, out of equity, have relaxed its
operation ... or qualified its effects 'since the actual existence of a
statute prior to such declaration is an operative fact, and may have
consequences which cannot justly be ignored' ... and a realistic
approach is eroding the general doctrine ....'" 2 Also: "We have taken
note, of the fact that, on June 30, 1961, Section 25 of Reorganization
Plan No. 20-A had been declared unconstitutional by this Court in
the case of Corominas, et al. v. The Labor Standards Commission, et
al., .... It appears, however, that the Plaintiff had filed his claim
before Regional Office No. 4 of the Department of Labor on July 26,
1960, or about one year before said Section 25 had been declared
unconstitutional. The circumstance that Section 25 of Reorganization
Plan No. 20-A had been declared unconstitutional should not be
counted against the defendant in the present case. In the case of
Manila Motor Co., Inc. v. Flores, ..., this Court upheld the right of a
party under the Moratorium Law which had accrued in his favor before said
law was declared unconstitutional by this Court in the case of Rutter v.
Esteban, 93 Phil. 68." 3
2. Nothing can be clearer therefore in the light of the two above cases than
that a previous declaration of invalidity of legislative acts would not be
bereft of legal results. Would that view hold true of nullification of
executive acts? There might have been doubts as to the correct answer
before. There is none now.
A judicial decision annulling a presidential exercise of authority 4 is not
without its effect either. That much is evident from the holding now reached.
The act stricken down, whether proceeding from the legislature or the
Executive, could in the language of the Chicot County case, be considered,
prior to the declaration of invalidity, as "an operative fact and may have
consequences which cannot justly be ignored."
Thus the frontiers of the law have been extended, a doctrine which to
some may come into play when a statute is voided is now considered
equally applicable to a Presidential act that has met a similar fate. Such a
result should not occasion surprise. That is to be expected.
There would be an unjustified deviation from the doctrine of separation of
powers if a consequence attached to the annulment of a statue is considered
as not operative where an executive order is involved. The doctrine of
co-equal or coordinate departments would be meaningless if a
discrimination of the above sort were considered permissible. The
cognizance taken of the prior existence of an enactment subsequently
declared unconstitutional applies as well as to a Presidential act thereafter
successfully assailed. There was a time when it too did exist and, as such, a
fact to be reckoned with, though an infirm source of a legal right, if, as
subsequently held, considered violative of a constitutional command.
3. Precisionists may cavil at the above view; they may assert, and with
some degree of plausibility, that the holding in the Pelaez case goes no
further than to locate a statutory infirmity in the Presidential act there
challenged, creating municipal corporations under what the then Executive
considered a grant of authority found in the Revised Administrative
Code. 5 Such a power having been found not to exist, the decision, so it may
be asserted, did not reach the constitutional issue of non-delegation of
legislative power. Tersely put, there was no finding of nullity based on a
violation of the Constitution.
To such a claim, it suffices to answer that while the challenged
Administrative Code provision was in fact held as not containing within
itself the authority conferred on the President to create municipal
corporations, the opinion by the then Justice, now Chief Justice,
Concepcion went further. As was pointed out by him: "Although Congress
may delegate to another branch of the Government the power to fill in the
details in the execution, enforcement or administration of a law, it is
essential, to forestall a violation of the principle of separation of powers,
that said law: (a) be complete in itself — it must set forth therein the policy
to be executed, carried out or implemented by the delegate — and (b) fix a
standard — the limits of which are sufficiently determinate or determinable
— to which the delegate must conform in the performance of his functions.
Indeed, without a statutory declaration of policy, the delegate would, in
effect, make or formulate such policy, which is the essence of every law;
and without the aforementioned standard, there would be no means to
determine, with reasonable certainty, whether the delegate has acted within
or beyond the scope of his authority. Hence, he could thereby arrogate upon
himself the power, not only to make the law, but also — and this is worse
— to unmake it, by adopting measures inconsistent with the end sought to
be attained by the Act of Congress, thus nullifying the principle of
separation of powers and the system of checks and balances, and,
consequently, undermining the very foundation of our Republican
system." 6
From which, it would follow, in the language of the opinion: "Section 68
of the Revised Administrative Code does not meet these well-settled
requirements for a valid delegation of the power to fix the details in the
enforcement of a law. It does not enunciate any policy to be carried out or
implemented by the President. Neither does it give a standard sufficiently
precise to avoid the evil effects above referred to." 7
It is thus clear that while it might not be strictly accurate to advance the
view that there was a finding of unconstitutionality of a challenged statutory
norm, there could be no objection to the view that the holding was
one of unconstitutional application.
Nor is this all. If there be admission of the force of the assertion
that the Pelaez opinion went no further than to locate in the
challenged Executive orders creating municipal corporations an act
in excess of statutory authority, then our decision in this case is all
the more noteworthy for the more hospitable scope accorded the
Chicot doctrine. For as originally formulated, it would merely
recognize that during its existence, prior to its being declared
violative of the constitute, the statute must be deemed an operative
fact. Today we decide that such a doctrine extends to a Presidential
act held void not only on the ground of unconstitutional infirmity but
also because in excess of the statutory power conferred. That to me is
the more significant aspect of this decision. To repeat, to that point of
view I yield full concurrence.
I do so because it appears to me a logical corollary to the principle
of separation of powers. Once we accept the basic doctrine that each
department as a coordinate agency of government is entitled to the
respect of the other two, it would seem to follow that at the very least,
there is a presumption of the validity of the act performed by it,
unless subsequently declared void in accordance with legally
accepted principles. The rule of law cannot be satisfied with anything
less.
Since under our Constitution, judicial review exists precisely to test
the validity of executive or legislative acts in an appropriate legal
proceeding, there is always the possibility of their being declared
inoperative and void. Realism compels the acceptance of the thought
that there could be a time-lag between the initiation of such
Presidential or congressional exercise of power and the final
declaration of nullity. In the meanwhile, it would be productive of
confusion, perhaps at times even of chaos, if the parties affected were
left free to speculate as to its fate being one of doom, thus leaving
them free to disobey it in the meanwhile. Since, however, the orderly
processes of government not to mention common sense, requires that
the presumption of validity be accorded an act of Congress or an
order of the President, it would be less than fair, and it may be
productive of injustice, if no notice of its existence as a fact be paid
to it, even if thereafter, it is stricken down as contrary, in the case of
Presidential act, either to the Constitution or a controlling statute.
The far-reaching import in the above sense of the decision we now
render calls, to my mind, for an articulation of further reflection on
its varied implications. We have here an illustration to paraphrase
Dean Pound, of the law being stable and yet far from standing still.
That is as it ought to be; that is how law grows. It is in that sense that
the judicial process is impressed with creativity, admittedly within
limits rather narrowly confined. That in itself is to hold fast to the
appropriate role of the judiciary, far from insignificant as our
decision discloses. Hence, this separate concurring opinion, which, I
trust, will make manifest why my agreement with what Justice
Castro had so ably expressed in the opinion of the Court is
wholehearted and entire.
HARRILL v. DAVIS et al.
Doctrine:
Parties who actively engage in business for profit under the name
and pretense of a corporation which they know neither exists nor
has any color of existence may not escape individual liability
because strangers are led by their pretense to con- tract with
their pretended entity as a corporation.
Color of legal organization as a corporation, such as a charter or the
filing of articles of incorporation under some law, and user of the
supposed corporate franchise in good faith, are indispensable to the
existence of a de facto corporation which will exempt from
individual liability those who actively conduct it.
Neither the execution of articles which are not filed, nor statements
nor beliefs of the promoters that they are a corporation, nor the
treatment of themselves by themselves and by those who deal with
them as a corporation, nor all these together, will exempt those who
actively conduct the business under the assumed name of such a
nonexistent corporation from individual liability for the debts they incur.
Facts:
The four defendants(Walter B. Mann, Frank Davis, Robert S. Davis, and
James G. Knight) agreed in April or June, 1902, to take specified shares in a
$10,000 enterprise for the purpose of building a cotton gin and carrying on
the business of buying, ginning, and selling cotton, and to organize a
corporation for this purpose. They transacted a business with the plaintiff
consisting of the purchase of lumber, materials, and labor for their buildings
and of dealing in cotton with it which amounted to several tens of thousands
of dollars, and they remained indebted to it over $5,000, of which $4,700.
On September 3, 1902, three of the defendants met and signed articles of
incorporation as the "Coweta Cotton & Milling Company" and a declaration
of the purpose of the incorporation, which the statutes required to be
verified by the signers and to be filed with the clerk of the Court of Appeals
and with the clerk of the judicial district in which the contemplated
corporation was to do business. This declaration was verified by Mann on
November 10, 1902, and by Frank M. Davis on December 10, 1902, and it
was filed with the clerk of the Court of Appeals on December 22, 1902, and
was never filed elsewhere. Frank M. Davis, as general manager of the
investment company, treated the milling company as a corporation all the
time during which this indebtedness was contracted, and never charged any
of it to himself or his associates.
The Western Investment Company brought this action for a balance due It
upon an account for lumber and materials sold, cotton handled, and services
rendered to Walter B. Mann, Frank Davis, Robert S. Davis, and James G.
Knight, as partners doing business under the firm name the "Coweta Cotton
& Milling Company. The defendants denied the partnership and their
liability, and averred that the indebtedness in question was that of the
milling company and that that company was a corporation.
Issue/s:
Was there ‘colorable’ compliance enough to give the supposed corporation
at least the status of a ‘de facto’ corporation?
Held:
There was none.
The defendants cannot escape individual liability on the ground that the
Coweta Cotton & Milling Company was a corporation de facto when that
portion of the plaintiff's claim was incurred, because it then had no color of
incorporation, and they knew it and yet, actively used its name to incur the
obligation.
The general rule is that parties who associate themselves together and
actively engage in business for profit under any name are liable as partners
for the debts they incur under that name. It is an exception to this rule that
such associates may escape individual liability for such debts by a
compliance with incorporation laws or by a real attempt to comply with
them which gives the color of a legal corporation, and by the user of the
franchise of such a corporation in the honest belief that it is duly
incorporated. When the fact appears, as it does in the case at bar, by
indisputable evidence that parties associated and knowingly incurred
liabilities under a given name, the legal presumption is that they are
governed by the general rule, and the burden is upon them to prove that
they fall under some exception to it.
For the exception to apply, under the general law of Arkansas in force in the
Indian Territory, the filing of articles of incorporation with the clerk of the
Court of Appeals was a sine qua non of any color of a legal corporation.
Without that there was not, and there could not be, an apparent corporation
or the color of a corporation, Agreements to form one, statements that there
was one, signed articles of association to make one, acts as one, created no
color of incorporation, because there could be no incorporation or color of it
under the law until the articles were filed.
The defendants never became a corporation de facto prior to December 22,
1902, that they never became a corporation de jure, that the indebtedness
here in question was not incurred under any promise or assurance of the
defendants as promoters that it should become the obligation of a
corporation to be formed, that a large part of it was incurred in the conduct
of a general commercial business, and not to prepare for the
commencement of such a business or for the organization of a
corporation
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of
Leyte, FRED BROWN, EMMA BROWN, HIPOLITA
CAPUCIONG, in his capacity as receiver of the Far Eastern
Lumber and Commercial Co., Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No.
381 of the Court of First Instance of Leyte and to enjoin the
respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and
Bradley P. Hall, and the respondents Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of incorporation of the Far
Eastern Lumber and Commercial Co., Inc., organized to engage in a
general lumber business to carry on as general contractors, operators
and managers, etc. Attached to the article was an affidavit of the
treasurer stating that 23,428 shares of stock had been subscribed and
fully paid with certain properties transferred to the corporation
described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation,
the corporation proceeded to do business with the adoption of
by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were
filed in the office of the Securities and Exchange Commissioner, for
the issuance of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of
incorporation by the aforesaid governmental office, the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S.
Abella filed before the Court of First Instance of Leyte the civil case
numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.",
alleging among other things that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they wished to
have it dissolved because of bitter dissension among the members,
mismanagement and fraud by the managers and heavy financial
losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P.
Hall, filed a motion to dismiss, contesting the court's jurisdiction and
the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the
dissolution of the company; and at the request of plaintiffs, appointed
of the properties thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a
counter-bond for the discharge of the receiver, but the respondent
judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this
court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the
dissolution of the company, because it being a de facto corporation,
dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the
Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had
signed the article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All
the parties are informed that the Securities and Exchange
Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of
a corporation begins to exist only from the moment such certificate is
issued — not before (sec. 11, Corporation Law). The complaining
associates have not represented to the others that they were incorporated
any more than the latter had made similar representations to them. And as
nobody was led to believe anything to his prejudice and damage, the
principle of estoppel does not apply. Obviously this is not an instance
requiring the enforcement of contracts with the corporation through the rule
of estoppel.
The first proposition above stated is premised on the theory that, inasmuch
as the Far Eastern Lumber and Commercial Co., is a de facto corporation,
section 19 of the Corporation Law applies, and therefore the court had not
jurisdiction to take cognizance of said civil case number 381. Section 19
reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a
corporation under this Act and its right to exercise corporate powers shall
not be inquired into collaterally in any private suit to which the corporation
may be a party, but such inquiry may be had at the suit of the Insular
Government on information of the Attorney-General.
There are least two reasons why this section does not govern the situation.
Not having obtained the certificate of incorporation, the Far Eastern
Lumber and Commercial Co. — even its stockholders — may not probably
claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the
issuance of a certificate of incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation into being. The immunity
if collateral attack is granted to corporations "claiming in good faith to be a
corporation under this act." Such a claim is compatible with the existence of
errors and irregularities; but not with a total or substantial disregard of the
law. Unless there has been an evident attempt to comply with the law the
claim to be a corporation "under this act" could not be made "in good faith."
(Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a
litigation between stockholders of the alleged corporation, for the purpose
of obtaining its dissolution. Even the existence of a de jure corporation may
be terminated in a private suit for its dissolution between stockholders,
without the intervention of the state.
There might be room for argument on the right of minority stockholders to
sue for dissolution;1 but that question does not affect the court's jurisdiction,
and is a matter for decision by the judge, subject to review on appeal.
Whkch brings us to one principal reason why this petition may not prosper,
namely: the petitioners have their remedy by appealing the order of
dissolution at the proper time.
There is a secondary issue in connection with the appointment of a receiver.
But it must be admitted that receivership is proper in proceedings for
dissolution of a company or corporation, and it was no error to reject the
counter-bond, the court having declared the dissolution. As to the amount of
the bond to be demanded of the receiver, much depends upon the discretion
of the trial court, which in this instance we do not believe has been clearly
abused.
Judgment: The petition will, therefore, be dismissed, with costs. The
preliminary injunction heretofore issued will be dissolved.
ASIA BANKING CORPORATION, plaintiff-appellee,
vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.
Charles C. De Selms for appellant.
Gibbs & McDonough and Roman Ozaeta for appellee.
OSTRAND, J.:
This action is brought to recover the sum of P24,736.47, the balance due on
the following promissory note:
P37,757.22
MANILA, P. I., Nov. 28, 1921.
MANILA, P. I., Nov. 28, 1921.
On demand, after date we promise to pay to the Asia Banking
Corporation, or order, the sum of thirty-seven thousand seven
hundred fifty-seven and 22/100 pesos at their office in Manila, for
value received, together with interest at the rate of ten per cent per
annum.
No. ________ Due __________
THE STANDARD PRODUCTS CO., INC.
By (Sgd.) GEORGE H. SEAVER
By President
The court below rendered judgment in favor of the plaintiff for the
sum demanded in the complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate of 10 per cent per
annum, and the costs. From this judgment the defendant appeals to
this court.
At the trial of the case the plaintiff failed to prove affirmatively the
corporate existence of the parties and the appellant insists that under
these circumstances the court erred in finding that the parties were
corporations with juridical personality and assigns same as reversible
error.
There is no merit whatever in the appellant's contention. The general
rule is that in the absence of fraud a person who has contracted or
otherwise dealt with an association in such a way as to recognize and
in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of
or involving such contract or dealing, unless its existence is attacked
for cause which have arisen since making the contract or other
dealing relied on as an estoppel and this applies to foreign as well as
to domestic corporations. (14 C. J., 227; Chinese Chamber of
Commerce vs. Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the
plaintiff by making a promissory note in its favor and making partial
payments on the same is therefore estopped to deny said plaintiff's
corporate existence. It is, of course, also estopped from denying its
own corporate existence. Under these circumstances it was
unnecessary for the plaintiff to present other evidence of the
corporate existence of either of the parties. It may be noted that there
is no evidence showing circumstances taking the case out of the rules
stated.
The judgment appealed from is affirmed, with the costs against the
appellant. So ordered.
CRANSON v. I.B.M. CORP. | 234 Md. 477 (1964) | 
April 30, 1964 | Horney, J.
Summary: The Real Estate Service Bureau was defectively
incorporated. Before the certificate of incorporation was filed, the
bureau purchased eight typewriters from I.B.M. I.B.M. is running
after the Bureau’s president Cranson for the balance due on the
typewriters. The Court ruled that Cranson may not be subjected to
personal liability because I.B.M. is estopped from denying the
corporate existence of the Bureau.
FACTS
1. Albion C. Cranson, Jr., was a partner in the business
conducted by the Real Estate Service Bureau and was
elected president.
 Cranson was asked to invest in a new business
corporation.
 He met with other interested individuals and an attorney
and agreed to purchase stock and become an officer and
director
 Upon being advised by the attorney that the corporation
had been formed under the laws of Maryland,he paid
for and received a stock certificate evidencing
ownership of shares in the corporation
2. Their business was conducted as if it were a corporation, through
corporate bank accounts, with auditors maintaining corporate
books and records, and under a lease entered into by the
corporation for the office from which it operated
3. However, due to the attorney’s oversight which Carson was not
aware, the certificate of incorporation, which had been signed and
acknowledged prior to May 1, 1961, was not filed until
November 24, 1961.
 Between May 17 and November 8, the Bureau purchased
eight typewriters from I.B.M.
4. I.B.M. Corporation brought this action against Cranson for the
balance due on electric typewriters purchased by the Bureau.
ISSUE
Whether an officer of a defectively incorporated association may be
subjected to personal liability – NO!
 Doctrine of de facto corporations applied in cases with the
following requisites:
o (1) the existence of law authorizing incorporation:
o (2) an effort in good faith to incorporate under the existing
law; and
o (3) actual user or exercise of corporate powers.
 Doctrine of estoppel to deny the corporate existence
o Generally employed where the person seeking to hold the
officer personally liable has contracted or otherwise
dealt with the association in such a manner as to
recognize and in effect admit its existence as a
corporate body
 It is generally held that where there had been a failure to comply
with a requirement which the law declared to be a condition
precedent to the existence of the corporation, the corporation was
not a legal entity and was therefore precluded from suing or being
sued as such
 In a line of cases, it was held that substantial compliance with
those formalities of the corporation law, which are made a
condition precedent to corporate existence, was not only
necessary for the creation of a corporation de jure, but was also a
prerequisite to the existence of a de facto corporation or a
corporation by estoppel.
 The law in Maryland pertaining to the de facto and estoppel
doctrines reveals that the cases seem to fall into one or the other
of two categories
o Choosing to disregard the nature of the dealings between
the parties, the Court refused to recognize both
doctrines where there had been a failure to comply with
a condition precedent to corporate existence
o whenever such noncompliance concerned a condition
subsequent to incorporation, the Court often applied the
estoppel doctrine
 There is a wide difference between creating a corporation by
means of the de facto doctrine and estopping a party, due to his
conduct in a particular case, from setting up the claim of no
incorporation
Where there is a concurrence of the three elements necessary for
the application of the de facto corporation doctrine, there exists an
entity which is a corporation de jure against all persons but the
state.
 On the other hand, the estoppel theory is applied only to the facts
of each particular case and may be invoked even where there is
no corporation de facto.
o Even though one or more of the requisites of a de facto
corporation are absent, we think that this factor does not
preclude the application of the estoppel doctrine
Whether the failure of the Bureau to file its certificate of incorporation
debarred all corporate existence.
 I.B.M., having dealt with the Bureau as if it were a corporation
and relied on its credit rather than that of Cranson, is estopped to
assert that the Bureau was not incorporated at the time the
typewriters were purchased.
  The doctrine in relation to estoppel is based upon
o the ground that it would generally be inequitable to
permit the corporate existence of an association
to be denied by persons who have represented it
to be a corporation, or held it out as a corporation,
or by any persons who have recognized it as a
corporation by dealing with it as such; and
o by the overwhelming weight of authority, therefore,
a person may be estopped to deny the legal
incorporation of an association which is not even
a corporation de facto
 In cases similar to the one at bar, involving a failure to file
articles of incorporation, the courts of other jurisdictions
have held that where one has recognized the corporate
existence of an association, he is estopped to assert the
contrary with respect to a claim arising out of such
dealings.
 Since I.B.M. is estopped to deny the corporate existence of
the Bureau, we hold that Cranson was not liable for the
balance due on account of the typewriters.
Judgement REVERSED
MANUELA T. VDA. DE SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the
Court of First Instance of Leyte, Branch II, and SEGUNDINO
REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de
Salvatierra seeking to nullify the order of the Court of First Instance
of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between
the former and the Philippine Fibers Producers Co., Inc., of which
Refuerzo is the president. The facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel
of land located at Maghobas, Poblacion, Burauen, Teyte. On March 7,
1954, said landholder entered into a contract of lease with the
Philippine Fibers Producers Co., Inc., allegedly a corporation "duly
organized and existing under the laws of the Philippines, domiciled
at Burauen, Leyte, Philippines, and with business address therein,
represented in this instance by Mr. Segundino Q. Refuerzo, the
President". It was provided in said contract, among other things, that
the lifetime of the lease would be for a period of 10 years; that the
land would be planted to kenaf, ramie or other crops suitable to the
soil; that the lessor would be entitled to 30 per cent of the net income
accruing from the harvest of any, crop without being responsible for
the cost of production thereof; and that after every harvest, the lessee
was bound to declare at the earliest possible time the income derived
therefrom and to deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged
corporation were not complied with because on April 5, 1955,
Alanuela T. Vda, de Salvatierra filed with the Court of First Instance
of Leyte a complaint against the Philippine Fibers Producers Co.,
Inc., and Segundino Q. Refuerzo, for accounting, rescission and
damages (Civil Case No. 1912). She averred that sometime in April,
1954, defendants planted kenaf on 3 hectares of the leased property
which crop was, at the time of the commencement of the action,
already harvested, processed and sold by defendants; that
notwithstanding that fact, defendants refused to render an accounting
of the income derived therefrom and to deliver the lessor's share; that
the estimated gross income was P4,500, and the deductible expenses
amounted to P1,000; that as defendants' refusal to undertake such
task was in violation of the terms of the covenant entered into
between the plaintiff and defendant corporation, a rescission was but
proper.
As defendants apparently failed to file their answer to the complaint,
of which they were allegedly notified, the Court declared them in
default and proceeded to receive plaintiff's evidence. On June 8,
1955, the lower Court rendered judgment granting plaintiff's prayer,
and required defendants to render a complete accounting of the harvest of
the land subject of the proceeding within 15 days from receipt of the
decision and to deliver 30 per cent of the net income realized from the last
harvest to plaintiff, with legal interest from the date defendants received
payment for said crop. It was further provide that upon defendants' failure
to abide by the said requirement, the gross income would be fixed at P4,200
or a net income of P3,200 after deducting the expenses for production, 30
per cent of which or P960 was held to be due the plaintiff pursuant to the
aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period,
the Court, upon motion of plaintiff, issued a writ of execution, in virtue of
which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of
land registered in the name of Segundino Refuerzo. No property of the
Philippine Fibers Producers Co., Inc., was found available for attachment.
On January 31, 1956, defendant Segundino Refuerzo filed a motion
claiming that the decision rendered in said Civil Case No. 1912 was null
and void with respect to him, there being no allegation in the complaint
pointing to his personal liability and thus prayed that an order be issued
limiting such liability to defendant corporation. Over plaintiff's opposition,
the Court a quo granted the same and ordered the Provincial Sheriff of
Leyte to release all properties belonging to the movant that might have
already been attached, after finding that the evidence on record made no
mention or referred to any fact which might hold movant personally liable
therein. As plaintiff's petition for relief from said order was denied,
Manuela T. Vda. de Salvatierra instituted the instant action asserting that
the trial Judge in issuing the order complained of, acted with grave abuse of
discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be
nullified was issued by tile respondent Judge upon motion of defendant
Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of
said Rule, however, in providing for the period within which such a motion
may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION.
— A petition provided for in either of the preceding sections of this rule
must be verified, filed within sixty days after the petitioner learns of the
judgment, order, or other proceeding to be set aside, and not more than six
months after such judgment or order was entered, or such proceeding was
taken; and must be must be accompanied with affidavit showing the fraud,
accident, mistake, or excusable negligence relied upon, and the facts
constituting the petitioner is good and substantial cause of action or defense,
as the case may be, which he may prove if his petition be granted". (Rule
38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner
learns of the judgment, and not more than 6 months after the judgment or
order was rendered, both of which must be satisfied. As the decision in the
case at bar was under date of June 8, 1955, whereas the motion filed by
respondent Refuerzo was dated January 31, 1956, or after the lapse of 7
months and 23 days, the filing of the aforementioned motion was clearly
made beyond the prescriptive period provided for by the rules. The remedy
allowed by Rule 38 to a party adversely affected by a decision or order is
certainly an alert of grace or benevolence intended to afford said litigant a
penultimate opportunity to protect his interest. Considering the nature of
such relief and the purpose behind it, the periods fixed by said rule are
non-extendible and never interrupted; nor could it be subjected to any
condition or contingency because it is of itself devised to meet a condition
or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31,
1952). On this score alone, therefore, the petition for a writ
of certiorari filed herein may be granted. However, taking note of the
question presented by the motion for relief involved herein, We deem it
wise to delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting from
the non-fulfillment of the obligation imposed on defendant Philippine
Fibers Producers Co., Inc., interposed the defense that the complaint filed
with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the
lease contract, he did so in his capacity as president of the corporation. And
this allegation was found by the Court a quo to be supported by the records.
Plaintiff on the other hand tried to refute this averment by contending that
her failure to specify defendant's personal liability was due to the fact that
all the time she was under the impression that the Philippine Fibers
Producers Co., Inc., represented by Refuerzo was a duly registered
corporation as appearing in the contract, but a subsequent inquiry from the
Securities and Exchange Commission yielded otherwise. While as a be sued, the complaint was amended. 2 Certain officials of the school were
general rule a person who has contracted or dealt with an association also impleaded to make them solidarily liable with the school.
in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such The Court of First Instance of Sorsogon dismissed the complaint. 3 On
transaction or dealing, (Asia Banking Corporation vs. Standard appeal, its decision was set aside by the respondent court, which held the
Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. school suable and liable while absolving the other defendants. 4 The motion
Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 for reconsideration having been denied, 5 the school then came to this Court
Phil., 117), yet this doctrine may not be held to be applicable where in this petition for review on certiorari.
fraud takes a part in the said transaction. In the instant case, on
plaintiff's charge that she was unaware of the fact that the Philippine The issues raised in the petition are:
Fibers Producers Co., Inc., had no juridical personality, defendant
Refuerzo gave no confirmation or denial and the circumstances
1. Whether or not a school that has not been incorporated may be sued by
surrounding the execution of the contract lead to the inescapable
reason alone of its long continued existence and recognition by the
conclusion that plaintiff Manuela T. Vda. de Salvatierra was really
government,
made to believe that such corporation was duly organized in
accordance with law.
2. Whether or not a complaint filed against persons associated under a
common name will justify a judgment against the association itself and not
There can be no question that a corporation with registered has a
its individual members.
juridical personality separate and distinct from its component
members or stockholders and officers such that a corporation cannot
be held liable for the personal indebtedness of a stockholder even if 3. Whether or not the collection of tuition fees and book rentals will make a
he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. school profit-making and not charitable.
No. 42420) and conversely, a stockholder or member cannot be held
personally liable for any financial obligation be, the corporation in 4. Whether or not the Termination Pay Law then in force was available to
excess of his unpaid subscription. But this rule is understood to refer the private respondent who was employed on a year-to-year basis.
merely to registered corporations and cannot be made applicable to
the liability of members of an unincorporated association. The reason 5. Whether or not the awards made by the respondent court were warranted.
behind this doctrine is obvious-since an organization which before
the law is non-existent has no personality and would be incompetent We hold against the petitioner on the first question. It is true that Rule 3,
to act and appropriate for itself the powers and attribute of a Section 1, of the Rules of Court clearly provides that "only natural or
corporation as provided by law; it cannot create agents or confer juridical persons may be parties in a civil action." It is also not denied that
authority on another to act in its behalf; thus, those who act or the school has not been incorporated. However, this omission should not
purport to act as its representatives or agents do so without authority prejudice the private respondent in the assertion of her claims against the
and at their own risk. And as it is an elementary principle of law that school.
a person who acts as an agent without authority or without a principal
is himself regarded as the principal, possessed of all the rights and
As a school, the petitioner was governed by Act No. 2706 as amended by
subject to all the liabilities of a principal, a person acting or
C.A. No. 180, which provided as follows:
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and comes
Unless exempted for special reasons by the Secretary of Public Instruction,
personally liable for contracts entered into or for other acts
any private school or college recognized by the government shall be
performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188.
incorporated under the provisions of Act No. 1459 known as the
Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed.,
Corporation Law, within 90 days after the date of recognition, and shall file
P. 689-690). Considering that defendant Refuerzo, as president of the
with the Secretary of Public Instruction a copy of its incorporation papers
unregistered corporation Philippine Fibers Producers Co., Inc., was
and by-laws.
the moving spirit behind the consummation of the lease agreement by
acting as its representative, his liability cannot be limited or restricted
that imposed upon corporate shareholders. In acting on behalf of a Having been recognized by the government, it was under obligation to
corporation which he knew to be unregistered, he assumed the risk of incorporate under the Corporation Law within 90 days from such
reaping the consequential damages or resultant rights, if any, arising recognition. It appears that it had not done so at the time the complaint was
out of such transaction. filed notwithstanding that it had been in existence even earlier than 1932.
The petitioner cannot now invoke its own non-compliance with the law to
immunize it from the private respondent's complaint.
Wherefore, the order of the lower Court of March 21, 1956,
amending its previous decision on this matter and ordering the
Provincial Sheriff of Leyte to release any and all properties of There should also be no question that having contracted with the private
movant therein which might have been attached in the execution of respondent every year for thirty two years and thus represented itself as
such judgment, is hereby set aside and nullified as if it had never possessed of juridical personality to do so, the petitioner is now estopped
been issued. With costs against respondent Segundino Refuerzo. It is from denying such personality to defeat her claim against it. According to
so ordered. Article 1431 of the Civil Code, "through estoppel an admission or
representation is rendered conclusive upon the person making it and cannot
be denied or disproved as against the person relying on it."
CHIANG KAI SHEK SCHOOL, petitioner,
vs.
COURT OF APPEALS and FAUSTINA FRANCO As the school itself may be sued in its own name, there is no need to apply
OH, respondents. Rule 3, Section 15, under which the persons joined in an association
without any juridical personality may be sued with such association.
Besides, it has been shown that the individual members of the board of
CRUZ, J.:
trustees are not liable, having been appointed only after the private
respondent's dismissal. 6
An unpleasant surprise awaited Fausta F. Oh when she reported for
work at the Chiang Kai Shek School in Sorsogon on the first week of
It is clear now that a charitable institution is covered by the labor
July, 1968. She was told she had no assignment for the next semester.
laws 7 although the question was still unsettled when this case arose in
Oh was shocked. She had been teaching in the school since 1932 for
1968. At any rate, there was no law even then exempting such institutions
a continuous period of almost 33 years. And now, out of the blue,
from the operation of the labor laws (although they were exempted by the
and for no apparent or given reason, this abrupt dismissal.
Constitution from ad valorem taxes). Hence, even assuming that the
petitioner was a charitable institution as it claims, the private respondent
Oh sued. She demanded separation pay, social security benefits,
was nonetheless still entitled to the protection of the Termination Pay Law,
salary differentials, maternity benefits and moral and exemplary
which was then in force.
damages. 1 The original defendant was the Chiang Kai Shek School
but when it filed a motion to dismiss on the ground that it could not
While it may be that the petitioner was engaged in charitable works,
it would not necessarily follow that those in its employ were as
generously motivated. Obviously, most of them would not have the
means for such charity. The private respondent herself was only a
humble school teacher receiving a meager salary of Pl80. 00 per
month.
At that, it has not been established that the petitioner is a charitable
institution, considering especially that it charges tuition fees and
collects book rentals from its students. 8 While this alone may not
indicate that it is profit-making, it does weaken its claim that it is a
non-profit entity.
The petitioner says the private respondent had not been illegally
dismissed because her teaching contract was on a yearly basis and
the school was not required to rehire her in 1968. The argument is
that her services were terminable at the end of each year at the
discretion of the school. Significantly, no explanation was given by
the petitioner, and no advance notice either, of her relief after
teaching year in and year out for all of thirty-two years, the private
respondent was simply told she could not teach any more.
The Court holds, after considering the particular circumstance of
Oh's employment, that she had become a permanent employee of the
school and entitled to security of tenure at the time of her dismissal.
Since no cause was shown and established at an appropriate hearing,
and the notice then required by law had not been given, such
dismissal was invalid.
The private respondent's position is no different from that of the
rank-and-file employees involved in Gregorio Araneta University
Foundation v. NLRC, 9 of whom the Court had the following to say:
Undoubtedly, the private respondents' positions as deans and
department heads of the petitioner university are necessary in its
usual business. Moreover, all the private respondents have been
serving the university from 18 to 28 years. All of them rose from the
ranks starting as instructors until they became deans and department
heads of the university. A person who has served the University for
28 years and who occupies a high administrative position in addition
to teaching duties could not possibly be a temporary employee or a
casual.
The applicable law is the Termination Pay Law, which provided:
SECTION 1. In cases of employment, without a definite period, in a
commercial, industrial, or agricultural establishment or enterprise,
the employer or the employee may terminate at any time the
employment with just cause; or without just cause in the case of an
employee by serving written notice on the employer at least one
month in advance, or in the case of an employer, by serving such
notice to the employee at least one month in advance or one-half
month for every year of service of the employee, whichever, is
longer, a fraction of at least six months being considered as one
whole year.
The employer, upon whom no such notice was served in case of
termination of employment without just cause may hold the
employee liable for damages.
The employee, upon whom no such notice was served in case of
termination of employment without just cause shall be entitled to
compensation from the date of termination of his employment in an I
amount equivalent to his salaries or wages correspond to the required
period of notice. ... .
The respondent court erred, however, in awarding her one month pay
instead of only one-half month salary for every year of service. The
law is quite clear on this matter. Accordingly, the separation pay
should be computed at P90.00 times 32 months, for a total of
P2,880.00.
Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta
for Public School Teachers, confers security of tenure on the teacher
upon appointment as long as he possesses the required
qualification. 10 And under the present policy of the Department of
Education, Culture and Sports, a teacher becomes permanent and
automatically acquires security of tenure upon completion of three years in
the service. 11
While admittedly not applicable to the case at bar, these I rules nevertheless
reflect the attitude of the government on the protection of the worker's
security of tenure, which is now guaranteed by no less than the Constitution
itself. 12
We find that the private respondent was arbitrarily treated by the petitioner,
which has shown no cause for her removal nor had it given her the notice
required by the Termination Pay Law. As the respondent court said, the
contention that she could not report one week before the start of classes is a
flimsy justification for replacing her. 13 She had been in its employ for all
of thirty-two years. Her record was apparently unblemished. There is no
showing of any previous strained relations between her and the petitioner.
Oh had every reason to assume, as she had done in previous years, that she
would continue teaching as usual.
It is easy to imagine the astonishment and hurt she felt when she was flatly
and without warning told she was dismissed. There was not even the
amenity of a formal notice of her replacement, with perhaps a graceful
expression of thanks for her past services. She was simply informed she
was no longer in the teaching staff. To put it bluntly, she was fired.
For the wrongful act of the petitioner, the private respondent is entitled to
moral damages. 14 As a proximate result of her illegal dismissal, she
suffered mental anguish, serious anxiety, wounded feelings and even
besmirched reputation as an experienced teacher for more than three
decades. We also find that the respondent court did not err in awarding her
exemplary damages because the petitioner acted in a wanton and oppressive
manner when it dismissed her. 15
The Court takes this opportunity to pay a sincere tribute to the grade school
teachers, who are always at the forefront in the battle against illiteracy and
ignorance. If only because it is they who open the minds of their pupils to
an unexplored world awash with the magic of letters and numbers, which is
an extraordinary feat indeed, these humble mentors deserve all our respect
and appreciation.
WHEREFORE, the petition is DENIED. The appealed decision is
AFFIRMED except for the award of separation pay, which is reduced to
P2,880.00. All the other awards are approved. Costs against the petitioner.
This decision is immediately executory.
SO ORDERED.
REYNALDO M. LOZANO, Petitioner, v. HON. ELIEZER R. DE LOS
SANTOS, Presiding Judge, RTC, Br. 58, Angeles City; and ANTONIO
ANDA, Respondents.
PUNO, J.:
This petition for certiorari seeks to annul and set aside the decision of the
Regional Trial Court, Branch 58, Angeles City which ordered the
Municipal Circuit Trial Court, Mabalacat and Magalang, Pampanga to
dismiss Civil Case No. 1214 for lack of jurisdiction.
The facts are undisputed. On December 19, 1995, petitioner Reynaldo M.
Lozano filed Civil Case No. 1214 for damages against respondent Antonio
Anda before the Municipal Circuit Trial Court (MCTC), Mabalacat and
Magalang, Pampanga. Petitioner alleged that he was the president of the
Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc.
(KAMAJDA) while respondent Anda was the president of the Samahang
Angeles-Mabalacat Jeepney Operators' and Drivers' Association, Inc.
(SAMAJODA); in August 1995, upon the request of the Sangguniang
Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to
consolidate their respective associations and form the Unified
Mabalacat-Angeles Jeepney Operators' and Drivers Association, Inc.
(UMAJODA); petitioner and private respondent also agreed to elect one set
of officers who shall be given the sole authority to collect the daily dues
from the members of the consolidated association; elections were held on
October 29, 1995 and both petitioner and private respondent ran for
president; petitioner won; private respondent protested and, alleging fraud,
refused to recognize the results of the election; private respondent also
refused to abide by their agreement and continued collecting the dues
from the members of his association despite several demands to
desist. Petitioner was thus constrained to file the complaint to restrain
private respondent from collecting the dues and to order him to pay
damages in the amount of P25,000.00 and attorney's fees of
P500.00. 1
Private respondent moved to dismiss the complaint for lack of
jurisdiction, claiming that jurisdiction was lodged with the Securities
and Exchange Commission (SEC). The MCTC denied the motion on
February 9, 1996. 2 It denied reconsideration on March 8, 1996. 3
Private respondent filed a petition for certiorari before the Regional
Trial Court, Branch 58, Angeles City. 4 The trial court found the
dispute to be intracorporate, hence, subject to the jurisdiction of the
SEC, and ordered the MCTC to dismiss Civil Case No. 1214
accordingly. 5 It denied reconsideration on May 31, 1996. 6
Hence this petition. Petitioner claims that:
THE RESPONDENT JUDGE ACTED WITH
GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF
JURISDICTION AND SERIOUS ERROR OF
LAW IN CONCLUDING THAT THE
SECURITIES AND EXCHANGE
COMMISSION HAS JURISDICTION OVER A
CASE OF DAMAGES BETWEEN
HEADS/PRESIDENTS OF TWO (2)
ASSOCIATIONS WHO INTENDED TO
CONSOLIDATE/MERGE THEIR
ASSOCIATIONS BUT NOT YET [SIC]
APPROVED AND REGISTERED WITH THE
SECURITIES AND EXCHANGE
COMMISSION. 7
The jurisdiction of the Securities and Exchange Commission (SEC)
is set forth in Section 5 of Presidential Decree No. 902-A. Section 5
reads as follows:
Sec. 5. . . . [T]he Securities and Exchange
Commission [has] original and exclusive
jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts
of the board of directors, business associates, its
officers or partners, amounting to fraud and
misrepresentation which may be detrimental to
the interest of the public and/or of the
stockholders, partners, members of associations
or organizations registered with the Commission.
(b) Controversies arising out of intracorporate or
partnership relations, between and among
stockholders, members or associates; between
any or all of them and the corporation,
partnership or association of which they are
stockholders, members, or associates,
respectively; and between such corporation,
partnership or association and the state insofar as
it concerns their individual franchise or right to
exist as such entity.
(c) Controversies in the election or appointment
of directors, trustees, officers or managers of
such corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or
associations to be declared in the state of
suspension of payments in cases where the
corporation, partnership or association possesses
sufficient property to cover all its debts but
foresees the impossibility of meeting them when
they respectively fall due or in cases where the
corporation, partnership or association has no
sufficient assets to over its liabilities, but is under
the management of a Rehabilitation Receiver or
Management Committee created pursuant to this
Decree.
The grant of jurisdiction to the SEC must be viewed in the light of its nature
and function under the law. 8 This jurisdiction is determined by a
concurrence of two elements: (1) the status or relationship of the parties;
and (2) the nature of the question that is the subject of their controversy. 9
The first element requires that the controversy must arise out of
intracorporate or partnership relations between and among stockholders,
members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or
association and the State in so far as it concerns their individual
franchises. 10 The second element requires that the dispute among the
parties be intrinsically connected with the regulation of the corporation,
partnership or association or deal with the internal affairs of the corporation,
partnership or association. 11 After all, the principal function of the SEC is
the supervision and control of corporations, partnership and associations
with the end in view that investments in these entities may be encouraged
and protected, and their entities may be encouraged and protected, and their
activities pursued for the promotion of economic development. 12
There is no intracorporate nor partnership relation between petitioner and
private respondent. The controversy between them arose out of their plan to
consolidate their respective jeepney drivers' and operators' associations into
a single common association. This unified association was, however, still a
proposal. It had not been approved by the SEC, neither had its officers and
members submitted their articles of consolidation is accordance with
Sections 78 and 79 of the Corporation Code. Consolidation becomes
effective not upon mere agreement of the members but only upon issuance
of the certificate of consolidation by the SEC. 13 When the SEC, upon
processing and examining the articles of consolidation, is satisfied that the
consolidation of the corporations is not inconsistent with the provisions of
the Corporation Code and existing laws, it issues a certificate of
consolidation which makes the reorganization official. 14 The new
consolidated corporation comes into existence and the constituent
corporations dissolve and cease to exist. 15
The KAMAJDA and SAMAJODA to which petitioner and private
respondent belong are duly registered with the SEC, but these associations
are two separate entities. The dispute between petitioner and private
respondent is not within the KAMAJDA nor the SAMAJODA. It is
between members of separate and distinct associations. Petitioner and
private respondent have no intracorporate relation much less do they have
an intracorporate dispute. The SEC therefore has no jurisdiction over the
complaint.
The doctrine of corporation by estoppel 16 advanced by private respondent
cannot override jurisdictional requirements. Jurisdiction is fixed by law and
is not subject to the agreement of the parties. 17 It cannot be acquired
through or waived, enlarged or diminished by, any act or omission of the
parties, neither can it be conferred by the acquiescence of the court. 18
Corporation by estoppel is founded on principles of equity and is designed
to prevent injustice and unfairness. 19 It applies when persons assume to
form a corporation and exercise corporate functions and enter into business
relations with third person. Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation, who
therefore know that it has not been registered, there is no corporation by
estoppel. 20
IN VIEW WHEREOF, the petition is granted and the decision dated April
18, 1996 and the order dated May 31, 1996 of the Regional Trial Court,
Branch 58, Angeles City are set aside. The Municipal Circuit Trial Court of
Mabalacat and Magalang, Pampanga is ordered to proceed with dispatch in
resolving Civil Case No. 1214. No costs.
SO ORDERED.
LIM TONG LIM, Petitioner, v. PHILIPPINE FISHING GEAR
INDUSTRIES, INC, Respondent.

DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to
borrow money to pursue a business and to divide the profits or losses
that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their
contribution may be in the form of credit or industry, not necessarily
cash or fixed assets. Being partners, they are all liable for debts
incurred by or on behalf of the partnership. The liability for a
contract entered into on behalf of an unincorporated association or
ostensible corporation may lie in a person who may not have directly
transacted on its behalf, but reaped benefits from that
contract.chanroblesvirtuallawlibrary:red
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim
assails the November 26, 1998 Decision of the Court of Appeals in
CA-GR CV 41477, 1 which disposed as
follows:jgc:chanrobles.com.ph
"WHEREFORE, [there being] no reversible error in the appealed
decision, the same is hereby affirmed." 2
The decretal portion of the Quezon City Regional Trial Court (RTC)
ruling, which was affirmed by the CA, reads as
follows:jgc:chanrobles.com.ph
"WHEREFORE, the Court rules:chanrob1es virtual 1aw library
1. That plaintiff is entitled to the writ of preliminary attachment
issued by this Court on September 20, 1990;chanrobles virtual
lawlibrary
2. That defendants are jointly liable to plaintiff for the following
amounts, subject to the modifications as hereinafter made by reason
of the special and unique facts and circumstances and the
proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the
fishing nets covered by the Agreement plus P68,000.00 representing
the unpaid price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff’s invoices
and computed on their respective amounts as follows:chanrob1es
virtual 1aw library
i. Accrued interest of P73,221.00 on Invoice No. 14407 for
P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for
P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for
P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney’s fees, plus P8,500.00 representing
P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage
charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction
sale);chanroblesvirtuallawlibrary
e. Cost of suit.
"With respect to the joint liability of defendants for the principal
obligation or for the unpaid price of nets and floats in the amount of
P532,045.00 and P68,000.00, respectively, or for the total amount of
P600,045.00, this Court noted that these items were attached to
guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it was ordered sold at
public auction for not less than P900,000.00 for which the plaintiff
was the sole and winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of P900,000.00
replaced the attached property as a guaranty for any judgment that plaintiff
may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the
highest bidder in the public auction sale. It has also been noted that
ownership of the nets [was] retained by the plaintiff until full payment [was]
made as stipulated in the invoices; hence, in effect, the plaintiff attached its
own properties. It [was] for this reason also that this Court earlier ordered
the attachment bond filed by plaintiff to guaranty damages to defendants to
be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff
to serve as its bond in favor of defendants.
"From the foregoing, it would appear therefore that whatever judgment the
plaintiff may be entitled to in this case will have to be satisfied from the
amount of P900,000.00 as this amount replaced the attached nets and floats.
Considering, however, that the total judgment obligation as computed
above would amount to only P840,216.92, it would be inequitable, unfair
and unjust to award the excess to the defendants who are not entitled to
damages and who did not put up a single centavo to raise the amount of
P900,000.00 aside from the fact that they are not the owners of the nets and
floats. For this reason, the defendants are hereby relieved from any and all
liabilities arising from the monetary judgment obligation enumerated above
and for plaintiff to retain possession and ownership of the nets and floats
and for the reimbursement of the P900,000.00 deposited by it with the
Clerk of Court.
SO ORDERED." 3chanroblesvirtuallawlibrary
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter
Yao entered into a Contract dated February 7, 1990, for the purchase of
fishing nets of various sizes from the Philippine Fishing Gear Industries,
Inc. (herein respondent). They claimed that they were engaged in a business
venture with Petitioner Lim Tong Lim, who however was not a signatory to
the agreement. The total price of the nets amounted to P532,045. Four
hundred pieces of floats worth P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence,
private respondent filed a collection suit against Chua, Yao and Petitioner
Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit
was brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certification from the Securities and Exchange
Commission. 5 On September 20, 1990, the lower court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing
nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.chanrobles law library : red
Instead of answering the Complaint, Chua filed a Manifestation admitting
his liability and requesting a reasonable time within which to pay. He also
turned over to respondent some of the nets which were in his possession.
Peter Yao filed an Answer, after which he was deemed to have waived his
right to cross-examine witnesses and to present evidence on his behalf,
because of his failure to appear in subsequent hearings. Lim Tong Lim, on
the other hand, filed an Answer with Counterclaim and Crossclaim and
moved for the lifting of the Writ of Attachment. 6 The trial court
maintained the Writ, and upon motion of private respondent, ordered the
sale of the fishing nets at a public auction. Philippine Fishing Gear
Industries won the bidding and deposited with the said court the sales
proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that
Philippine Fishing Gear Industries was entitled to the Writ of Attachment
and that Chua, Yao and Lim, as general partners, were jointly liable to
pay Respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed
based (1) on the testimonies of the witnesses presented and (2) on a
Compromise Agreement executed by the three 9 in Civil Case No.
1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial
documents; (b) a reformation of contracts; (c) a declaration of ownership of
fishing boats; (d) an injunction and (e) damages. 10 The Compromise
Agreement provided:chanroblesvirtualawlibrary
"a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4)
vessels sold in the amount of P5,750,000.00 including the fishing net. This
P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor
of JL Holdings Corporation and/or Lim Tong Lim;
"b) If the four (4) vessel[s] and the fishing net will be sold at a higher
price than P5,750,000.00 whatever will be the excess will be divided
into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
"c) If the proceeds of the sale the vessels will be less than
P5,750,000.00 whatever the deficiency shall be shouldered and paid
to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua;
1/3 Peter Yao." 11
The trial court noted that the Compromise Agreement was silent as to
the nature of their obligations, but that joint liability could be
presumed from the equal distribution of the profit and loss. 12
Lim appealed to the Court of Appeals (CA) which, as already stated,
affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner
of Chua and Yao in a fishing business and may thus be held liable as
such for the fishing nets and floats purchased by and for the use of
the partnership. The appellate court ruled:jgc:chanrobles.com.ph
"The evidence establishes that all the defendants including herein
appellant Lim Tong Lim undertook a partnership for a specific
undertaking, that is for commercial fishing . . . . Obviously, the
ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is . . . . By
a contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves (Article 1767,
New Civil Code)." 13chanroblesvirtual|awlibrary
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the
assailed Decision on the following grounds:jgc:chanrobles.com.ph
"I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON
A COMPROMISE AGREEMENT THAT CHUA, YAO AND
PETITIONER LIM ENTERED INTO IN A SEPARATE CASE,
THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.
"II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT
HE WAS ACTING FOR OCEAN QUEST FISHING
CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM
AS WELL.
"III THE TRIAL COURT IMPROPERLY ORDERED THE
SEIZURE AND ATTACHMENT OF PETITIONER LIM’S
GOODS."cralaw virtua1aw library
In determining whether petitioner may be held liable for the fishing
nets and floats purchased from respondent, the Court must resolve
this key issue: whether by their acts, Lim, Chua and Yao could be
deemed to have entered into a Lim who was petitioner’s brother. In their Compromise Agreement, they
partnership.chanroblesvirtuallawlibrary
This Court’s Ruling
The Petition is devoid of merit.
First and Second Issues:chanrob1es virtual 1aw library
Existence of a Partnership and Petitioner’s Liability
In arguing that he should not be held liable for the equipment
purchased from respondent, petitioner controverts the CA finding
that a partnership existed between him, Peter Yao and Antonio Chua.
He asserts that the CA based its finding on the Compromise
Agreement alone. Furthermore, he disclaims any direct participation
in the purchase of the nets, alleging that the negotiations were
conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he
was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease"
dated February 1, 1990, showed that he had merely leased to the two the
main asset of the purported partnership — the fishing boat F/B Lourdes.
The lease was for six months, with a monthly rental of P37,500 plus 25
percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by
the two lower courts clearly showed that there existed a partnership among
Chua, Yao and him, pursuant to Article 1767 of the Civil Code which
provides:jgc:chanrobles.com.ph
"ARTICLE 1767. By the contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves." chanrobles
lawlibrary : rednad
Specifically, both lower courts ruled that a partnership among the three
existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yao’s
partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally
agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for
the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner
Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which
executed a Deed of Sale over these two (2) boats in favor of Petitioner Lim
Tong Lim only to serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping,
repairing, dry docking and other expenses for the boats would be
shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended
a loan to the partnership in the amount of P1 million secured by a check,
because of which, Yao and Chua entrusted the ownership papers of two
other boats, Chua’s FB Lady Anne Mel and Yao’s FB Tracy to Lim Tong
Lim.chanroblesvirtual|awlibrary
(7) That in pursuance of the business agreement, Peter Yao and Antonio
Chua bought nets from Respondent Philippine Fishing Gear, in behalf of
"Ocean Quest Fishing Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon
RTC, Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for
(a) declaration of nullity of commercial documents; (b) reformation of
contracts; (c) declaration of ownership of fishing boats; (4) injunction; and
(e) damages.
(9) That the case was amicably settled through a Compromise Agreement
executed between the parties-litigants the terms of which are already
enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao
and Lim had decided to engage in a fishing business, which they started by
buying boats worth P3.35 million, financed by a loan secured from Jesus
subsequently revealed their intention to pay the loan with the proceeds of
the sale of the boats, and to divide equally among them the excess or loss.
These boats, the purchase and the repair of which were financed with
borrowed money, fell under the term "common fund" under Article 1767.
The contribution to such fund need not be cash or fixed assets; it could be
an intangible like credit or industry. That the parties agreed that any loss or
profit from the sale and operation of the boats would be divided equally
among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase
of the boat, but also to that of the nets and the floats. The fishing nets and
the floats, both essential to fishing, were obviously acquired in furtherance
of their business. It would have been inconceivable for Lim to involve
himself so much in buying the boat but not in the acquisition of the
aforesaid equipment, without which the business could not have
proceeded.chanroblesvirtual|awlibrary
Given the preceding facts, it is clear that there was, among petitioner,
Chua and Yao, a partnership engaged in the fishing business. They
purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and
operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present
case should involve only questions of law. Thus, the foregoing
factual findings of the RTC and the CA are binding on this Court,
absent any cogent proof that the present action is embraced by one of
the exceptions to the rule. 16 In assailing the factual findings of the
two lower courts, petitioner effectively goes beyond the bounds of a
petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership
Petitioner argues that the appellate court’s sole basis for assuming the
existence of a partnership was the Compromise Agreement. He also
claims that the settlement was entered into only to end the dispute
among them, but not to adjudicate their preexisting rights and
obligations. His arguments are baseless. The Agreement was but an
embodiment of the relationship extant among the parties prior to its
execution.
A proper adjudication of claimants’ rights mandates that courts must
review and thoroughly appraise all relevant facts. Both lower courts
have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on
the basis of one piece of document alone, petitioner fails to
appreciate that the CA and the RTC delved into the history of the
document and explored all the possible consequential combinations
in harmony with law, logic and fairness. Verily, the two lower
courts’ factual findings mentioned above nullified petitioner’s
argument that the existence of a partnership was based only on the
Compromise Agreement.chanrobles law library
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioner’s argument that he was merely
the lessor of the boats to Chua and Yao, not a partner in the fishing
venture. His argument allegedly finds support in the Contract of
Lease and the registration papers showing that he was the owner of
the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to
believe that he consented to the sale of his own boats to pay a debt of
Chua and Yao, with the excess of the proceeds to be divided among
the three of them. No lessor would do what petitioner did. Indeed, his
consent to the sale proved that there was a preexisting partnership
among all three.
Verily, as found by the lower courts, petitioner entered into a
business agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and the upgrading of
the vessels which would be used in their fishing business. The sale of
the boats, as well as the division among the three of the balance
remaining after the payment of their loans, proves beyond cavil that
F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the person
the lender trusts, who in this case is the petitioner himself. After all,
he is the brother of the creditor, Jesus Lim.chanrobles.com.ph :
virtual law library
We stress that it is unreasonable — indeed, it is absurd — for
petitioner to sell his property to pay a debt he did not incur, if the
relationship among the three of them was merely that of lessor-lessee,
instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel,
liability can be imputed only to Chua and Yao, and not to him. Again,
we disagree.
Section 21 of the Corporation Code of the Philippines
provides:jgc:chanrobles.com.ph
"SECTION 21. Corporation by estoppel. — All persons who assume to act
as a corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or arising
as a result thereof: Provided however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.
"One who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact no
corporation." chanrobles.com:cralaw:red
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate existence.
"The reason behind this doctrine is obvious — an unincorporated
association has no personality and would be incompetent to act and
appropriate for itself the power and attributes of a corporation as provided
by law; it cannot create agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its representatives or agents
do so without authority and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent without authority or
without a principal is himself regarded as the principal, possessed of all the
right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent." 17
The doctrine of corporation by estoppel may apply to the alleged
corporation and to a third party. In the first instance, an unincorporated
association, which represented itself to be a corporation, will be estopped
from denying its corporate capacity in a suit against it by a third person who
relied in good faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received benefits
from it, may be barred from denying its corporate existence in a suit
brought against the alleged corporation. In such case, all those who
benefited from the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts they
impliedly assented to or took advantage of.chanrobles virtual lawlibrary
There is no dispute that the respondent, Philippine Fishing Gear Industries,
is entitled to be paid for the nets it sold. The only question here is whether
petitioner should be held jointly 18 liable with Chua and Yao. Petitioner
contests such liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Since his name does not appear
on any of the contracts and since he never directly transacted with the
respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside
F/B Lourdes, the boat which has earlier been proven to be an asset of the
partnership. He in fact questions the attachment of the nets, because the
Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao
decided to form a corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude the liabilities of the
three as contracting parties in representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered
into by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel. We reiterate the ruling of the Court in
Alonso v. Villamor: 19chanrobles.com.ph : virtual law library
"A litigation is not a game of technicalities in which one, more deeply
schooled and skilled in the subtle art of movement and position, entraps and
destroys the other. It is, rather, a contest in which each contending party
fully and fairly lays before the court the facts in issue and then, brushing
aside as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that justice be done upon the merits.
Lawsuits, unlike duels, are not to be won by a rapier’s thrust.
Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in
technicalities."cralaw virtua1aw library
Third Issue:chanrob1es virtual 1aw library
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly
issued against the nets. We agree with the Court of Appeals that this
issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the
name of petitioner, only to assure payment of the debt he and his
partners owed. The nets and the floats were specifically
manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed upon. Hence,
the issuance of the Writ to assure the payment of the price stipulated
in the invoices is proper. Besides, by specific agreement, ownership
of the nets remained with Respondent Philippine Fishing Gear, until
full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.chanrobles virtual lawlibrary
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Separate Opinions
VITUG, J., concurring:chanrob1es virtual 1aw library
I share the views expressed in the ponencia of an esteemed colleague,
Mr. Justice Artemio V. Panganiban, particularly the finding that
Antonio Chua, Peter Yao and petitioner Lim Tong Lim have incurred
the liabilities of general partners. I merely would wish to elucidate a
bit, albeit briefly, the liability of partners in a general partnership.
When a person by his act or deed represents himself as a partner in
an existing partnership or with one or more persons not actual
partners, he is deemed an agent of such persons consenting to such
representation and in the same manner, if he were a partner with
respect to persons who rely upon the representation. 1 The
association formed by Chua, Yao and Lim, should be, as it has been
deemed, a de facto partnership with all the consequent obligations for
the purpose of enforcing the rights of third persons. The liability of
general partners (in a general partnership as so opposed to a limited
partnership) is laid down in Article 1816 2 which posits that all
partners shall be liable pro rata beyond the partnership assets for all
the contracts which may have been entered into in its name, under its
signature, and by a person authorized to act for the partnership. This
rule is to be construed along with other provisions of the Civil Code
which postulate that the partners can be held solidarily liable with the
partnership specifically in these instances — (1) where, by any
wrongful act or omission of any partner acting in the ordinary course
of the business of the partnership or with the authority of his
co-partners, loss or injury is caused to any person, not being a partner
in the partnership, or any penalty is incurred, the partnership is liable
therefor to the same extent as the partner so acting or omitting to act;
(2) where one partner acting within the scope of his apparent
authority receives money or property of a third person and misapplies
it; and (3) where the partnership in the course of its business receives
money or property of a third person and the money or property so
received is misapplied by any partner while it is in the custody of the
partnership 3 — consistently with the rules on the nature of civil
liability in delicts and quasi-delicts.chanrobles law library : red
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,
INC., Petitioner, v. HON. COURT OF APPEALS, HENRI KAHN,
PHILIPPINES FOOTBALL FEDERATION, Respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour
Services, Inc., through its managing director, wrote a letter to the
Philippine Football Federation (Federation), through its president private
respondent Henri Kahn, wherein the former offered its services as a travel
agency to the latter. 1
The offer was accepted.chanrob1es virtua1 1aw 1ibrary
Petitioner secured the airline tickets for the trips of the athletes and officials
of the Federation to the South East Asian Games in Kuala Lumpur as well
as various other trips to the People’s Republic of China and Brisbane. The
total cost of the tickets amounted to P449,654.83. For the tickets received,
the Federation made two partial payments, both in September of 1989, in
the total amount of P176,467.50. 2
On 4 October 1989, petitioner wrote the Federation, through the private
respondent a demand letter requesting for the amount of P265,894.33. 3 On
30 October 1989, the Federation, through the Project Gintong Alay, paid
the amount of P31,603.00. 4
On 27 December 1989, Henri Kahn issued a personal check in the amount
of P50,000 as partial payment for the outstanding balance of the Federation.
5 Thereafter, no further payments were made despite repeated
demands.chanrob1es virtua1 1aw 1ibrary
This prompted petitioner to file a civil case before the Regional Trial Court
of Manila. Petitioner sued Henri Kahn in his personal capacity and as
President of the Federation and impleaded the Federation as an alternative
defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri
Kahn allegedly guaranteed the said obligation. 6
Henri Kahn filed his answer with counterclaim. While not denying the
allegation that the Federation owed the amount P207,524.20, representing
the unpaid balance for the plane tickets, he averred that the petitioner has no
cause of action against him either in his personal capacity or in his official
capacity as president of the Federation. He maintained that he; did not
guarantee payment but merely acted as an agent of the Federation which
has a separate and distinct juridical personality. 7
On the other hand, the Federation failed to file its answer, hence, was
declared in default by the trial court. 8
In due course, the trial court rendered judgment and ruled in favor of the
petitioner and declared Henri Kahn personally liable for the unpaid
obligation of the Federation. In arriving at the said ruling, the trial court
rationalized:chanrob1es virtual 1aw library
Defendant Henri Kahn would have been correct in his contentions had it
been duly established that defendant Federation is a corporation The trouble,
however, is that neither the plaintiff nor the defendant Henri Kahn has
adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that
"defendant Philippine Football Federation is a sports association . . ." This
has not been denied by defendant Henri Kahn in his Answer. Being the
President of defendant Federation, its corporate existence is within the
personal knowledge of defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a mere sports association if
it were a domestic corporation. But he did not.
x x x
A voluntary unincorporated association, like defendant Federation has no
power to enter into, or to ratify, a contract. The contract entered into by its
officers or agents on behalf of such association is not binding on, or
enforceable against it. The officers or agents are themselves personally
liable.
x x x9
The dispositive portion of the trial court’s decision reads:chanrob1es virtual
1aw library
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to
pay the plaintiff the principal sum of P207,524.20, plus the interest thereon
at the legal rate computed from July 5, 1990, the date the complaint was
filed, until the principal obligation is fully liquidated; and another sum of
P15,000.00 for attorney’s fees.chanrob1es virtua1 1aw 1ibrary
The complaint of the plaintiff against the Philippine Football
Federation and the counterclaims of the defendant Henri Kahn are
hereby dismissed.
With the costs against defendant Henri Kahn. 10
Only Henri Kahn elevated the above decision to the Court of Appeals.
On 21 December 1994, the respondent court rendered a decision
reversing the trial court, the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is
hereby REVERSED and SET ASIDE and another one is rendered
dismissing the complaint against defendant Henri S. Kahn. 11
In finding for Henri Kahn, the Court of Appeals recognized the
juridical existence of the Federation. It rationalized that since
petitioner failed to prove that Henri Kahn guaranteed the obligation
of the Federation, he should not be held liable for the same as said
entity has a separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative
prayer pleaded that the Federation be held liable for the unpaid
obligation. The same was denied by the appellate court in its
resolution of 8 February 1995, where it stated that:chanrob1es
virtua1 1aw 1ibrary
As to the alternative prayer for the Modification of the Decision by
expressly declaring in the dispositive portion thereof the Philippine
Football Federation (PFF) as liable for the unpaid obligation, it
should be remembered that the trial court dismissed the complaint
against the Philippine Football Federation, and the plaintiff did not
appeal from this decision. Hence, the Philippine Football Federation
is not a party to this appeal and consequently, no judgment may be
pronounced by this Court against the PFF without violating the due
process clause, let alone the fact that the judgment dismissing the
complaint against it, had already become final by virtue of the
plaintiff’s failure to appeal therefrom. The alternative prayer is
therefore similarly DENIED. 12
Petitioner now seeks recourse to this Court and alleges that the
respondent court committed the following assigned errors: 13
A. THE, HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONER HAD DEALT WITH THE
PHILIPPINE FOOTBALL FEDERATION (PFF) AS A
CORPORATE ENTITY AND IN NOT HOLDING THAT
PRIVATE RESPONDENT HENRI KAHN WAS THE ONE, WHO
REPRESENTED THE PFF AS HAVING CORPORATE
PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING PRIVATE RESPONDENT HENRI KAHN
PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH
PETITIONER AND CONTRACTED THE OBLIGATION IN
BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AN
ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT
KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE
COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY
LIABLE FOR THE OBLIGATION.chanrob1es virtua1 1aw 1ibrary
The resolution of the case at bar hinges on the determination of the
existence of the Philippine Football Federation as a juridical person.
In the assailed decision, the appellate court recognized the existence
of the Federation. In support of this, the CA cited Republic Act 3135,
otherwise known as the Revised Charter of the Philippine Amateur
Athletic Federation, and Presidential Decree No. 604 as the laws
from which said Federation derives its existence.chanrob1es virtua1
1aw 1ibrary
As correctly observed by the appellate court, both R.A. 3135 and P.D.
No. 604 recognized the juridical existence of national sports
associations. This may be gleaned from the powers and functions
granted to these associations. Section 14 of R.A. 3135
provides:chanrob1es virtual 1aw library
SECTION 14. Functions, powers and duties of Associations. — The
National Sports’ Association shall have the following functions, powers and
duties:chanrob1es virtual 1aw library
1. To adopt a constitution and by-laws for their internal organization and
government.
2. To raise funds by donations benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and
personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports’ Associations after due
consultation with the executive committee;
x x x
13. To perform such other acts as may be necessary for the proper
accomplishment of their purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports
associations:chanrob1es virtual 1aw library
SECTION. 8. Functions, Powers, and Duties of National Sports Association.
— The National sports associations shall have the following functions,
powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and
government which shall be submitted to the Department and any
amendment hereto shall take effect upon approval by the Department:
Provided, however, That no team, school, club, organization or entity shall
be admitted as a voting member of an association unless 60 per cent of the
athletes composing said team, school, club, organization or entity are
Filipino citizens.
2. Raise funds by donations, benefits, and other means for their purpose
subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and
personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the
Olympic and Asian Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due
consultation with the Department;
x x x
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations
clearly indicate that these entities may acquire a juridical personality. The
power to purchase, sell, lease and encumber property are acts which may
only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national
sports associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.chanrob1es
virtua1 1aw 1ibrary
It is a basic postulate that before a corporation may acquire juridical
personality, the State must give its consent either in the form of a special
law or a general enabling act. We cannot agree with the view of the
appellate court; and the private respondent that the Philippine Football
Federation came into existence upon the passage of these laws. Nowhere
can it be found in R.A. 3135 or P.D. 604 any provision creating the
Philippine Football Federation. These laws merely recognized the existence
of national sports associations and provided the manner by which these
entities may acquire juridical personality. Section 11 of R.A. 3135
provides:chanrob1es virtual 1aw library
SECTION 11. National Sports’ Association; organization and recognition.
— A National Association shall be organized for each individual sports in
the Philippines in the manner hereinafter provided to constitute the
Philippine Amateur Athletic Federation. Applications for recognition as a
National Sports’ Association shall be filed with the executive committee
together with, among others, a copy of the constitution and by-laws and a
list of the members of the proposed association, and a filing fee of
ten pesos.
The Executive Committee shall give the recognition applied for if it
is satisfied that said association will promote the purposes of this Act
and particularly section three thereof. No application shall be held
pending for more than three months after the filing thereof without
any action having been taken thereon by the executive committee.
Should the application be rejected, the reasons for such rejection
shall be clearly stated in a written communication to the applicant.
Failure to specify the reasons for the rejection shall not affect the
application which shall be considered as unacted upon: Provided
however, That until the executive committee herein provided shall
have been formed, applications for recognition shall be passed upon
by the duly elected members of the present executive committee of
the Philippine Amateur Athletic Federation. The said executive
committee shall be dissolved upon the organization of the executive
committee herein provided: Provided, further, That the functioning
executive committee is charged with the responsibility of seeing to it
that the National Sports’ Associations are formed and organized
within six months from and after the passage of this Act.chanrob1es
virtua1 1aw 1ibrary
Section 7 of P.D. 604, similarly provides:chanrob1es virtual 1aw
library
SECTION 7. National Sports Associations: — Application for
accreditation or recognition as a national sports association for each
individual sport in the Philippines shall be filed with the Department
together with, among others, a copy of the Constitution and By-Laws
and a list of the members of the proposed association.
The Department shall give the recognition applied for if it is satisfied
that the national sports association to be organized will promote the
objectives of this Decree and has substantially complied with the
rules and regulations of the Department: Provided, That the
Department may withdraw accreditation or recognition for violation
of this Decree and such rules and regulations formulated by it.
The Department shall supervise the national sports association:
Provided, That the latter shall have exclusive technical control over
the development and promotion of the particular sport for which they
are organized.
Clearly the above cited provisions require that before an entity may
be considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine, Amateur
Athletic Federation under R.A. 3135, and the Department of Youth
and Sports Development under P.D. 604.
This fact of recognition, however, Henri Kahn failed to substantiate.
In attempting to prove the juridical existence of the Federation, Henri
Kahn attached to his motion for reconsideration before the trial court
a copy of the constitution and by-laws of the Philippine, Football
Federation. Unfortunately, the same does not prove that said
Federation has indeed been recognized and accredited by either the
Philippine Amateur Athletic Federation or the Department of Youth
and Sports Development. Accordingly, we rule that the Philippine
Football Federation is not a national sports association within the
purview of the aforementioned laws and does not have corporate
existence of its own.chanrob1es virtua1 1aw 1ibrary
Thus being said, it follows that private respondent Henry Kahn
should be held liable for the unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled principal in corporation
law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges
and becomes personally liable for contract entered into or for other
acts performed as such agent. 14 As president of the Federation,
Henri Kahn is presumed to have known about the corporate existence
or non-existence of the Federation. We cannot subscribe to the
position taken by the appellate court that even assuming that the
Federation was defectively incorporated, the petitioner cannot deny
the corporate existence of the Federation because it had contracted
and dealt with the Federation in such a manner as to recognize and in
effect admit its existence. 15 The doctrine of corporation by estoppel
is mistakenly applied by the respondent court to the petitioner. The
application of the doctrine applies to a third party only when he tries
to escape liabilities on a contract from which he has benefited on the
irrelevant ground of defective incorporation. 16 In the case at bar, the
petitioner is not trying to escape liability from the contract but rather is the
one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET
ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in
Civil Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)
ASSOCIATION, INC., petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND
GUARANTY CORPORATION, EMDEN ENCARNACION and
HORATIO AYCARDO, respondents.
ROMERO, J.:
May the failure of a corporation to file its by-laws within one month from
the date of its incorporation, as mandated by Section 46 of the Corporation
Code, result in its automatic dissolution?
This is the issue raised in this petition for review on certiorari of the
Decision1 of the Court of Appeals affirming the decision of the Home
Insurance and Guaranty Corporation (HIGC). This quasi-judicial body
recognized Loyola Grand Villas Homeowners Association (LGVHA) as the
sole homeowners' association in Loyola Grand Villas, a duly registered
subdivision in Quezon City and Marikina City that was owned and
developed by Solid Homes, Inc. It revoked the certificates of registration
issued to Loyola Grand Villas homeowners (North) Association
Incorporated (the North Association for brevity) and Loyola Grand Villas
Homeowners (South) Association Incorporated (the South Association).
LGVHAI was organized on February 8, 1983 as the association of
homeowners and residents of the Loyola Grand Villas. It was registered
with the Home Financing Corporation, the predecessor of herein respondent
HIGC, as the sole homeowners' organization in the said subdivision under
Certificate of Registration No. 04-197. It was organized by the developer of
the subdivision and its first president was Victorio V. Soliven, himself the
owner of the developer. For unknown reasons, however, LGVHAI did not
file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws.
They failed to do so. 2 To the officers' consternation, they discovered that
there were two other organizations within the subdivision — the North
Association and the South Association. According to private respondents, a
non-resident and Soliven himself, respectively headed these associations.
They also discovered that these associations had five (5) registered
homeowners each who were also the incorporators, directors and officers
thereof. None of the members of the LGVHAI was listed as member of the
North Association while three (3) members of LGVHAI were listed as
members of the South Association.3 The North Association was registered
with the HIGC on February 13, 1989 under Certificate of Registration No.
04-1160 covering Phases West II, East III, West III and East IV. It
submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty.
Joaquin A. Bautista, the head of the legal department of the HIGC,
informed him that LGVHAI had been automatically dissolved for two
reasons. First, it did not submit its by-laws within the period required by the
Corporation Code and, second, there was non-user of corporate charter
because HIGC had not received any report on the association's activities.
Apparently, this information resulted in the registration of the South
Association with the HIGC on July 27, 1989 covering Phases West I, East I
and East II. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a
complaint with the HIGC. They questioned the revocation of LGVHAI's
certificate of registration without due notice and hearing and concomitantly
prayed for the cancellation of the certificates of registration of the North
and South Associations by reason of the earlier issuance of a certificate of
registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private
respondents obtained a favorable ruling from HIGC Hearing Officer
Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as
follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola
Grand Villas Homeowners Association, Inc., under Certificate of
Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and
declaring the Certificates of Registration of Loyola Grand Villas
Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or
cancelled; that the receivership be terminated and the Receiver is
hereby ordered to render an accounting and turn-over to Loyola
Grand Villas Homeowners Association, Inc., all assets and records of
the Association now under his custody and possession.
The South Association appealed to the Appeals Board of the HIGC.
In its Resolution of September 8, 1993, the Board 4 dismissed the
appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the Court of
Appeals, raising two issues. First, whether or not LGVHAI's failure
to file its by-laws within the period prescribed by Section 46 of the
Corporation Code resulted in the automatic dissolution of
LGVHAI. Second, whether or not two homeowners' associations
may be authorized by the HIGC in one "sprawling subdivision."
However, in the Decision of August 23, 1994 being assailed here, the
Court of Appeals affirmed the Resolution of the HIGC Appeals
Board.
In resolving the first issue, the Court of Appeals held that under the
Corporation Code, a private corporation commences to have
corporate existence and juridical personality from the date the
Securities and Exchange Commission (SEC) issues a certificate of
incorporation under its official seal. The requirement for the filing of
by-laws under Section 46 of the Corporation Code within one month
from official notice of the issuance of the certificate of incorporation
presupposes that it is already incorporated, although it may file its
by-laws with its articles of incorporation. Elucidating on the effect of
a delayed filing of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e.,
Section 46 and 22, Corporation Code, or in any other provision of the
Code and other laws which provide or at least imply that failure to
file the by-laws results in an automatic dissolution of the corporation.
While Section 46, in prescribing that by-laws must be adopted within
the period prescribed therein, may be interpreted as a mandatory
provision, particularly because of the use of the word "must," its
meaning cannot be stretched to support the argument that automatic
dissolution results from non-compliance.
We realize that Section 46 or other provisions of the Corporation
Code are silent on the result of the failure to adopt and file the
by-laws within the required period. Thus, Section 46 and other
related provisions of the Corporation Code are to be construed with
Section 6 (1) of P.D. 902-A. This section empowers the SEC to
suspend or revoke certificates of registration on the grounds listed
therein. Among the grounds stated is the failure to file by-laws (see
also II Campos: The Corporation Code, 1990 ed., pp. 124-125). Such
suspension or revocation, the same section provides, should be made
upon proper notice and hearing. Although P.D. 902-A refers to the
SEC, the same principles and procedures apply to the public
respondent HIGC as it exercises its power to revoke or suspend the
certificates of registration or homeowners association. (Section 2 [a],
E.O. 535, series 1979, transferred the powers and authorities of the
SEC over homeowners associations to the HIGC.)
We also do not agree with the petitioner's interpretation that Section
46, Corporation Code prevails over Section 6, P.D. 902-A and that
the latter is invalid because it contravenes the former. There is no
basis for such interpretation considering that these two provisions are
not inconsistent with each other. They are, in fact, complementary to
each other so that one cannot be considered as invalidating the other.
The Court of Appeals added that, as there was no showing that the
registration of LGVHAI had been validly revoked, it continued to be
the duly registered homeowners' association in the Loyola Grand Villas.
More importantly, the South Association did not dispute the fact that
LGVHAI had been organized and that, thereafter, it transacted business
within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous
ruling 5 that the HIGC has the authority to order the holding of a
referendum to determine which of two contending associations should
represent the entire community, village or subdivision.
Undaunted, the South Association filed the instant petition for review
on certiorari. It elevates as sole issue for resolution the first issue it had
raised before the Court of Appeals, i.e., whether or not the LGVHAI's
failure to file its by-laws within the period prescribed by Section 46 of the
Corporation Code had the effect of automatically dissolving the said
corporation.
Petitioner contends that, since Section 46 uses the word "must" with respect
to the filing of by-laws, noncompliance therewith would result in
"self-extinction" either due to non-occurrence of a suspensive condition or
the occurrence of a resolutory condition "under the hypothesis that (by) the
issuance of the certificate of registration alone the corporate personality is
deemed already formed." It asserts that the Corporation Code provides for a
"gradation of violations of requirements." Hence, Section 22 mandates that
the corporation must be formally organized and should commence
transaction within two years from date of incorporation. Otherwise, the
corporation would be deemed dissolved. On the other hand, if the
corporation commences operations but becomes continuously inoperative
for five years, then it may be suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the
Corporation Code do not provide for sanctions for non-filing of the by-laws.
However, it insists that no sanction need be provided "because the
mandatory nature of the provision is so clear that there can be no doubt
about its being an essential attribute of corporate birth." To petitioner, its
submission is buttressed by the facts that the period for compliance is
"spelled out distinctly;" that the certification of the SEC/HIGC must show
that the by-laws are not inconsistent with the Code, and that a copy of the
by-laws "has to be attached to the articles of incorporation." Moreover, no
sanction is provided for because "in the first place, no corporate identity has
been completed." Petitioner asserts that "non-provision for remedy or
sanction is itself the tacit proclamation that non-compliance is fatal and no
corporate existence had yet evolved," and therefore, there was "no need to
proclaim its demise." 6 In a bid to convince the Court of its arguments,
petitioner stresses that:
. . . the word MUST is used in Sec. 46 in its universal literal meaning and
corollary human implication — its compulsion is integrated in its very
essence — MUST is always enforceable by the inevitable consequence —
that is, "OR ELSE". The use of the word MUST in Sec. 46 is no exception
— it means file the by-laws within one month after notice of issuance of
certificate of registration OR ELSE. The OR ELSE, though not specified, is
inextricably a part of MUST . Do this or if you do not you are "Kaput". The
importance of the by-laws to corporate existence compels such meaning for
as decreed the by-laws is "the government" of the corporation. Indeed, how
can the corporation do any lawful act as such without by-laws. Surely, no
law is indeed to create chaos. 7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power
of the Corporation Code which itself does not provide sanctions for
non-filing of by-laws. For the petitioner, it is "not proper to assess the true
meaning of Sec. 46 . . . on an unauthorized provision on such matter
contained in the said decree."
In their comment on the petition, private respondents counter that the
requirement of adoption of by-laws is not mandatory. They point to P.D. No.
902-A as having resolved the issue of whether said requirement is
mandatory or merely directory. Citing Chung Ka Bio v. Intermediate
Appellate Court, 8 private respondents contend that Section 6(I) of that
decree provides that non-filing of by-laws is only a ground for suspension
or revocation of the certificate of registration of corporations and, therefore,
it may not result in automatic dissolution of the corporation. Moreover, the
adoption and filing of by-laws is a condition subsequent which does not
affect the corporate personality of a corporation like the LGVHAI. This is
so because Section 9 of the Corporation Code provides that the corporate
existence and juridical personality of a corporation begins from the date the
SEC issues a certificate of incorporation under its official seal.
Consequently, even if the by-laws have not yet been filed, a
corporation may be considered a de facto corporation. To emphasize
the fact the LGVHAI was registered as the sole homeowners'
association in the Loyola Grand Villas, private respondents point out
that membership in the LGVHAI was an "unconditional restriction in
the deeds of sale signed by lot buyers."
In its reply to private respondents' comment on the petition,
petitioner reiterates its argument that the word " must" in Section 46
of the Corporation Code is mandatory. It adds that, before the ruling
in Chung Ka Bio v. Intermediate Appellate Court could be applied to
this case, this Court must first resolve the issue of whether or not the
provisions of P.D. No. 902-A prescribing the rules and regulations to
implement the Corporation Code can "rise above and change" the
substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the focal
point of controversy in this case states:
Sec. 46. Adoption of by-laws. — Every corporation formed under this
Code, must within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government
not inconsistent with this Code. For the adoption of by-laws by the
corporation, the affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a
majority of the members, in the case of non-stock corporations, shall
be necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of
the corporation, subject to the stockholders or members voting for
them and shall be kept in the principal office of the corporation,
subject to inspection of the stockholders or members during office
hours; and a copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles
of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such
by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the
by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing
the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that
such by-laws or amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this
provision of law begins with the determination of the meaning and
import of the word "must" in this section Ordinarily, the word "must"
connotes an imperative act or operates to impose a duty which may
be enforced. 9 It is synonymous with "ought" which connotes
compulsion or mandatoriness. 10 However, the word "must" in a
statute, like "shall," is not always imperative. It may be consistent
with an exercise of discretion. In this jurisdiction, the tendency has
been to interpret "shall" as the context or a reasonable construction of
the statute in which it is used demands or requires. 11 This is equally
true as regards the word "must." Thus, if the languages of a statute
considered as a whole and with due regard to its nature and object
reveals that the legislature intended to use the words "shall" and
"must" to be directory, they should be given that meaning. 12
In this respect, the following portions of the deliberations of the
Batasang Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be
filed within one month after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
effect of the failure of the corporation to file these by-laws within one
month?
MR. MENDOZA. There is a provision in the latter part of the Code which
identifies and describes the consequences of violations of any provision of
this Code. One such consequences is the dissolution of the corporation for
its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution
of the corporation by merely failing to file the by-laws within one month.
Supposing the corporation was late, say, five days, what would be the
mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic
or ipso facto dissolution of the corporation. Perhaps, as in the case, as you
suggested, in the case of El Hogar Filipino where a quo warranto action is
brought, one takes into account the gravity of the violation committed. If
the by-laws were late — the filing of the by-laws were late by, perhaps, a
day or two, I would suppose that might be a tolerable delay, but if they are
delayed over a period of months — as is happening now — because of the
absence of a clear requirement that by-laws must be completed within a
specified period of time, the corporation must suffer certain
consequences. 13
This exchange of views demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the intention of
the legislature. Moreover, even without resorting to the records of
deliberations of the Batasang Pambansa, the law itself provides the answer
to the issue propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a
statute is the statute itself (optima statuli interpretatix est ipsum
statutum), 14 Section 46 aforequoted reveals the legislative intent to attach a
directory, and not mandatory, meaning for the word "must" in the first
sentence thereof. Note should be taken of the second paragraph of the law
which allows the filing of the by-laws even prior to incorporation. This
provision in the same section of the Code rules out mandatory compliance
with the requirement of filing the by-laws "within one (1) month after
receipt of official notice of the issuance of its certificate of incorporation by
the Securities and Exchange Commission." It necessarily follows that
failure to file the by-laws within that period does not imply the "demise" of
the corporation. By-laws may be necessary for the "government" of the
corporation but these are subordinate to the articles of incorporation as well
as to the Corporation Code and related statutes.15 There are in fact cases
where by-laws are unnecessary to corporate existence or to the valid
exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, by-laws are
not necessary either to the existence of a corporation or to the valid exercise
of the powers conferred upon it, certainly in all cases where the charter
sufficiently provides for the government of the body; and even where the
governing statute in express terms confers upon the corporation the power
to adopt by-laws, the failure to exercise the power will be ascribed to mere
nonaction which will not render void any acts of the corporation which
would otherwise be valid. 16 (Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its life, and
that until by-laws have been adopted the corporation may not be able to act
for the purposes of its creation, and that the first and most important duty of
the members is to adopt them. This would seem to follow as a matter of
principle from the office and functions of by-laws. Viewed in this light, the
adoption of by-laws is a matter of practical, if not one of legal, necessity.
Moreover, the peculiar circumstances attending the formation of a
corporation may impose the obligation to adopt certain by-laws, as in the
case of a close corporation organized for specific purposes. And the statute
or general laws from which the corporation derives its corporate existence
may expressly require it to make and adopt by-laws and specify to some
extent what they shall contain and the manner of their adoption. The mere
fact, however, of the existence of power in the corporation to adopt by-laws
does not ordinarily and of necessity make the exercise of such power
essential to its corporate life, or to the validity of any of its acts. 17
Although the Corporation Code requires the filing of by-laws, it does
not expressly provide for the consequences of the non-filing of the
same within the period provided for in Section 46. However, such
omission has been rectified by Presidential Decree No. 902-A, the
pertinent provisions on the jurisdiction of the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships
or associations, upon any of the grounds provided by law, including
the following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the
Commission or by a Commissioner or by such other bodies, boards,
committees and/or any officer as may be created or designated by the
Commission for the purpose. The decision, ruling or order of any
such Commissioner, bodies, boards, committees and/or officer may
be appealed to the Commission sitting en banc within thirty (30)
days after receipt by the appellant of notice of such decision, ruling
or order. The Commission shall promulgate rules of procedures to
govern the proceedings, hearings and appeals of cases falling with its
jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the
Commission sitting en banc to the Supreme Court by petition for
review in accordance with the pertinent provisions of the Rules of
Court.
Even under the foregoing express grant of power and authority, there
can be no automatic corporate dissolution simply because the
incorporators failed to abide by the required filing of by-laws
embodied in Section 46 of the Corporation Code. There is no outright
"demise" of corporate existence. Proper notice and hearing are
cardinal components of due process in any democratic institution,
agency or society. In other words, the incorporators must be given
the chance to explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation
Code but in another law is of no moment. P.D. No. 902-A, which
took effect immediately after its promulgation on March 11, 1976, is
very much apposite to the Code. Accordingly, the provisions
abovequoted supply the law governing the situation in the case at bar,
inasmuch as the Corporation Code and P.D. No. 902-A are statutes
in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized
with other statutes as to form a uniform system of jurisprudence. 18
As the "rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs
and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their relation
to it," 19 by-laws are indispensable to corporations in this jurisdiction.
These may not be essential to corporate birth but certainly, these are
required by law for an orderly governance and management of
corporations. Nonetheless, failure to file them within the period
required by law by no means tolls the automatic dissolution of a
corporation.
In this regard, private respondents are correct in relying on the
pronouncements of this Court in Chung Ka Bio v. Intermediate
Appellate Court, 20 as follows:
. . . . Moreover, failure to file the by-laws does not automatically operate to
dissolve a corporation but is now considered only a ground for such
dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of the
Corporation Code, provided that the powers of the corporation would cease
if it did not formally organize and commence the transaction of its business
or the continuation of its works within two years from date of its
incorporation. Section 20, which has been reproduced with some
modifications in Section 46 of the Corporation Code, expressly declared
that "every corporation formed under this Act, must within one month after
the filing of the articles of incorporation with the Securities and Exchange
Commission, adopt a code of by-laws." Whether this provision should be
given mandatory or only directory effect remained a controversial question
until it became academic with the adoption of PD 902-A. Under this decree,
it is now clear that the failure to file by-laws within the required period is
only a ground for suspension or revocation of the certificate of registration
of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to
"suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation" on the ground inter alia of
"failure to file by-laws within the required period." It is clear from this
provision that there must first of all be a hearing to determine the existence
of the ground, and secondly, assuming such finding, the penalty is not
necessarily revocation but may be only suspension of the charter. In fact,
under the rules and regulations of the SEC, failure to file the by-laws on
time may be penalized merely with the imposition of an administrative fine
without affecting the corporate existence of the erring firm.
It should be stressed in this connection that substantial compliance with
conditions subsequent will suffice to perfect corporate personality.
Organization and commencement of transaction of corporate business are
but conditions subsequent and not prerequisites for acquisition of corporate
personality. The adoption and filing of by-laws is also a condition
subsequent. Under Section 19 of the Corporation Code, a Corporation
commences its corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues
certificate of incorporation under its official seal. This may be done even
before the filing of the by-laws, which under Section 46 of the Corporation
Code, must be adopted "within one month after receipt of official notice of
the issuance of its certificate of incorporation." 21
That the corporation involved herein is under the supervision of the HIGC
does not alter the result of this case. The HIGC has taken over the
specialized functions of the former Home Financing Corporation by virtue
of Executive Order No. 90 dated December 17, 1989. 22 With respect to
homeowners associations, the HIGC shall "exercise all the powers,
authorities and responsibilities that are vested on the Securities and
Exchange Commission . . . , the provision of Act 1459, as amended by P.D.
902-A, to the contrary notwithstanding." 23
WHEREFORE, the instant petition for review on certiorari is hereby
DENIED and the questioned Decision of the Court of Appeals AFFIRMED.
This Decision is immediately executory. Costs against petitioner.
SO ORDERED.
HENRY FLEISCHER, Plaintiff-Appellee, vs. BOTICA NOLASCO CO.,
INC., Defendant-Appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province
of Oriental Negros on the 14th day of August, 1923, against the board of
directors of the Botica Nolasco, Inc., a corporation duly organized and
existing under the laws of the Philippine Islands. The plaintiff prayed that
said board of directors be ordered to register in the books of the corporation
five shares of its stock in the name of Henry Fleischer, the plaintiff, and to
pay him the sum of P500 for damages sustained by him resulting from the
refusal of said body to register the shares of stock in question. The
defendant filed a demurrer on the ground that the facts alleged in the
complaint did not constitute sufficient cause of action, and that the action
was not brought against the proper party, which was the Botica
Nolasco, Inc. The demurrer was sustained, and the plaintiff was
granted five days to amend his
complaint.chanroblesvirtualawlibrary chanrobles virtual law library
On November 15, 1923, the plaintiff filed an amended complaint
against the Botica Nolasco, Inc., alleging that he became the owner
of five shares of stock of said corporation, by purchase from their
original owner, one Manuel Gonzalez; that the said shares were fully
paid; and that the defendant refused to register said shares in his
name in the books of the corporation in spite of repeated demands to
that effect made by him upon said corporation, which refusal caused
him damages amounting to P500. Plaintiff prayed for a judgment
ordering the Botica Nolasco, Inc. to register in his name in the books
of the corporation the five shares of stock recorded in said books in
the name of Manuel Gonzalez, and to indemnify him in the sum of
P500 as damages, and to pay the costs. The defendant again filed a
demurrer on the ground that the amended complaint did not state
facts sufficient to constitute a cause of action, and that said amended
complaint was ambiguous, unintelligible, uncertain, which demurrer
was overruled by the court.chanroblesvirtualawlibrary chanrobles
virtual law library
The defendant answered the amended complaint denying generally
and specifically each and every one of the material allegations
thereof, and, as a special defense, alleged that the defendant, pursuant
to article 12 of its by-laws, had preferential right to buy from the
plaintiff said shares at the par value of P100 a share, plus P90 as
dividends corresponding to the year 1922, and that said offer was
refused by the plaintiff. The defendant prayed for a judgment
absolving it from all liability under the complaint and directing the
plaintiff to deliver to the defendant the five shares of stock in
question, and to pay damages in the sum of P500, and the
costs.chanroblesvirtualawlibrary chanrobles virtual law library
Upon the issue presented by the pleadings above stated, the cause
was brought on for trial, at the conclusion of which, and on August
21, 1924, the Honorable N. Capistrano, judge, held that, in his
opinion, article 12 of the by-laws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in
conflict with Act No. 1459 (Corporation Law), especially with
section 35 thereof; and rendered a judgment ordering the defendant
corporation, through its board of directors, to register in the books of
said corporation the said five shares of stock in the name of the
plaintiff, Henry Fleischer, as the shareholder or owner thereof,
instead of the original owner, Manuel Gonzalez, with costs against
the defendant.chanroblesvirtualawlibrary chanrobles virtual law
library
The defendant appealed from said judgment, and now makes several
assignment of error, all of which, in substance, raise the question
whether or not article 12 of the by-laws of the corporation is in
conflict with the provisions of the Corporation Law (Act No.
1459).chanroblesvirtualawlibrary chanrobles virtual law library
There is no controversy as to the facts of the present case. They are
simple and may be stated as follows:chanrobles virtual law library
That Manuel Gonzalez was the original owner of the five shares of
stock in question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco,
Inc.; that on March 11, 1923, he assigned and delivered said five
shares to the plaintiff, Henry Fleischer, by accomplishing the form of
endorsement provided on the back thereof, together with other credits,
in consideration of a large sum of money owed by Gonzalez to
Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13,
1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said
corporation, offered to buy from Henry Fleischer, on behalf of the
corporation, said shares of stock, at their par value of P100 a share,
for P500; that by virtue of article 12 of the by-laws of Botica Nolasco,
Inc., said corporation had the preferential right to buy from Manuel
Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell
them to the defendant; that the plaintiff requested Doctor Miciano to
register said shares in his name; that Doctor Miciano refused to do so,
saying that it would be in contravention of the by-laws of the
corporation.chanroblesvirtualawlibrary chanrobles virtual law library
It also appears from the record that on the 13th day of March, 1923, two
days after the assignment of the shares to the plaintiff, Manuel Gonzales
made a written statement to the Botica Nolasco, Inc., requesting that the
five shares of stock sold by him to Henry Fleischer be noted transferred to
Fleischer's name. He also acknowledged in said written statement the
preferential right of the corporation to buy said five shares (Exhibit 3). On
June 14, 1923, Gonzalez wrote a letter to the Botica Nolasco, withdrawing
and cancelling his written statement of March 13, 1923 (Exhibit C), to
which letter the Botica Nolasco on June 15, 1923, replied, declaring that his
written statement was in conformity with the by-laws of the corporation;
that his letter of June 14th was of no effect, and that the shares in question
had been registered in the name of the Botica Nolasco, Inc., (Exhibit
X).chanroblesvirtualawlibrary chanrobles virtual law library
As indicated above, the important question raised in this appeal is whether
or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict
with the provisions of the Corporation Law (Act No. 1459). Appellant
invoked said article as its ground for denying the request of the plaintiff that
the shares in question be registered in his (plaintiff's) name, and for
claiming that it (Botica Nolasco, Inc.) had the preferential right to buy said
shares from Gonzalez. Appellant now contends that article 12 of the said
by-laws is in conformity with the provisions of Act No. 1459. Said article is
as follows:
ART. 12. Las acciones de la Corporacion pueden ser
transferidas a otra persona, pero para que estas
transferencias tengan validez legal, deben constar en los
registros de la Corporacion con el debido endoso del
accionista a cuyo nombre se ha expedido la accion o
acciones que se transfieran, o un documento de
transferencia. Entendiendose que, ningun accionista
transferira accion alguna a otra persona sin participar
antes por escrito al Secretario-Tesorero. En igualdad de
condiciones, la sociedad tendra el derecho de adquirir
para si la accion o acciones que se traten de transferir.
(Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the
Botica Nolasco, Inc., governing the transfer of shares of stock of said
corporation. The latter part of said article creates in favor of the Botica
Nolasco, Inc., a preferential right to buy, under the same conditions, the
share or shares of stock of a retiring shareholder. Has said corporation any
power, under the Corporation Law (Act. No. 1459), to adopt such
by-law?chanrobles virtual law library
The particular provisions of the Corporation Law referring to transfer of
shares of stock are as follows:
SEC. 13. Every corporation has the power:
xxx xxx x x xchanrobles virtual
law library
(7) To make by-laws, not inconsistent with any existing
law, for the fixing or changing of the number of its
officers and directors within the limits prescribed by
law, and for the transferring of its stock, the
administration of its corporate affairs, etc.
xxx xxx x x xchanrobles virtual
law library
SEC. 35. The capital stock of stock corporations shall
de divided into shares for which certificates signed by
the president or the vice-president, countersigned by the
secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate
indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the
parties to the transaction, that date of the transfer, the
number of the certificate, and the number of shares
transferred. chanrobles virtual law library
 No share of stock against which the corporation
holds any unpaid claim shall be transferable on
the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to
make by-laws, not inconsistent with any existing law, for the
transferring of its stock. It follows from said provision, that a by-law
adopted by a corporation relating to transfer of stock should be in
harmony with the law on the subject of transfer of stock. The law on
this subject is found in section 35 of Act No. 1459 above quoted.
Said section specifically provides that the shares of stock "are
personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc." Said section 35 defines the
nature, character and transferability of shares of stock. Under said
section they are personal property and may be transferred as therein
provided. Said section contemplates no restriction as to whom they
may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor or against
a certain purchaser. The holder of shares, as owner of personal
property, is at liberty, under said section, to dispose of them in favor
of whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer of shares of
stock should take into consideration the specific provisions of section
35 of Act No. 1459, and said by-law should be made to harmonize
with said provisions. It should not be inconsistent
therewith.chanroblesvirtualawlibrary chanrobles virtual law library
The by-law now in question was adopted under the power conferred
upon the corporation by section 13, paragraph 7, above quoted; but in
adopting said by-law the corporation has transcended the limits fixed
by law in the same section, and has not taken into consideration the
provisions of section 35 of Act No.
1459.chanroblesvirtualawlibrary chanrobles virtual law library
As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the
corporation, and are not contradictory to the general policy of the
laws of the land. (Supreme Commandery of the Knights of the
Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep.,
332.)chanrobles virtual law library
On the other hand, it is equally well settled that by-laws of a
corporation must be reasonable and for a corporate purpose, and
always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land. They
must not infringe the policy of the state, nor be hostile to public
welfare. (46 Am. Rep., 332.) They must not disturb vested rights or
impair the obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect rights of property
or create obligations unknown to the law. (People's Home Savings
Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147;
Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)chanrobles
virtual law library
The validity of the by-law of a corporation is purely a question of
law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale
and transfer of stock must be found in the
governing statute or the charter. Restrictions
upon the traffic in stock must have their source in
legislative enactment, as the corporation itself
cannot create such impediments. By-law are
intended merely for the protection of the
corporation, and prescribe regulation and not
restriction; they are always subject to the charter
of the corporation. The corporation, in the
absence of such a power, cannot ordinarily
inquire into or pass upon the legality of the
transaction by which its stock passes from one
person to another, nor can it question the
consideration upon which a sale is based. A
by-law cannot take away or abridge the
substantial rights of stockholder. Under a statute
authorizing by- laws for the transfer of stock, a
corporation can do no more than prescribe a
general mode of transfer on the corporate books and
cannot justify an unreasonable restriction upon the right
of sale. (4 Thompson on Corporations, sec. 4137, p.
674.chanroblesvirtualawlibrary chanrobles virtual law
library
The right of unrestrained transfer of shares inheres in
the very nature of a corporation, and courts will
carefully scrutinize any attempt to impose restrictions
or limitations upon the right of stockholders to sell and
assign their stock. The right to impose any restraint in
this respect must be conferred upon the corporation
either by the governing statute or by the articles of the
corporation. It cannot be done by a by-law without
statutory or charter authority. (4 Thompson on
Corporations, sec. 4334, pp. 818, 819.)chanrobles
virtual law library
The jus disponendi, being an incident of the ownership
of property, the general rule (subject to exceptions
hereafter pointed out and discussed) is that every owner
of corporate shares has the same uncontrollable right to
alien them which attaches to the ownership of any other
species of property. A shareholder is under no
obligation to refrain from selling his shares at the
sacrifice of his personal interest, in order to secure the
welfare of the corporation, or to enable another
shareholder to make gains and profits. (10 Cyc., p.
577.)chanrobles virtual law library
It follows from the foregoing that a corporation has no
power to prevent or to restrain transfers of its shares,
unless such power is expressly conferred in its charter
or governing statute. This conclusion follows from the
further consideration that by-laws or other regulations
restraining such transfers, unless derived from authority
expressly granted by the legislature, would be regarded
as impositions in restraint of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this
question. They hold that the power of a corporation to enact by-laws
restraining the sale and transfer of shares, should not only be in harmony
with the law or charter of the corporation, but such power should be
expressly granted in said law or
charter.chanroblesvirtualawlibrary chanrobles virtual law library
The only restraint imposed by the Corporation Law upon transfer of shares
is found in section 35 of Act No. 1459, quoted above, as follows: "No
transfer, however, shall be valid, except as between the parties, until the
transfer is entered and noted upon the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the
number of the certificate, and the number of shares transferred." This
restriction is necessary in order that the officers of the corporation may
know who are the stockholders, which is essential in conducting elections
of officers, in calling meeting of stockholders, and for other purposes. but
any restriction of the nature of that imposed in the by-law now in question,
is ultra vires, violative of the property rights of shareholders, and in
restraint of trade.chanroblesvirtualawlibrary chanrobles virtual law library
And moreover, the by-laws now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc.
Said by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell
his shares without first offering them to the corporation
for a period of thirty days is not binding upon an
assignee of the stock as a personal contract, although
his assignor knew of the by-law and took part in its
adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co.,
21 R.I., 9.)chanrobles virtual law library
When no restriction is placed by public law on the
transfer of corporate stock, a purchaser is not affected
by any contractual restriction of which he had no notice.
 (Brinkerhoff-Farris Trust and Savings Co. vs.
Home Lumber Co., 118 Mo., 447.)chanrobles
virtual law library
The assignment of shares of stock in a
corporation by one who has assented to an
unauthorized by-law has only the effect of a
contract by, and enforceable against, the assignor;
the assignee is not bound by such by-law by
virtue of the assignment alone. (Ireland vs. Globe
Milling Co., 21 R.I., 9.)chanrobles virtual law
library
A by-law of a corporation which provides that
transfers of stock shall not be valid unless
approved by the board of directors, while it may
be enforced as a reasonable regulation for the
protection of the corporation against worthless
stockholders, cannot be made available to defeat
the rights of third persons. (Farmers' and
Merchants' Bank of Lineville vs. Wasson, 48
Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the
plaintiff does not have any right of action against the defendant
corporation, but against the president and secretary thereof, inasmuch
as the signing and registration of shares is incumbent upon said
officers pursuant to section 35 of the Corporation Law. This
contention cannot be sustained now. The question should have been
raised in the lower court. It is too late to raise it now in this appeal.
Besides, as stated above, the corporation was made defendant in this
action upon the demurrer of the attorney of the original defendant in
the lower court, who contended that the Botica Nolasco, Inc., should
be made the party defendant in this action. Accordingly, upon order
of the court, the complaint was amended and the said corporation
was made the party defendant.chanroblesvirtualawlibrary chanrobles
virtual law library
Whenever a corporation refuses to transfer and register stock in cases
like the present, mandamus will lie to compel the officers of the
corporation to transfer said stock upon the books of the corporation.
(26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)chanrobles virtual law
library
In view of all the foregoing, we are of the opinion, and so hold, that
the decision of the lower court is in accordance with law and should
be and is hereby affirmed, with costs. So ordered.
HE GOVERNMENT OF THE PHILIPPINE ISLANDS (on
relation of the Attorney-General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
STREET, J.:
This is a quo warranto proceeding instituted originally in this court
by the Government of the Philippine Islands on the relation of the
Attorney-General against the building and loan association known as
El Hogar Filipino, for the purpose of depriving it of its corporate
franchise, excluding it from all corporate rights and privileges, and
effecting a final dissolution of said corporation. The complaint
enumerates seventeen distinct causes of action, to all of which the
defendant has answered upon the merits, first admitting the
averments of the first paragraph in the statement of the first cause of
action, wherein it is alleged that the defendant was organized in the
year 1911 as a building and loan association under the laws of the
Philippine Islands, and that, since its organization, the corporation
has been doing business in the Philippine Islands, with its principal
office in the City of Manila. Other facts alleged in the various causes
of action in the complaint are either denied in the answer or
controverted in legal effect by other facts.
After issue had been thus joined upon the merits, the attorneys
entered into an elaborate agreement as to the fact, thereby removing
from the field of dispute such matters of fact as are necessary to the
solution of the controversy. It follows that we are here confronted
only with the legal questions arising upon the agreed statement.
On March 1, 1906, the Philippine Commission enacted what is known as
the Corporation Law (Act No. 1459) effective upon April 1 of the same
year. Section 171 to 190, inclusive, of this Act are devoted to the subject of
building and loan associations, defining their objects making various
provisions governing their organization and administration, and providing
for the supervision to be exercised over them. These provisions appear to be
adopted from American statutes governing building and loan associations
and they of course reflect the ideals and principles found in American law
relative to such associations. The respondent, El Hogar Filipino, was
apparently the first corporation organized in the Philippine Islands under
the provisions cited, and the association has been favored with
extraordinary success. The articles of incorporation bear the date of
December 28, 1910, at which time capital stock in the association had been
subscribed to the amount of P150,000 of which the sum of P10,620 had
been paid in. Under the law as it then stood, the capital of the Association
was not permitted to exceed P3,000,000, but by Act No. 2092, passed
December 23, 1911, the statute was so amended as to permit the
capitalization of building and loan associations to the amount of ten
millions. Soon thereafter the association took advantage of this enactment
by amending its articles so as to provide that the capital should be in an
amount not exceeding the then lawful limit. From the time of its first
organization the number of shareholders has constantly increased, with the
result that on December 31, 1925, the association had 5,826 shareholders
holding 125,750 shares, with a total paid-up value of P8,703,602.25. During
the period of its existence prior to the date last above-mentioned the
association paid to withdrawing stockholders the amount of P7,618,257,.72;
and in the same period it distributed in the form of dividends among its
stockholders the sum of P7,621,565.81.
First cause of action. — The first cause of action is based upon the alleged
illegal holding by the respondent of the title to real property for a period in
excess of five years after the property had been bought in by the respondent
at one of its own foreclosure sales. The provision of law relevant to the
matter is found in section 75 of Act of Congress of July 1, 1902 (repeated in
subsection 5 of section 13 of the Corporation Law.) In both of these
provisions it is in substance declared that while corporations may loan
funds upon real estate security and purchase real estate when necessary for
the collection of loans, they shall dispose of real estate so obtained within
five years after receiving the title.
In this connection it appears that in the year 1920 El Hogar Filipino was the
holder of a recorded mortgage upon a tract of land in the municipality of
San Clemente, Province of Tarlac, as security for a loan of P24,000 to the
shareholders of El Hogar Filipino who were the owners of said property.
The borrowers having defaulted in their payments, El Hogar Filipino
foreclosed the mortgage and purchased the land at the foreclosure sale for
the net amount of the indebtedness, namely, the sum of P23,744.18. The
auction sale of the mortgaged property took place November 18, 1920, and
the deed conveying the property to El Hogar Filipino was executed and
delivered December 22, 1920. On December 27, 1920, the deed conveying
the property to El Hogar Filipino was sent to the register of deeds of the
Province of Tarlac, with the request that the certificate of title then standing
in the name of the former owners be cancelled and that a new certificate of
title be issued in the name of El Hogar Filipino. Said deed was received in
the office of the register of deeds of Tarlac on December 28, 1920, together
with the old certificate of title, and thereupon the register made upon the
said deed the following annotation:
The foregoing document was received in this office at 4.10 p. m., December
28, 1920, according to entry 1898, page 50 of Book One of the Day Book
and registered on the back of certificate of title No. 2211 and its duplicate,
folio 193 of Book A-10 of the register of original certificate. Tarlac, Tarlac,
January 12, 1921. (Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from the register of
deeds of Tarlac, and letters were written to him by El Hogar Filipino on the
subject in March and April, 1921, requesting action. No answer having
been received to these letters, a complaint was made by El Hogar Filipino
to the Chief of the General Land Registration Office; and on May 7, 1921,
the certificate of title to the San Clemente land was received by El Hogar
Filipino from the register of deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar Filipino adopted a
resolution authorizing Vicente Bengzon, an agent of the corporation, to
endeavor to find a buyer for the San Clemente land. On July 27, 1921, El
Hogar Filipino authorized one Jose Laguardia to endeavor to find a
purchaser for the San Clemente land for the sum of P23,000 undertaking to
pay the said Laguardia a commission of 5 per centum of the selling
price for his services, but no offers to purchase were obtained
through this agent or through the agent Bengzon. In July, 1923, plans
of the San Clemente land were sent to Mr. Luis Gomez, Mr. J.
Gonzalez and Mr. Alfonso de Castelvi, as prospective purchasers, but
no offers were received from them. In January, 1926, the agent not
having succeeded in finding a buyer, the San Clemente land was
advertised for sale by El Hogar Filipino in El Debate, La
Vanguardia and Taliba, three newspapers of general circulation in
the Philippine Islands published in the City of Manila. On March 16,
1926, the first offer for the purchase of the San Clemente land was
received by El Hogar Filipino. This offer was made to it in writing by
one Alcantara, who offered to buy it for the sum of P4,000,
Philippine currency, payable P500 in cash, and the remainder within
thirty days. Alcantara's offer having been reported by the manager of
El Hogar Filipino to its board of directors, it was decided, by a
resolution adopted at a meeting of the board held on March 25, 1926,
to accept the offer, and this acceptance was communicated to the
prospective buyer. Alcantara was given successive extensions of the
time, the last of which expired April 30, 1926, within which to make
the payment agreed upon; and upon his failure to do so El Hogar
Filipino treated the contract with him as rescinded, and efforts were
made at once to find another buyer. Finally the land was sold to Doña
Felipa Alberto for P6,000 by a public instrument executed before a
notary public at Manila, P. I., on July 30, 1926.
Upon consideration of the facts above set forth it is evident that the
strict letter of the law was violated by the respondent; but it is
equally obvious that its conduct has not been characterized by
obduracy or pertinacity in contempt of the law. Moreover, several
facts connected with the incident tend to mitigate the offense. The
Attorney-General points out that the respondent acquired title on
December 22, 1920, when the deed was executed and delivered, by
which the property was conveyed to it as purchaser at its foreclosure
sale, and this title remained in it until July 30, 1926, when the
property was finally sold to Felipa Alberto. The interval between
these two conveyances is thus more than five years; and it is
contended that the five year period did not begin to run against the
respondent until May 7, 1921, when the register of deeds of Tarlac
delivered the new certificate of title to the respondent pursuant to the
deed by which the property was acquired. As an equitable
consideration affecting the case this contention, though not decisive,
is in our opinion more than respectable. It has been held by this court
that a purchaser of land registered under the Torrens system cannot
acquire the status of an innocent purchaser for value unless his
vendor is able to place in his hands an owner's duplicate showing the
title of such land to be in the vendor (Director of Lands vs. Addison,
49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results
that prior to May 7, 1921, El Hogar Filipino was not really in a
position to pass an indefeasible title to any purchaser. In this
connection it will be noted that section 75 of the Act of Congress of
July 1, 1902, and the similar provision in section 13 of the
Corporation Law, allow the corporation "five years after receiving
the title," within which to dispose of the property. A fair
interpretation of these provisions would seem to indicate that the date
of the receiving of the title in this case was the date when the
respondent received the owner's certificate, or May 7, 1921, for it
was only after that date that the respondent had an unequivocal and
unquestionable power to pass a complete title. The failure of the
respondent to receive the certificate sooner was not due in any wise
to its fault, but to unexplained delay on the part of the register of
deeds. For this delay the respondent cannot be held accountable.
Again, it is urged for the respondent that the period between March
25, 1926, and April 30, 1926, should not be counted as part of the
five-year period. This was the period during which the respondent
was under obligation to sell the property to Alcantara, prior to the
rescission of the contract by reason of Alcantara's failure to make the
stipulated first payment. Upon this point the contention of the
respondent is, in our opinion, well founded. The acceptance by it of
Alcantara's offer obligated the respondent to Alcantara; and if it had
not been for the default of Alcantara, the effective sale of the
property would have resulted. The respondent was not at all
chargeable with the collapse of these negotiations; and hence in any
equitable application of the law this period should be deducted from
the five-year period within which the respondent ought to have made
the sale. Another circumstance explanatory of the respondent's delay
in selling the property is found in the fact that it purchased the
property for the full amount of the indebtedness due to it from the former
owner, which was nearly P24,000. It was subsequently found that the
property was not salable for anything like that amount and in the end it had
to be sold for P6,000, notwithstanding energetic efforts on the part of the
respondent to find a purchaser upon better terms.
The question then arises whether the failure of the respondent to get rid of
the San Clemente property within five years after it first acquired the deed
thereto, even supposing the five-year period to be properly counted from
that date, is such a violation of law as should work a forfeiture of its
franchise and require a judgment to be entered for its dissolution in this
action of quo warranto. Upon this point we do not hesitate to say that in our
opinion the corporation has not been shown to have offended against the
law in a manner that should entail a forfeiture of its charter. Certainly no
court with any discretion to use in the matter would visit upon the
respondent and its thousands of shareholders the extreme penalty of the law
as a consequence of the delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the
Code of Civil Procedure, as applied by this court in Government of the
Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil.,
15). This section (212), in prescribing the judgment to be rendered against a
corporation in an action of quo warranto, among other things says:
. . . When it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or forfeiture,
or has misused a franchise or exercised a power not conferred by law, but
not of such a character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be outset from the continuance of such
offense or the exercise of such power.
This provision clearly shows that the court has a discretion with respect to
the infliction of capital punishment upon corporation and that there are
certain misdemeanors and misuses of franchises which should not be
recognized as requiring their dissolution. In Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15), it was
found that the offending corporation had been largely (though indirectly)
engaged in the buying and holding or real property for speculative purposes
in contravention of its charter and contrary to the express provisions of law.
Moreover, in that case the offending corporation was found to be still
interested in the properties so purchased for speculative at the time the
action was brought. Nevertheless, instead of making an absolute and
unconditional order for the dissolution of the corporation, the judgment of
ouster was made conditional upon the failure of the corporation to
discontinue its unlawful conduct within six months after final decision. In
the case before us the respondent appears to have rid itself of the San
Clemente property many months prior to the institution of this action. It is
evident from this that the dissolution of the respondent would not be an
appropriate remedy in this case. We do not of course undertake to say that a
corporation might not be dissolved for offenses of this nature perpetrated in
the past, especially if its conduct had exhibited a willful obduracy and
contempt of law. We content ourselves with holding that upon the facts here
before us the penalty of dissolution would be excessively severe and fraught
with consequences altogether disproportionate to the offense committed.
The evident purpose behind the law restricting the rights of corporations
with respect to the tenure of land was to prevent the revival of the entail
(mayorazgo) or other similar institution by which land could be fettered and
its alienation hampered over long periods of time. In the case before us the
respondent corporation has in good faith disposed of the piece of property
which appears to have been in its hands at the expiration of the period fixed
by law, and a fair explanation is given of its failure to dispose of it sooner.
Under these circumstances the destruction of the corporation would bring
irreparable loss upon the thousand of innocent shareholders of the
corporation without any corresponding benefit to the public. The discretion
permitted to this court in the application of the remedy of quo
warranto forbids so radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this court in
matters like that now before us has been expressly taken away by the third
section of Act No. 2792, and that the dissolution of the corporation is
obligatory upon the court a mere finding that the respondent has violated
the provision of the Corporation Law in any respect. This makes necessary
to examine the Act last above-mentioned with some care. Upon referring
thereto, we find that it consists of three sections under the following style:
No. 2792. — An Act to amend certain sections of the Corporation
Law, Act Numbered Fourteen hundred and fifty-nine, providing for
the publication of the assets and liabilities of corporations registering
in the Bureau of Commerce and Industry, determining the liability of
the officers of corporations with regard to the issuance of stock or
bonus, establishing penalties for certain things, and for other
purposes.
The first two section contain amendments to the Corporation Law
with respect to matters with which we are not here concurred. The
third section contains anew enactment to be inserted as section 190
(A) in the corporation Law immediately following section 190. This
new section reads as follows:
SEC. 190. (A). Penalties. — The violation of any of the provisions of
this Act and its amendments not otherwise penalized therein, shall be
punished by a fine of not more than one thousand pesos, or by
imprisonment for not more than five years, or both, in the discretion
of the court. If the violation being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-General or by any
provincial fiscal, by order of said Attorney-General: Provided, That
nothing in this section provided shall be construed to repeal the other
causes for the dissolution of corporation prescribed by existing law,
and the remedy provided for in this section shall be considered as
additional to the remedies already existing.
The contention for the plaintiff is to the effect that the second
sentence in this enactment has entirely abrogated the discretion of
this court with respect to the application of the remedy of qou
warranto, as expressed in section 212 of the Code of Civil Procedure,
and that it is now mandatory upon us to dissolved any corporation
whenever we find that it has committed any violation of the
Corporation Law, however trivial. In our opinion in this radical view
of the meaning of the enactment is untenable. When the statute says,
"If the violation is committed by a corporation, the same shall, upon
such violation being proved, be dissolved by quo
warranto proceedings . . .," the intention was to indicate that the
remedy against the corporation shall be by action of quo warranto.
There was no intention to define the principles governing said
remedy, and it must be understood that in applying the remedy the
court is still controlled by the principles established in immemorial
jurisprudence. The interpretation placed upon this language in the
brief of the Attorney-General would be dangerous in the extreme,
since it would actually place the life of all corporate investments in
the official. No corporate enterprise of any moment can be conducted
perpetually without some trivial misdemeanor against corporate law
being committed by some one or other of its numerous employees.
As illustrations of the preposterous effects of the provision, in the
sense contended for by the Attorney-General, the attorneys for the
respondent have called attention to the fact that under section 52 of
the Corporation Law, a business corporation is required to keep a
stock book and a transfer book in which the names of stockholders
shall kept in alphabetical order. Again, under section 94, railroad
corporations are required to cause all employees working on
passenger trains or at a station for passengers to wear a badge on his
cap or hat which will indicate his office. Can it be supposed that the
Legislature intended to penalize the violation of such provisions as
these by dissolution of the corporation involved? Evidently such
could not have been the intention; and the only way to avoid the
consequence suggested is to hold, as we now hold, that the provision
now under consideration has not impaired the discretion of this court
in applying the writ of quo warranto.
Another way to put the same conclusion is to say that the expression
"shall be dissolved by quo warranto proceedings" means in effect,
"may be dissolved by quo warranto proceedings in the discretion of
the court." The proposition that the word "shall" may be construed as
"may", when addressed by the Legislature to the courts, is well
supported in jurisprudence. In the case of Becker vs. Lebanon and M.
St. Ry. Co., (188 Pa., 484), the Supreme Court of Pennsylvania had
under consideration a statute providing as follows:
It shall be the duty of the court . . . to examine, inquire and ascertain
whether such corporation does in fact posses the right or franchise to
do the act from which such alleged injury to private rights or to the
rights and franchises of other corporations results; and if such rights
or franchises have not been conferred upon such corporations, such
courts, it exercising equitable power, shall, by injunction, at suit of the
private parties or other corporations, restrain such injurious acts.
In an action based on this statute the plaintiff claimed injunctive relief as a
matter of right. But this was denied the court saying:
Notwithstanding, therefore, the use of the imperative "shall" the injunction
is not to be granted unless a proper case for injunction be made out, in
accordance with the principles and practice of equity. The word "shall"
when used by the legislature to a court, is usually a grant of authority and
means "may", and even if it be intended to be mandatory it must be subject
to the necessary limitation that a proper case has been made out for the
exercise of the power.
Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y.
Supp., 129, 133; West Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24
Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095;
State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572;
16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1
Sothard], 387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790;
Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506;
Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257;
103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent on the
ground that the subject-matter of this section is not expressed in the title of
the Act, with the result that the section is invalid. This criticism is in our
opinion well founded. Section 3 of our organic law (Jones Bill) declares,
among other things, that "No bill which may be enacted into law shall
embrace more than one subject, and that subject shall be expressed in the
title of the bill." Any law or part of a law passed by the Philippine
Legislature since this provision went into effect and offending against its
requirement is necessarily void.
Upon examining the entire Act (No. 2792), we find that it is directed to
three ends which are successively dealt with in the first three sections of the
Act. But it will be noted that these three matters all relate to the Corporation
Law; and it is at once apparent that they might properly have been
embodied in a single Act if a title of sufficient unity and generality had
been prefixed thereto. Furthermore, it is obvious, even upon casual
inspection, that the subject-matter of each of the first two sections is
expressed and defined with sufficient precision in the title. With respect to
the subject-matter of section 3 the only words in the title which can be
taken to refer to the subject-matter of said section are these, "An Act . . .
establishing penalties for certain things, and for other purposes." These
words undoubtedly have sufficient generality to cover the subject-matter of
section 3 of the Act. But this is not enough. The Jones Law requires that the
subject-matter of the bill "shall be expressed in the title of the bill."
When reference is had to the expression "establishing penalties for certain
things," it is obvious that these words express nothing. The constitutional
provision was undoubtedly adopted in order that the public might be
informed as to what the Legislature is about while bills are in process of
passage. The expression "establishing penalties for certain things" would
give no definite information to anybody as to the project of legislation
intended under this expression. An examination of the decided cases shows
that courts have always been indulgent of the practices of the Legislature
with respect to the form and generality of title, for if extreme refinements
were indulged by the courts, the work of legislation would be unnecessarily
hampered. But, as has been observed by the California court, there must be
some reasonable limit to the generality of titles that will be allowed. The
measure of legality is whether the title is sufficient to give notice of the
general subject of the proposed legislation to the persons and interests likely
to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled
"An Act to revise the Code of Civil Procedure of the State of California, by
amending certain sections, repealing others, and adding certain new
sections." This title was held to embrace more than one subject, which were
not sufficiently expressed in the title. In discussing the question the court
said:
* * * It is apparent that the language of the title of the act in question, in and
of itself, express no subject whatever. No one could tell from the title alone
what subject of legislation was dealt with in the body of the act; such
subject so far as the title of the act informs us, might have been entirely
different from anything to be found in the act itself.
We cannot agree with the contention of some of respondent's counsel
— apparently to some extent countenanced by a few authorities —
that the provision of the constitution in question can be entirely
avoided by the simple device of putting into the title of an act words
which denote a subject "broad" enough to cover everything. Under
that view, the title, "An act concerning the laws of the state," would
be good, and the convention and people who framed and adopted the
constitution would be convicted of the folly of elaborately
constructing a grave constitutional limitation of legislative power
upon a most important subject, which the legislature could at once
circumvent by a mere verbal trick. The word "subject" is used in the
constitution embrace but "one subject" it necessarily implies — what
everybody knows — that there are numerous subjects of the
legislation, and declares that only one of these subjects shall
embraced in any one act. All subjects cannot be conjured into one
subject by the mere magic of a word in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme
Court of New Jersey made the following observation:
* * * It is true, that it may be difficult to indicate, by a formula, how
specialized the title of a statute must be; but it is not difficult to
conclude that it must mean something in the way of being a notice of
what is doing. Unless it does not enough that it embraces the
legislative purpose — it must express it; and where the language is
too general, it will accomplish the former, but not the latter. Thus, a
law entitled "An act for a certain purpose," would embrace any
subject, but would express none, and, consequently, it would not
stand the constitutional test.
The doctrine properly applicable in matters of this kind is, we think,
fairly summed up in a current repository of jurisprudence in the
following language:
* * * While it may be difficult to formulate a rule by which to
determine the extent to which the title of a bill must specialize its
object, it may be safely assumed that the title must not only embrace
the subject of proposed legislation, but also express it clearly and
fully enough to give notice of the legislative purpose. (25 R. C. L., p.
853.)
In dealing with the problem now before us the words "and for other
purposes "found at the end of the caption of Act No. 2792, must be
laid completely out of consideration. They express nothing, and
amount to nothing as a compliance with the constitutional
requirement to which attention has been directed. This expression
"(for other purposes") is frequently found in the title of acts adopted
by the Philippine Legislature; and its presence in our laws is due to
the adoption by our Legislature of the style used in Congression
allegation. But it must be remembered that the legislation of
Congress is subject to no constitutional restriction with respect to the
title of bills. Consequently, in Congressional legislation the words
"and for other purposes" at least serve the purpose of admonishing
the public that the bill whose heading contains these words contains
legislation upon other subjects than that expressed in the title. Now,
so long as the Philippine Legislature was subject to no restriction
with respect to the title of bills intended for enactment into general
laws, the expression "for other purposes" could be appropriately used
in titles, not precisely for the purpose of conveying information as to
the matter legislated upon, but for the purpose ad admonishing the
public that any bill containing such words in the title might contain
other subjects than that expressed in the definitive part of the title.
But, when congress adopted the Jones Law, the restriction with
which we are now dealing became effective here and the words "for
other purposes" could no longer be appropriately used in the title of
legislative bills. Nevertheless, the custom of using these words has
still been followed, although they can no longer serve to cover matter
not germane to the bill in the title of which they are used. But the
futility of adding these words to the style of any act is now obvious
(Cooley, Const. Lims., 8th ed., p. 302)
In the brief for the plaintiff it is intimated that the constitutional
restriction which we have been discussing is more or less of a dead
letter in this jurisdiction; and it seems to be taken for granted that no
court would ever presume to hold a legislative act or part of a
legislative act invalid for non-compliance with the requirement. This
is a mistake; and no utterance of this court can be cited as giving
currency to any such notion. On the contrary the discussion contained
in Central Capiz vs. Ramirez (40 Phil., 883), shows that when a case arises
where a violation of the restriction is apparent, the court has no alternative
but to declare the legislation affected thereby to be invalid.
Second cause of action. — The second cause of action is based upon a
charge that the respondent is owning and holding a business lot, with the
structure thereon, in the financial district of the City of Manila is excess of
its reasonable requirements and in contravention of subsection 5 of section
13 of the corporation Law. The facts on which this charge is based appear
to be these:
On August 28, 1913, the respondent purchased 1,413 square meters of land
at the corner of Juan Luna Street and the Muelle de la Industria, in the City
of Manila, immediately adjacent to the building then occupied by the
Hongkong and Shanghai Banking Corporation. At the time the respondent
acquired this lot there stood upon it a building, then nearly fifty years old,
which was occupied in part by the offices of an importing firm and in part
by warehouses of the same firm. The material used in the construction was
Guadalupe stone and hewn timber, and the building contained none of the
facilities usually found in a modern office building.
In purchase of a design which had been formed prior to the purchase of the
property, the directors of the El Hogar Filipino caused the old building to be
demolished; and they erected thereon a modern reinforced concrete office
building. As at first constructed the new building was three stories high in
the main, but in 1920, in order to obtain greater advantage from the use of
the land, an additional story was added to the building, making a structure
of four stories except in one corner where an additional story was place,
making it five stories high over an area of 117.52 square meters. It is
admitted in the plaintiffs brief that this "noble and imposing structure" — to
use the words of the Attorney-General — "has greatly improved the aspect
of the banking and commercial district of Manila and has greatly
contributed to the movement and campaign for the Manila Beautiful." It is
also admitted that the competed building is reasonably proportionate in
value and revenue producing capacity to the value of the land upon which it
stands. The total outlay of the respondent for the land and the improvements
thereon was P690,000 and at this valuation the property is carried on the
books of the company, while the assessed valuation of the land and
improvements is at P786,478.
Since the new building was completed the respondent has used about 324
square meters of floor space for its own offices and has rented the
remainder of the office space in said building, consisting of about 3,175
square meters, to other persons and entities. In the second cause of action of
the complaint it is supposed that the acquisition of this lot, the construction
of the new office building thereon, and the subsequent renting of the same
in great part to third persons, are ultra vires acts on the part of the
corporation, and that the proper penalty to be enforced against it in this
action is that if dissolution.
With this contention we are unable to agree. Under subsection 5 of section
13 of the Corporation Law, every corporation has the power to purchase,
hold and lease such real property as the transaction of the lawful business of
the corporation may reasonably and necessarily require. When this property
was acquired in 1916, the business of El Hogar Filipino had developed to
such an extent, and its prospects for the future were such as to justify its
directors in acquiring a lot in the financial district of the City of Manila and
in constructing thereon a suitable building as the site of its offices; and it
cannot be fairly said that the area of the lot — 1,413 square meters — was
in excess of its reasonable requirements. The law expressly declares that
corporations may acquire such real estate as is reasonably necessary to
enable them to carry out the purposes for which they were created; and we
are of the opinion that the owning of a business lot upon which to construct
and maintain its offices is reasonably necessary to a building and loan
association such as the respondent was at the time this property was
acquired. A different ruling on this point would compel important
enterprises to conduct their business exclusively in leased offices — a result
which could serve no useful end but would retard industrial growth and be
inimical to the best interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to was
lawfully acquired by the respondent, it is entitled to the full beneficial use
thereof. No legitimate principle can discovered which would deny to one
owner the right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to discriminate between
owners in this respect is not lightly to be imputed to the Legislature. The
point here involved has been the subject of consideration in many
decisions of American courts under statutes even more restrictive
than that which prevails in this jurisdiction; and the conclusion has
uniformly been that a corporations whose business may properly be
conducted in a populous center may acquire an appropriate lot and
construct thereon an edifice with facilities in excess of its own
immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R.
A., 366), it appeared that the respondent corporation owned and
controlled a large ten-story business block in the City of Chicago,
worth $2,000,000, and that it occupied only about one-fourth thereof
for its own purposes, leasing the remainder to others at heavy rentals.
The corporate charter merely permitted the holding of such real
estate by the respondent as might be necessary for the successful
prosecution of its business. An attempt was made to obtain the
dissolution of the corporation in a quo warranto proceeding similar
to that now before us, but the remedy was denied.
In Rector vs. Hartford Deposit Co., a question was raised as to the
power of the Deposit Company to erect and own a fourteen-story
building — containing eight storerooms, one hundred suites of
offices, and one safety deposit vault, under a statute authorizing the
corporation to possess so much real estate "as shall be necessary for
the transaction of their business." The court said:
That the appellee company possessed ample power to acquire real
property and construct a building thereon for the purpose of
transacting therein the legitimate business of the corporation is
beyond the range of debate. Nor is the contrary contended, but the
insistence is that, under the guise of erecting a building for corporate
purposes, the appellee company purposely constructed a much larger
building than its business required, containing many rooms intended
to be rented to others for offices and business purposes, — among
them, the basement rooms contracted to be leased to the appellant, —
and that in so doing it designedly exceeded its corporate powers. The
position off appellant therefore is that the appellee corporation has
flagrantly abused its general power to acquire real estate and
construct a building thereon . . . It was within the general scope of
the express powers of the appellee corporation to own and possess a
building necessary for its proper corporate purposes. In planning and
constructing such a building, as was said in People vs. Pullman's
Palace Car Co., supra, the corporation should not necessarily be
restricted to a building containing the precise number of rooms its
then business might require, and no more, but that the future
probable growth and volume of its business might be considered and
anticipated, and a larger building, and one containing more rooms
than the present volume of business required be erected, and the
rooms not needed might be rented by the corporation, — provided, of
course, such course should be taken in good faith, and not as a mere
evasion of the public law and the policy of the state relative to the
ownership of real estate by corporations. In such state of case the
question is whether the corporation has abused or excessively and
unjustifiably used the power and authority granted it by the state to
construct buildings and own real estate necessary for its corporate
purposes.
In Home savings building Association vs. Driver (129 Ky., 754), one
of the questions before the court was precisely the same as that now
before us. Upon this the Supreme Court of Kentucky said:
The third question is, has the association the right to erect, remodel,
or own a building of more than sufficient capacity to accommodate
its own business and to rent out the excess? There is nothing in the
Constitution, charter of the association, or statutes placing any
limitation upon the character of a building which a corporation may
erect as a home in which to conduct its business. A corporation
conducting a business of the character of that in which appellant is
engaged naturally expects its business to grow and expand from time
to time, and, in building a home it would be exercising but a
short-sighted judgment if it did not make provision for the future by
building a home large enough to take care of its expanding business,
and hence, even if it should build a house larger and roomier than its
present needs or interests require, it would be acting clearly with the
exercise of its corporate right and power. The limitation which the
statute imposes is that proper conduct of its business, but it does not
attempt to place any restriction or limitation upon the right of the
corporation or association as to the character of building it shall erect on
said real estate; and, while the Constitution and the statutes provide that no
corporation shall engage in any business other than that expressly
authorized by its charter, we are of opinion that, in renting out the
unoccupied and unused portions of the building so erected, the association
could not be said to engaged in any other business than that authorized by
its charter. The renting of the unused portions of the building is a mere
incident in the conduct of its real business. We would not say that a
building association might embark in the business of building houses and
renting or leasing them, but there is quite a difference in building or renting
a house in which to conduct its own business and leasing the unused portion
thereof for the time being, or until such time as they may be needed by the
association, and in building houses for the purpose of renting or leasing
them. The one might properly be said to be the proper exercise of a power
incident to the conduct of its legitimate business, whereas the other would
be a clear violation of that provision of the statute which denies to any
corporation the right to conduct any business other than that authorized by
its charter. To hold otherwise would be to charge most of the banking
institutions, trust companies and other corporations, such as title guaranty
companies, etc., doing with violating the law; for it is known that there are
few of such institutions that do not, at times, rent out or lease the unneeded
portions of the building occupied by them as homes. We do not think that in
so doing they are violating any provisions of the law, but that the renting
out of the unused or unoccupied portions of their buildings is but an
incident in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739,
741), a stockholder sought to enjoin the bank from building a six-story
building owned by the bank in the commercial district of Hagerstown of
which only the first story was to be used by the bank, the remaining stories
to be rented out for offices and places of business, on the theory that such
action was ultra vires and in violation of the provisions of the national
banking act confining such corporations to the holding, only, of such real
estate "as shall be necessary for its immediate accommodation in the
transaction of its business."
The injunction was denied, the court adopting the opinion of the lower court
in which the following was said:
'The other ground urged by the complainant is that the proposed action is
violative of the restriction which permits a national bank to hold only such
real estate as shall be necessary for its immediate accommodation in the
transaction of its business, and that, therefore, the erection of a building
which will contain offices not necessary for the business of the bank is not
permitted by the law, although that method of improving the lot may be the
most beneficial use that can be made of it. It is matter of common
knowledge that the actual practice of national banks is to the contrary.
Where ground is valuable, it may probably be truly said that the majority of
national bank buildings are built with accommodations in excess of the
needs of the bank for the purpose of lessening the bank's expense by renting
out the unused portion. If that were not allowable, many smaller banks in
cities would be driven to become tenants as the great cost of the lot would
be prohibitive of using it exclusively for the banking accommodation of a
single bank. As indicative of the interpretation of the law commonly
received and acted upon, reference may be made to the reply of the
Comptroller of the Currency to the injury by the bank in this case asking
whether the law forbids the bank constructing such a building as was
contemplated.
'The reply was follows: "Your letter of the 9th instant received, stating that
the directors contemplate making improvements in the bank building and
inquiring if there is anything in the national banking laws prohibiting the
construction of a building which will contain floors for offices to be rented
out by the bank as well as the banking room. Your attention is called to the
case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the
court held that: 'If the land which a national bank purchases or leases for the
accommodation of its business is very valuable it may exercise the same
rights that belong to other landowners of improving it in a way that will
yield the largest income, lessen its own rent, and render that part of its
funds which are invested in realty most productive.'" This seems to be the
common sense interpretation of the act of Congress and is the one which
prevails.'
It would seem to be unnecessary to extend the opinion by lengthy citations
upon the point under consideration, but Brown vs. Schleier (118 Fed., 981),
may be cited as being in harmony with the foregoing authorities. In dealing
with the powers of a national bank the court, in this case, said:
When an occasion arises for an investment in real property for either
of the purposes specified in the statute the national bank act permits
banking associations to act as any prudent person would act in
making an investment in real estate, and to exercise the same
measure of judgment and discretion. The act ought not to be
construed in such as way as to compel a national bank, when it
acquires real property for a legitimate purpose, to deal with it
otherwise than a prudent land owner would ordinarily deal with such
property.
In the brief of the Attorney-General reliance is place almost entirely
upon two Illinois cases, namely Africani Home Purchase and Loan
Association vs. Carroll (267 Ill., 380), and First Methodist Episcopal
Church of Chicago vs. Dixon (178 Ill., 260). In our opinion these
cases are either distinguishable from that now before us, or they
reflect a view of the law which is incorrect. At any rate the weight of
judicial opinion is so overwhelmingly in favor of sustaining the
validity of the acts alleged in the second cause of action to have been
done by the respondent in excess of its powers that we refrain from
commenting at any length upon said cases. The ground stated in the
second cause of action is in our opinion without merit.
Third cause of action. — Under the third cause of action the
respondent is charged with engaging in activities foreign to the
purposes for which the corporation was created and not reasonable
necessary to its legitimate ends. The specifications under this cause
of action relate to three different sorts of activities. The first consist
of the administration of the offices in the El Hogar building not used
by the respondent itself and the renting of such offices to the public.
As stated in the discussion connected with the second cause of action,
the respondent uses only about ten per cent of the office space in the
El Hogar building for its own purposes, and it leases the remainder to
strangers. In the years 1924 and 1925 the respondent received as rent
for the leased portions of the building the sums of P75,395.06 and
P58,259.27, respectively. The activities here criticized clearly fall
within the legitimate powers of the respondent, as shown in what we
have said above relative to the second cause of action. This matter
will therefore no longer detain us. If the respondent had the power to
acquire the lot, construct the edifice and hold it beneficially, as there
decided, the beneficial administration by it of such parts of the
building as are let to others must necessarily be lawful.
The second specification under the third cause of action has reference
to the administration and management of properties belonging to
delinquent shareholders of the association. In this connection it
appears that in case of delinquency on the part of its shareholders in
the payment of interest, premium, and dues, the association has been
accustomed (pursuant to clause 8 of its standard mortgage) to take
over and manage the mortgaged property for the purpose of applying
the income to the obligations of the debtor party. For these services
the respondent charges a commission at the rate of 2½ per centum on
sums collected. The case for the government supposes that the only
remedy which the respondent has in case of default on the part of its
shareholders is to proceed to enforce collection of the whole loan in
the manner contemplated in section 185 of the Corporation Law. It
will be noted, however, that, according to said section, the
association may treat the whole indebtedness as due, "at the option of
the board of directors," and this remedy is not made exclusive. We
see no reason to doubt the validity of the clause giving the
association the right to take over the property which constitutes the
security for the delinquent debt and to manage it with a view to the
satisfaction of the obligations due to the debtor than the immediate
enforcement of the entire obligation, and the validity of the clause
allowing this course to be taken appears to us to be not open to doubt.
The second specification under this cause of action is therefore
without merit, as was true of the first.
The third specification under this cause of action relates to certain
activities which are described in the following paragraphs contained
in the agreed statements of facts:.
El Hogar Filipino has undertaken the management of some parcels of
improved real estate situated in Manila not under mortgage to it, but
owned by shareholders, and has held itself out by advertisement as
prepared to do so. The number of properties so managed during the
years 1921 to 1925, inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the persons whose
properties are so managed for them became shareholders only to enable
them to take advantage thereof.
The services rendered in the management of such improved real estate by
El Hogar Filipino consist in the renting of the same, the payment of real
estate taxes and insurance for the account of the owner, causing the
necessary repairs for upkeep to be made, and collecting rents due from
tenants. For the services so rendered in the management of such properties
El Hogar Filipino receives compensation in the form of commissions upon
the gross receipts from such properties at rates varying from two and
one-half per centum to five per centum of the sums so collected, according
to the location of the property and the effort involved in its management.
The work of managing real estate belonging to non-borrowing shareholders
administered by El Hogar Filipino is carried on by the same members of the
staff who attend to the details of the management of properties administered
by the manager of El Hogar Filipino under the provisions of paragraph 8 of
the standard mortgage form, and of properties bought in on foreclosure of
mortgage.
The practice described in the passage above quoted from the agreed facts is
in our opinion unauthorized by law. Such was the view taken by the bank
examiner of the Treasury Bureau in his report to the Insular Treasurer on
December 21, 1925, wherein the practice in question was criticized. The
administration of property in the manner described is more befitting to the
business of a real estate agent or trust company than to the business of a
building and loan association. The practice to which this criticism is
directed relates of course solely to the management and administration of
properties which are not mortgaged to the association. The circumstance
that the owner of the property may have been required to subscribe to one
or more shares of the association with a view to qualifying him to receive
this service is of no significance. It is a general rule of law that corporations
possess only such express powers. The management and administration of
the property of the shareholders of the corporation is not expressly
authorized by law, and we are unable to see that, upon any fair construction
of the law, these activities are necessary to the exercise of any of the
granted powers. The corporation, upon the point now under the criticism,
has clearly extended itself beyond the legitimate range of its powers. But it
does not result that the dissolution of the corporation is in order, and it will
merely be enjoined from further activities of this sort.
Fourth cause of action. — It appears that among the by laws of the
association there is an article (No. 10) which reads as follows:
The board of directors of the association, by the vote of an absolute
majority of its members, is empowered to cancel shares and to return to the
owner thereof the balance resulting from the liquidation thereof whenever,
by reason of their conduct, or for any other motive, the continuation as
members of the owners of such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct conflict with
the latter part of section 187 of the Corporation Law, which expressly
declares that the board of directors shall not have the power to force the
surrender and withdrawal of unmatured stock except in case of liquidation
of the corporation or of forfeiture of the stock for delinquency. It is agreed
that this provision of the by-laws has never been enforced, and in fact no
attempt has ever been made by the board of directors to make use of the
power therein conferred. In November, 1923, the Acting Insular Treasurer
addressed a letter to El Hogar Filipino, calling attention to article 10 of its
by-laws and expressing the view that said article was invalid. It was
therefore suggested that the article in question should be eliminated from
the by-laws. At the next meeting of the board of directors the matter was
called to their attention and it was resolved to recommend to the
shareholders that in their next annual meeting the article in question be
abrogated. It appears, however, that no annual meeting of the shareholders
called since that date has been attended by a sufficient number of
shareholders to constitute a quorum, with the result that the provision
referred to has no been eliminated from the by-laws, and it still
stands among the by-laws of the association, notwithstanding its
patent conflict with the law.
It is supposed, in the fourth cause of action, that the existence of this
article among the by-laws of the association is a misdemeanor on the
part of the respondent which justifies its dissolution. In this view we
are unable to concur. The obnoxious by-law, as it stands, is a mere
nullity, and could not be enforced even if the directors were to
attempt to do so. There is no provision of law making it a
misdemeanor to incorporate an invalid provision in the by-laws of a
corporation; and if there were such, the hazards incident to corporate
effort would certainly be largely increased. There is no merit in this
cause of action.
Fifth cause of action. — In section 31 of the Corporation Law it is
declared that, "at all elections of directors there must be present,
either in person or by representative authorized to act by written
proxy, the owners of the majority of the subscribed capital stock
entitled to vote. . . ." Conformably with this requirement it is
declared in article 61 of the by-laws of El Hogar Filipino that, "the
attendance in person or by proxy of shareholders owning one-half
plus one of the shareholders shall be necessary to constitute a
quorum for the election of directors. At the general annual meetings
of the El Hogar Filipino held in the years 1911 and 1912, there was a
quorum of shares present or represented at the meetings and directors
were duly elected accordingly. As the corporation has grown,
however, it has been fond increasingly difficult to get together a
quorum of the shareholders, or their proxies, at the annual meetings;
and with the exception of the annual meeting held in 1917, when a
new directorate was elected, the meetings have failed for lack of
quorum. It has been foreseen by the officials in charge of the
respondent that this condition of affairs would lead to embarrassment,
and a special effort was made by the management to induce a
sufficient number of shareholders to attend the annual meeting for
February, 1923. In addition to the publication of notices in the
newspapers, as required by the by-laws, a letter of notification was
sent to every shareholder at his last known address, together with a
blank form of proxy to be used in the event the shareholder could not
personally attend the meeting. Notwithstanding these special efforts
the meeting was attended only by shareholders, in person and by
proxy, representing 3,889 shares, out of a total of 106,491 then
outstanding and entitled to vote.
Owing to the failure of a quorum at most of the general meetings
since the respondent has been in existence, it has been the practice of
the directors to fill vacancies in the directorate by choosing suitable
persons from among the stockholders. This custom finds its sanction
in article 71 of the by-laws, which reads as follows:
ART. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of directors
until the election at the general meeting.
The person thus chosen to fill vacancies in the directorate have, it is
admitted, uniformly been experienced and successful business and
professional men of means, enjoying earned incomes of from
P12,000 to P50,000 per annum, with an annual average of P30,000 in
addition to such income as they derive from their properties.
Moreover, it appears that several of the individuals constituting the
original directorate and persons chosen to supply vacancies therein
belong to prominent Filipino families, and that they are more or less
related to each other by blood or marriage. In addition to this it
appears that it has been the policy of the directorate to keep thereon
some member or another of a single prominent American law firm in
the city.
It is supposed in the statement of the fifth cause of action in the
complaint that the failure of the corporation to hold annual meetings
and the filling of vacancies in the directorate in the manner described
constitute misdemeanors on the part of the respondent which justify
the resumption of the franchise by the Government and dissolution of
the corporation; and in this connection it is charge that the board of
directors of the respondent has become a permanent and self
perpetuating body composed of wealthy men instead of wage earners
and persons of moderate means. We are unable to see the slightest merit in
the charge. No fault can be imputed to the corporation on account of the
failure of the shareholders to attend the annual meetings; and their
non-attendance at such meetings is doubtless to be interpreted in part as
expressing their satisfaction of the way in which things have been
conducted. Upon failure of a quorum at any annual meeting the directorate
naturally holds over and continues to function until another directorate is
chosen and qualified. Unless the law or the charter of a corporation
expressly provides that an office shall become vacant at the expiration of
the term of office for which the officer was elected, the general rule is to
allow the officer to holdover until his successor is duly qualified. Mere
failure of a corporation to elect officers does not terminate the terms of
existing officers nor dissolve the corporation (Quitman Oil Company vs.
Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New
York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill
Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins.
Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike
Road Co., 10 Ky. L. R., 486). The doctrine above stated finds expressions
in article 66 of the by-laws of the respondent which declares in so many
words that directors shall hold office "for the term of one year on until their
successors shall have been elected and taken possession of their offices."
It result that the practice of the directorate of filling vacancies by the action
of the directors themselves is valid. Nor can any exception be taken to then
personality of the individuals chosen by the directors to fill vacancies in the
body. Certainly it is no fair criticism to say that they have chosen competent
businessmen of financial responsibility instead of electing poor persons to
so responsible a position. The possession of means does not disqualify a
man for filling positions of responsibility in corporate affairs.
Sixth cause of action. — Under the sixth cause of action it is alleged that
the directors of El Hogar Filipino, instead of serving without pay, or
receiving nominal pay or a fixed salary, — as the complaint supposes
would be proper, — have been receiving large compensation, varying in
amount from time to time, out of the profits of the respondent. The facts
relating to this cause of action are in substance these:
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the
net profit shown by the annual balance sheet is distributed to the directors in
proportion to their attendance at meetings of the board. The compensation
paid to the directors from time to time since the organization was organized
in 1910 to the end of the year 1925, together with the number of meetings
of the board held each year, is exhibited in the following table:
Compensation Number of Rate per
Year paid directors meetings meeting
as a whole held as a whole
1911 .................................. P 4,167.96 25 P 166.71
1912 .................................. 10,511.87 29 362.47
1913 .................................. 15,479.29 27 573.30
1914 .................................. 19,164.72 27 709.80
1915 .................................. 24,032.85 25 961.31
1916 .................................. 27,539.50 28 983.55
1917 .................................. 31,327.00 26 1,204.88
1918 .................................. 32,858.35 20 1,642.91
1919 .................................. 36,318.78 21 1,729.46
1920 .................................. 63,517.01 28 2,268.46
1921 .................................. 36,815.33 25 1,472.61

1922 .................................. 43,133.73 25 1,725.34
1923 .................................. 39,773.61 27 1,473.09
1924 .................................. 38,651.92 26 1,486.61
1925 .................................. 35,719.27 26 1,373.81
It will be note that the compensation above indicated as accruing to
the directorate as a whole has been divided among the members
actually present at the different meetings. As a result of this practice,
and the liberal measure of compensation adopted, we find that the
attendance of the membership at the board meetings has been
extraordinarily good. Thus, during the years 1920 to 1925, inclusive,
when the board was composed of nine members, the attendance has
regularly been eight meeting with the exception of two years when
the average attendance was seven. It is insisted in the brief for the
Attorney-General that the payment of the compensation indicated is
excessive and prejudicial to he interests of the shareholders at large.
For the respondent, attention is directed to the fact that the liberal
policy adopted by the association with respect to the compensation of
the directors has had highly beneficial results, not only in securing a
constant attendance on the part of the membership, but in obtaining
their intelligent attention to the affairs of the association. Certainly,
in this connection, the following words from the report of the
government examiners for 1918 to the Insular Treasurer contain
matter worthy of consideration:
The management of the association is entrusted to men of recognized
ability in financial affairs and it is believed that they have long
foreseen all possible future contingencies and that under such men
the interests of the stockholders are duly protected. The steps taken
by the directorate to curtail the influx of unnecessary capital into the
association's coffers, as mentioned above, reveals how the men at
grasp the situation and to apply the necessary remedy as the
circumstances were found in the same excellent condition as in the
previous examination.
In so far as this court is concerned the question here before us is not
one concerning the propriety and wisdom of the measure of
compensation adopted by the respondent but rather the question of
the validity of the measure. Upon this point there can, it seems to us,
be no difference of intelligent opinion. The Corporation Law does
not undertake to prescribe the rate of compensation for the directors
of corporations. The power to fixed the compensation they shall
receive, if any, is left to the corporation, to be determined in its
by-laws(Act No. 1459, sec. 21). Pursuant to this authority the
compensation for the directors of El Hogar Filipino has been fixed in
section 92 of its by-laws, as already stated. The justice and property
of this provision was a proper matter for the shareholders when the
by-laws were framed; and the circumstance that, with the growth of
the corporation, the amount paid as compensation to the directors has
increased beyond what would probably be necessary to secure
adequate service from them is matter that cannot be corrected in this
action; nor can it properly be made a basis for depriving the
respondent of its franchise, or even for enjoining it from compliance
with the provisions of its own by-laws. If a mistake has been made,
or the rule adopted in the by-laws meeting to change the rule. The
remedy, if any, seems to lie rather in publicity and competition,
rather than in a court proceeding. The sixth cause of action is in our
opinion without merit.
Seventh cause of action. — It appears that the promoter and
organizer of El Hogar Filipino was Mr. Antonio Melian, and in the
early stages of the organization of the association the board of
directors authorized the association to make a contract with him with
regard to the services him therefor. Pursuant to this authority the
president of the corporation, on January 11, 1911, entered into a
written agreement with Mr. Melian, which is reproduced in the
agreed statement of facts and of which the important clauses are
these:
1. The corporation "El Hogar Filipino Sociedad Mutua de
Construccion y Prestamos," and on its behalf its president, Don
Antonio R. Roxas, hereby confers on Don Antonio Melian the office of
manager of said association for the period of one year from the date of this
contract.
2. Don Antonio Melian accepts said office and undertakes to render the
services thereto corresponding for the period of one year, as prescribed by
the by-laws of the corporation, without salary.
3. Don Antonio Melian furthermore undertakes to pay for his own account,
all the expenses incurred in the organization of the corporation.
4. Don Antonio Melian further undertakes to lend to the corporation,
without interest the sum of six thousand pesos (P6,000), Philippine
Currency, for the purpose of meeting the expense of rent, office supplies,
etcetera, until such time as the association has sufficient funds of its own
with which to return this loan: Provided, nevertheless, That the maximum
period thereof shall not exceed three (3) years.
5. Don Antonio Melian undertakes that the capital of the association shall
amount to the sum of four hundred thousand pesos (P400,000), Philippine
currency, par value, during the first year of its duration.
6. In compensation of the studies made and services rendered by Don
Antonio Melian for its organization, the expenses incurred by him to that
end, and in further consideration of the said loan of six thousand pesos
(P6,000), and of the services to be rendered by him as manager, and of the
obligation assumed by him that the nominal value of the capital of the
association shall reach the sum of four hundred thousand pesos (P400,000)
during the first year of its duration, the corporation 'El Hogar Filipino
Sociedad Mutua de Construccion y Prestamos' hereby grants him five per
centum (5%) of the net profits to be earned by it in each year during the
period fixed for the duration of the association by its articles of
incorporation; Provided, that this participation in the profits shall be
transmitted to the heirs of Señor Melian in the event of his death; And
provided further, that the performance of all the obligations assumed by
Señor Melian in favor of the association, in accordance with this contract,
shall and does constitute a condition precedent to the acquisition by Señor
Melian of the right to the said participation in the profits of the association,
unless the non-performance of such obligations shall be due to a fortuitous
event or force majeure.
In conformity with this agreement there was inserted in section 92 of the
by-laws of the association a provision recognizing the rights of Melian, as
founder, to 5 per centum of the net profits shown by the annual balance
sheet, payment of the same to be made to him or his heirs during the life of
the association. It is declared in said article that this portion of the earnings
of the association is conceded to him in compensation for the studies, work
and contributions made by him for the organization of El Hogar Filipino
and the performance on his part of the contract of January 11, 1911, above
quoted. During the whole life of the association, thus far, it has complied
with the obligations assumed by it in the contract above- mentioned; and
during the years 1911 to 1925, inclusive, it paid to him as founder's royalty
the sum of P459,011.19, in addition to compensation received from the
association by him in to remuneration of services to the association in
various official capacities.
As a seventh cause of action it is alleged in the complaint that this royalty
of the founder is "unconscionable, excessive and out of all proportion to the
services rendered, besides being contrary to and incompatible with the spirit
and purpose of building and loan associations." It is not alleged that the
making of this contract was beyond the powers of the association (ultra
vires); nor it alleged that it is vitiated by fraud of any kind in its
procurement. Nevertheless, it is pretended that in making and observing
said contract the respondent committed an offense requiring its dissolution,
or, as is otherwise suggested, that the association should be enjoined from
performing the agreement.
It is our opinion that this contention is entirely without merit. Stated in its
true simplicity, the primary question here is whether the making of a
(possibly) indiscreet contract is a capital offense in a corporation, — a
question which answers itself. No possible doubt exists as to the power of a
corporation to contract for services rendered and to be rendered by a
promoter in connection with organizing and maintaining the corporation. It
is true that contracts with promoters must be characterized by good faith;
but could it be said with certainty, in the light of facts existing at the time
this contract was made, that the compensation therein provided was
excessive? If the amount of the compensation now appears to be a subject
of legitimate criticism, this must be due to the extraordinary
development of the association in recent years.
If the Melian contract had been clearly ultra vires — which is not
charged and is certainly untrue — its continued performance might
conceivably be enjoined in such a proceeding as this; but if the defect
from which it suffers is mere matter for an action because Melian is
not a party. It is rudimentary in law that an action to annul a contract
cannot be maintained without joining both the contracting parties as
defendants. Moreover, the proper party to bring such an action is
either the corporation itself, or some shareholder who has an interest
to protect.
The mere fact that the compensation paid under this contract is in
excess of what, in the full light of history, may be considered
appropriate is not a proper consideration for this court, and supplies
no ground for interfering with its performance. In the case of El
Hogar Filipino vs. Rafferty (37 Phil., 995), which was before this
court nearly ten years ago, this court held that the El Hogar Filipino
is contract with Mr. Melian did not affect the association's legal
character. The inference is that the contract under consideration was
then considered binding, and it occurred to no one that it was invalid.
It would be a radical step indeed for a court to attempt to substitute
its judgment for the judgment of the contracting parties and to hold,
as we are invited to hold under this cause of action, that the making
of such a contract as this removes the respondent association from
the pale of the law. The majority of the court is of the opinion that
our traditional respect for the sanctity of the contract obligation
should prevail over the radical and innovating tendencies which find
acceptance with some and which, if given full rein, would go far to
sink legitimate enterprise in the Islands into the pit of populism and
bolshevism. The seventh count is not sustainable.
Eight cause of action. — Under the fourth cause of action we had
case where the alleged ground for the revocation of the respondent's
charter was based upon the presence in the by-laws of article 10 that
was found to be inconsistent with the express provisions of law.
Under the eight cause of action the alleged ground for putting an end
to the corporate life of the respondent is found in the presence of
other articles in the by-laws, namely, articles 70 and 76, which are
alleged to be unlawful but which, as will presently be seen, are
entirely valid. Article 70 of the by-laws in effect requires that persons
elected to the board of directors must be holders of shares of the paid
up value of P5,000 which shall be held as security may be put up in
the behalf of any director by some other holder of shares in the
amount stated. Article 76 of the by-laws declares that the directors
waive their right as shareholders to receive loans from the
association.
It is asserted, under the eight cause of action, that article 70 is
objectionable in that, under the requirement for security, a poor
member, or wage-earner, cannot serve as director, irrespective of
other qualifications and that as a matter of fact only men of means
actually sit on the board. Article 76 is criticized on the ground that
the provision requiring directors to renounce their right to loans
unreasonably limits their rights and privileges as members. There is
nothing of value in either of theses suggestions. Section 21 of the
Corporation Law expressly gives the power to the corporation to
provide in its by-laws for the qualifications of directors; and the
requirement of security from them for the proper discharge of the
duties of their office, in the manner prescribed in article 70, is highly
prudent and in conformity with good practice. Article 76, prohibiting
directors from making loans to themselves, is of course designed to
prevent the possibility of the looting of the corporation by
unscrupulous directors. A more discreet provision to insert in the
by-laws of a building and loan association would be hard to imagine.
Clearly, the eighth cause of action cannot be sustained.
Ninth cause of action. — The specification under this head is in
effect that the respondent has abused its franchise in issuing "special"
shares. The issuance of these shares is allege to be illegal and
inconsistent with the plan and purposes of building and loan
associations; and in particular, it is alleged and inconsistent with the
plan and purposes of building and loan associations; and in particular,
it is alleged that they are, in the main, held by well-to-wage-earners
for accumulating their modest savings for the building of homes.
In the articles of incorporation we find the special shares described as
follows:
"Special" shares shall be issued upon the payment of 80 per cent of their par
value in cash, or in monthly dues of P10. The 20 per cent remaining of the
par value of such shares shall be completed by the accumulation thereto of
their proportionate part of the profits of the corporation. At the end of each
quarter the holders of special shares shall be entitled to receive in cash such
part of the net profits of the corporation corresponding to the amount on
such date paid in by the holders of special shares, on account thereof, as
shall be determined by the directors, and at the end of each year the full
amount of the net profits available for distribution corresponding to the
special shares. The directors shall apply such part as they deem advisable to
the amortization of the subscription to capital with respect to shares not
fully paid up, and the remainder of the profits, if any, corresponding to such
shares, shall be delivered to the holders thereof in accordance with the
provision of the by-laws.
The ground for supposing the issuance of the "special" shares to be
unlawful is that special shares are not mentioned in the Corporation Law as
one of the forms of security which may be issued by the association. In the
agreed statement of facts it is said that special shares are issued upon two
plans. By the second, the shareholder, upon subscribing, pays in cash P10
for each share taken, and undertakes to pay P10 a month, as dues, until the
total so paid in amounts to P160 per share. On December 31, 1925, there
were outstanding 20,844 special shares of a total paid value (including
accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since
1915, has been to accumulate to each special share, at the end of the year,
one-tenth of the divident declared and to pay the remainder of the divident
in cash to the holders of shares. Since the same year dividend have been
declared on the special and common shares at the rate of 10 per centum per
annum. When the amount paid in upon any special share plus the
accumulated dividends accruing to it, amounts to the par value of the share
(P200), such share matures and ceases to participate further in the earning.
The amount of the par value of the share (P200) is then returned to the
shareholder and the share cancelled. Holders of special and ordinary shares
participate ratably in the dividends declared and distributed, the part
pertaining to each share being computed on the basis of the capital paid in,
plus the accumulated dividends pertaining to each share at the end of the
year. The total number of shares of El Hogar Filipino outstanding on
December 31, 1925, was 125,750, owned by 5,826 shareholders, and
dividend into classes as follows:
Preferred shares .................................. 1,503
Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special shares by El Hogar
Filipino has been before this court in two earlier cases, in both of which the
question has received the fullest consideration from this court. In El Hogar
Filipino vs. Rafferty (37 Phil., 995), it was insisted that the issuance of such
shares constituted a departure on the part of the association from the
principle of mutuality; and it was claimed by the Collector of Internal
Revenue that this rendered the association liable for the income tax to
which other corporate entities are subject. It was held that this contention
was untenable and that El Hogar Filipino was a legitimate building and loan
association notwithstanding the issuance of said shares. In Sevireno vs. El
Hogar Filipino (G. R. No. 24926),2 and the related cases of Gervasio
Miraflores and Gil Lopes against the same entity, it was asserted by the
plaintiffs that the emission of special shares deprived the herein responded
of the privileges and immunities of a building and loan association and that
as a consequence the loans that had been made to the plaintiffs in those
cases were usurious. Upon an elaborate review of the authorities, the court,
though divided, adhered to the principle announced in the earlier case and
held that the issuance of the special shares did not affect the respondent's
character as a building and loan association nor make its loans usurious. In
view of the lengthy discussion contained in the decisions above-mentioned,
it would appear to be an act of supererogation on our part to go over the
same ground again. The discussion will therefore not be repeated, and what
is now to be said should be considered supplemental thereto.
Upon examination of the nature of the special shares in the light of
American usage, it will be found that said shares are precisely the
same kind of shares that, in some American jurisdictions, are
generally known as advance payment shares; in if close attention be
paid to the language used in the last sentence of section 178 of the
Corporation Law, it will be found that special shares where evidently
created for the purpose of meeting the condition cause by the
prepayment of dues that is there permitted. The language of this
provision is as follow "payment of dues or interest may be made in
advance, but the corporation shall not allow interest on such advance
payment at a greater rate than six per centum per annum nor for a
longer period than one year." In one sort of special shares the dues
are prepaid to the extent of P160 per share; in the other sort
prepayment is made in the amount of P10 per share, and the
subscribers assume the obligation to pay P10 monthly until P160
shall have been paid.
It will escape notice that the provision quoted say that interest shall
not be allowed on the advance payments at a greater rate than six per
centum per annum nor for a longer period than one year. The word
"interest " as there used must be taken in its true sense of
compensation for the used of money loaned, and it not must not be
confused with the dues upon which it is contemplated that the
interest may be paid. Now, in the absence of any showing to the
contrary, we infer that no interest is ever paid by the association in
any amount for the advance payments made on these shares; and the
reason is to be found in the fact that the participation of the special
shares in the earnings of the corporation, in accordance with section
188 of the Corporation Law, sufficiently compensates the
shareholder for the advance payments made by him; and no other
incentive is necessary to induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value of
each special share is not paid for by the shareholder with funds out of
the pocket. The amount is satisfied by applying a portion of the
shareholder's participation in the annual earnings. But as the right of
every shareholder to such participation in the earnings is undeniable,
the portion thus annually applied is as much the property of the
shareholder as if it were in fact taken out of his pocket. It follows that
the mission of the special shares does not involve any violation of the
principle that the shares must be sold at par.
From what has been said it will be seen that there is express authority,
even in the very letter of the law, for the emission of
advance-payment or "special" shares, and the argument that these
shares are invalid is seen to be baseless. In addition to this it is
satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra,
that even assuming that the statute has not expressly authorized such
shares, yet the association has implied authority to issue them. The
complaint consequently fails also as regards the stated in the ninth
cause of action.
Tenth cause of action. — Under this head of the complaint it is
alleged that the defendant is pursuing a policy of depreciating, at the
rate of 10 per centum per annum, the value of the real properties
acquired by it at its sales; and it is alleged that this rate is excessive.
From the agreed statement it appears that since its organization in
1910 El Hogar Filipino, prior to the end of the year 1925, had made
1,373 loans to its shareholders secured by first mortgages on real
estate as well as by the pledge of the shares of the borrowers. In the
same period the association has purchased at foreclosure sales the
real estate constituting the security for 54 of the aforesaid loans. In
making these purchases the association has always bid the full
amount due to it from the debtor, after deducting the withdrawal
value of the shares pledged as collateral, with the result that in no
case has the shareholder been called upon to pay a deficiency
judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its inventory at
actual cost, as determined by the amount bid on foreclosure sale; and
thereafter until sold the book value of such real estate is depreciated
at the rate fixed by the directors in accordance with their judgment as
to each parcel, the annual average depreciation having varied from
nothing to a maximum of 14.138 per cent. The sales thereof, but
sales are made for the best prices obtainable, whether greater or less
than the book value.
It is alleged in the complaint that depreciation is charged by the association
at the rate of 10 per centum per annum. The agreed statement of facts on
this point shows that the annual average varies from nothing to a maximum
of something over 14 per centum. We are thus left in the dark as to the
precise depreciation allowed from year to year. It is not claimed for the
Government that the association is without power to allow some
depreciation; and it is quite clear that the board of directors possesses a
discretion in this matter. There is no positive 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; and article 74 of its
by-laws expressly authorizes the board of directors to determine each year
the amount to be written down upon the expenses of installation and the
property of the corporation. There can be no question that the power to
adopt such a by-law is embraced within the power to make by-laws for the
administration of the corporate affairs of the association and for the
management of its business, as well as the care, control and disposition of
its property (Act No. 1459, sec. 13 [7]). But the Attorney-General questions
the exercise of the direction confided to the board; and it is insisted that the
excessive depreciation of the property of the association is objectionable in
several respects, but mainly because it tends to increase unduly the reserves
of the association, thereby frustrating the right of the shareholders to
participate annually and equally in the earnings of the association.
This count for the complaint proceeds, in our opinion, upon an erroneous
notion as to what a court may do in determining the internal policy of a
business corporation. If the criticism contained in the brief of the
Attorney-General upon the practice of the respondent association with
respect to depreciation be well founded, the Legislature should supply the
remedy by defining the extent to which depreciation may be allowed by
building and loan associations. Certainly this court cannot undertake to
control the discretion of the board of directors of the association about an
administrative matter as to which they have legitimate power of action. The
tenth cause of action is therefore not well founded.
Eleventh and twelfth causes of action. — The same comment is appropriate
with respect to the eleventh and twelfth causes of action, which are treated
together in the briefs, and will be here combined. The specification in the
eleventh cause of action is that the respondent maintains excessive reserve
funds, and in the twelfth cause of action that the board of directors has
settled upon the unlawful policy of paying a straight annual dividend of 10
per centum, regardless of losses suffered and profits made by the
corporation and in contravention of the requirements of section 188 of the
Corporation Law. The facts relating to these two counts in the complaint, as
set forth in the stipulation, are these:
In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per
centum of the net profits earned each year, as shown by the annual balance
sheet shall be carried to a reserve fund. The fund so created is called the
General Reserve. Article 93 of the by-laws authorizes the directors to carry
funds to a special reserve, whenever in their judgment it is advisable to do
so, provided that the annual dividend in the year in which funds are carried
to special reserve exceeds 8 per centum. It appears to have been the policy
of the board of directors for several years past to place in the special reserve
any balance in the profit and loss account after the satisfaction of
preferential charges and the payment of a dividend of 10 per centum to all
special and ordinary shares (with accumulated dividends). As things stood
in 1926 the general reserve contained an amount equivalent to about 5 per
centum of the paid-in value of shared. This fund has never been drawn upon
for the purpose of maintaining the regular annual dividend; but recourse has
been had to the special reserve on three different occasions to make good
the amount necessary to pay dividends. It appears that in the last five years
the reserves have declined from something over 9 per cent to something
over 7.
It is insisted in the brief of the Attorney-General that the maintenance of
reserve funds is unnecessary in the case of building and loan associations,
and at any rate the keeping of reserves is inconsistent with section 188 of
the Corporation Law. Moreover, it is said that the practice of the association
in declaring regularly a 10 per cent dividend is in effect a guaranty by the
association of a fixed dividend which is contrary to the intention of the
statute.
Upon careful consideration of the questions involved we find no reason to
doubt the right of the respondent to maintain these reserves. It is true that
the corporation law does not expressly grant this power, but we think it is to
be implied. It is a fact of common observation that all commercial
enterprises encounter periods when earnings fall below the average, and the
prudent manager makes provision for such contingencies. To regard
all surplus as profit is to neglect one of the primary canons of good
business practice. Building and loan associations, though among the
most solid of financial institutions, are nevertheless subject to
vicissitudes. Fluctuations in the dividend rate are highly detrimental
to any fiscal institutions, while uniformity in the payments of
dividends, continued over long periods, supplies the surest
foundations of public confidence.
The question now under consideration is not new in jurisprudence,
for the American courts have been called upon more than once to
consider the legality of the maintenance of reserves by institutions of
this or similar character.
In Greeff vs. Equitable Life Assurance Society, the court had under
consideration a charter provision of a life insurance company,
organized on the mutual plan, in its relation to the power of the
company to provide reserves. There the statute provided that "the
officers of the company, within sixty days from the expiration of the
first five years, from December 31, 1859, and within the first sixty
days of every subsequent period of five years, shall cause a balance
to be struck of the affairs of the company, which shall exhibit its
assets and liabilities, both present and contingent, and also the net
surplus, after deducting a sufficient amount to cover all outstanding
risks and other obligations. Each policy holder shall be credited with
an equitable share of the said surplus."
The court said:
No prudent person would be inclined to take a policy in a company
which had so improvidently conducted its affairs that it only retained
a fund barely sufficient to pay its present liabilities, and, therefore,
was in a condition where any change by the reduction of interest
upon, or depreciation in, the value of its securities, or any increase of
mortality, would render it insolvent and subject to be placed in the
hands of a receiver. The evident purpose of the provisions of the
defendant's charter and policy relating to this subject was to vest in
the directors of the corporation a discretion to determine the
proportion of its surplus which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in 1916,
entitled Boheman Bldg. and Loan Association vs. Knolt, the court, in
commenting on the nature of these reserves, said:
The apparent function of this fund is to insure the stockholders
against losses. Its purpose is not unlike that of the various forms of
insurance now in such common use. This contribution is as
legitimate an item of expense as are the premiums paid on any
insurance policy. (See Clarks and Chase, Building and Loan
Association, footnote, page 344.)
In commenting on the necessity of such funds, Sundheim says:
It is optional with the association whether to maintain such a fund or
not, but justice and good business policy seem to require it. The
retiring stockholder must be paid the value of his stock in cash and
leave for those remaining a large number of securities and perhaps
some real estate purchased to protect the associations interest. How
much will be realized on these securities, or real estate, no human
foresight can tell. Further, the realizing on these securities may entail
considerable litigation and expense. There are many other
contingencies which might cause a shrinkage in the association's
assets, such as defective titles, undisclosed defalcations on the part of
an officer, a miscalculation of assets and liabilities, and many other
errors and omissions which must always be reckoned within the
conduct of human affairs.
The contingent fund is merely insurance against possible loss. That
losses may occur from time to time seems almost inevitable and it is,
therefore, inequitable that the remaining stockholders should be
compelled to accept all securities at par, so, to say the least, the
maintenance of this fund is justified. The association teaches the duty
of providing for the proverbial rainy day. Why should it not provide
for the hour of adversity? The reserve fund has protected the
maturing or withdrawing member during the period of his
membership. In case of loss it has or would have reimbursed him and,
at all times, it has protected him and given strength and standing to
the association. Losses may occur, after his membership ceases, that arose
from some mistake or mismanagement committed during the period of his
membership, and in fairness and equity the remaining members should have
some protection against this. (Sundheim, Law of Building and Loan
Association, sec. 53.)
The government insists, we thing, upon an interpretation of section 188 of
the Corporation Law that is altogether too strict and literal. From the fact
that the statute provides that profits and losses shall be annually apportioned
among the shareholders it is argued that all earnings should be distributed
without carrying anything to the reserve. But it will be noted that it is
provided in the same section that the profits and losses shall be determined
by the board of directors: and this means that they shall exercise the usual
discretion of good businessmen in allocating a portion of the annual profits
to purposes needful to the welfare of the association. The law contemplates
the distribution of earnings and losses after other legitimate obligations
have been met.
Our conclusion is that the respondent has the power to maintain the reserves
criticized in the eleventh and twelfth counts of the complaint; and at any
rate, if it be supposed that the reserves referred to have become excessive,
the remedy is in the hands of the Legislature. It is no proper function of the
court to arrogate to itself the control of administrative matters which have
been confided to the discretion of the board of directors. The causes of
action under discussion must be pronounced to be without merit.
Thirteenth cause of action. — The specification under this head is, in effect,
that the respondent association has made loans which, to the knowledge of
the associations officers were intended to be used by the borrowers for
other purposes than the building of homes. In this connection it appears that,
though loans have been made by the association exclusively to its
shareholders, no attempt has been made by it to control the borrowers with
respect to the use made of the borrowed funds, the association being content
to see that the security given for the loan in each case is sufficient. On
December 31, 1925, the respondent had five hundred forty-four loans
outstanding secured by mortgages upon real estate and by the pledge of the
borrowers' shares in an amount sufficient at maturity to amortize the loans.
With respect to the nature of the real estate upon which these loans were
made it appears that three hundred fifty-one loans were secured by
mortgages upon city residences, seven by mortgages upon commercial
building in cities, and three mortgages upon unimproved city lots. At the
same time one hundred eighty-three of the loans were secured by mortgages
upon groves, sugar land, and rice land, with a total area of about 7,558
hectares. From information gathered by the association from voluntary
statements of borrowers given at the time of application with respect to the
use intended to be made of the borrowed funds, it appears that the amount
of P693,200 was borrowed to redeem real property from existing mortgages
or pactos de retro, P280,800 to buy real estate, P449,100 to erect buildings,
P24,000 to improve and repair buildings, P1,480,900 for agricultural
purposes, while the amount of P5,763,700 was borrowed for purposes not
disclosed.
Upon these facts an elaborate argument has been constructed in behalf of
the plaintiff to the effect that in making loans for other purposes than the
building of residential houses the association has illegally departed from its
character and made itself amenable to the penalty of dissolution. Aside
from being directly opposed to the decision of this court in Lopez and
Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental
Negros (47 Phil., 249), this contention finds no substantial support in the
prevailing decisions made in American courts; and our attention has not
been directed to a single case wherein the dissolution of a building and loan
association has been decreed in a quo warranto proceeding because the
association allowed its borrowers to use the loans for other purposes than
the acquisition of homes.
The case principally relied upon for the Government appears to be Pfeister
vs. Wheeling Building Association (19 W. Va., 676, 716),which involved
the question whether a building and loan association could recover the full
amount of a note given to it by a member and secured by a mortgage from a
stranger. At the time the case arose there was a statute in force in the State
of West Virginia expressly forbidding building and loan associations to use
or direct their funds for or to any other object or purpose than the buying of
lots or houses or in building and repairing houses, and it was declared that
in case the funds should be improperly directed to other objects, the
offending association should forfeit all rights and privileges as a
corporation. Under the statute so worded the court held that the plaintiff
could only recover the amount actually advanced by it with lawful interest
and fines, without premium; and judgment was given accordingly.
The suggestion in that case that the result would have been the same
even in the absence of statute was mere dictum and is not supported
by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley vs.
Building & Saving Association. The statute in force in the State of
Tennessee at the time this action arose provided that all loans should
be made to the members of the association at open stated meetings
and that the money should be lent to the highest bidder.
Inconsistently with this provision, there was inserted in the by-laws
of the association a provision to the effect that no loan should be
made at a greater premium than 30 per cent, nor at a less premium
than 29 7/8 per cent. It was held that this by-law made free and open
competition impossible and that it in effect established a fixed
premium. It was accordingly held, in the case cited, that an
association could not recover such part of the loan as had been
applied by it to the satisfaction of a premium of 30 per centum.
We have no criticism to make upon the result reached in either of the
two decisions cited, but it is apparent that much of the discussion
contained in the opinions in those cases does not reflect the doctrine
now prevailing in the United States; and much less are those
decisions applicable in this jurisdiction. There is no statute here
expressly declaring that loans may be made by these
associations solely for the purpose of building homes. On the
contrary, the building of homes is mentioned in section 171 of the
Corporation Law as only one among several ends which building and
loan associations are designed to promote. Furthermore, section 181
of the Corporation Law expressly authorities the Board of directors
of the association from time to time to fix the premium to be charged.
In the brief of the plaintiff a number of excerpts from textbooks and
decisions have been collated in which the idea is developed that the
primary design of building and loan associations should be to help
poor people to procure homes of their own. This beneficent end is
undoubtedly served by these associations, and it is not to be denied
that they have been generally fostered with this end in view. But in
this jurisdiction at least the lawmaker has taken care not to limit the
activities of building and loan associations in an exclusive manner,
and the exercise of the broader powers must in the end approve itself
to the business community. Judging from the past history of these
institutions it can be truly said that they have done more to encourage
thrift, economy and saving among the people at large than any other
institution of modern times, not excepting even the saving banks. In
this connection Mr. Sundheim, in a late treatise upon the subject of
the law of building and loan associations, makes the following
comment:
They have grown to such an extent in recent years that they no longer
restrict their money to the home buyer, but loan their money to the
mere investor or dealer in real estate. They are the holder of large
mortgages secured upon farms, factories and other business
properties and rows of stores and dwellings. This is not an abuse of
their powers or departure from their main purposes, but only a
natural and proper expansion along healthy and legitimate lines.
(Sundheim, Building and Loan Associations, sec. 7.)
Speaking of the purpose for which loans may be made, the same
author adds:
Loans are made for the purpose of purchasing a homestead, or other
real estate, or for any lawful purpose or business, but there is no duty
or obligation of the association to inquire for what purpose the loan is
obtained, or to require any stipulation from the borrower as to what
use he will make of the money, or in any manner to supervise or
control its disbursement. (Sundheim, Building and Loan Association,
sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds
of Occidental Negros, this court had before it the question whether a
loan made by the respondent association upon the security of a
mortgage upon agricultural land, — where the loan was doubtless
used for agricultural purposes, — was usurious or not; and the case
turned upon the point whether, in making such loans, the association
had violated the law and departed from its fundamental purposes.
The conclusion of the court was that the loan was valid and could be
lawfully enforced by a nonjudicial foreclosure in conformity with the terms
of the contract between the association and the borrowing member. We now
find no reason to depart from the conclusion reached in that case, and it is
unnecessary to repeat what was then said. The thirteenth cause of action
must therefore be pronounced unfounded.
Fourteenth cause of action. — The specification under this head is that the
loans made by the defendant for purposes other than building or acquiring
homes have been extended in extremely large amounts and to wealthy
persons and large companies. In this connection attention is directed to
eight loans made at different times in the last several years to different
persons or entities, ranging in amounts from P120,000 to P390,000 and to
two large loans made to the Roxas Estate and to the Pacific Warehouse
Company in the amounts of P1,122,000 and P2,320,000, respectively. In
connection with the larger of the two after this loan was made the available
funds of El Hogar Filipino were reduced to the point that the association
was compelled to take advantage of certain provisions of its by-laws
authorizing the postponement of the payment of claims resulting from
withdrawals, whereas previously the association had always settled these
claims promptly from current funds. At no time was there apparently any
delay in the payment of matured shares; but in four or five cases there was
as much as ten months delay in the payment of withdrawal applications.
There is little that can be said upon the legal aspects of this cause of action.
In so far, as it relates to the purposes for which these loans were made, the
matter is covered by what was said above with reference to the thirteenth
cause of action; and in so far as it relates to the personality of the borrowers,
the question belongs more directly to the discussion under the sixteenth
cause of action, which will be found below. The point, then, which remains
for consideration here is whether it is a suicidal act on the part of a building
and loan association to make loans in large amount. If the loans which are
here the subject of criticism had been made upon inadequate security,
especially in case of the largest two, the consequences certainly would have
been disastrous to the association in the extreme; but no such fact is alleged;
and it is to be assumed that none of the ten borrowers have defaulted in
their contracts.
Now, it must be admitted that two of these loans at least are of a very large
size, considering the average range of financial transaction in this country;
and the making of the largest loan was followed, as we have already see,
with unpleasant consequences to the association in dealing with current
claims. Nevertheless the agreed statement of facts shoes that all of the loan
referred to are only ten out of a total of five hundred forty-four outstanding
on December 31, 1925; and the average of all the loans taken together is
modest enough. It appears that the chief examiner of banks and
corporations of the Philippine Treasury, after his examination of El Hogar
Filipino at the end of the year 1925, made a report concerning this
association as of January 31, 1926, in which he criticized the Pacific
Warehouse Company loan as being so large that it temporarily crippled the
lending power of the association for some time. This criticism was
apparently justified as proper comment on the activities of the association;
but the question for use here to decide is whether the making of this and the
other large loans constitutes such a misuser of the franchise as would justify
us in depriving the association of its corporate life. This question appears to
us to be so simple as almost to answer itself. The law states no limit with
respect to the size of the loans to be made by the association. That matter is
confided to the discretion of the board of directors; and this court cannot
arrogate to itself a control over the discretion of the chosen officials of the
company. If it should be thought wise in the future to put a limit upon the
amount of loans to be made to a single person or entity, resort should be
had to the Legislature; it is not a matter amenable to judicial control. The
fourteenth cause of action is therefore obviously without merit.
Fifteenth cause of action. — The criticism here comes back to the supposed
misdemeanor of the respondent in maintaining its reserve funds, — a matter
already discussed under the eleventh and twelfth causes of action. Under
the fifteenth cause of action it is claimed that upon the expiration of the
franchise of the association through the effluxion of time, or earlier
liquidation of its business, the accumulated reserves and other properties
will accrue to the founder, or his heirs, and the then directors of the
corporation and to those persons who may at that time to be holders of the
ordinary and special shares of the corporation. In this connection we note
that article 95 of the by-laws reads as follows:
ART. 95. The funds obtained by the liquidation of the association shall be
applied in the first place to the repayment of shares and the balance, if any,
shall be distribute in accordance with the system established for the
distribution of annual profits.
It will be noted that the cause of action with which we are now
concerned is not directed to any positive misdemeanor supposed to
have been committed by the association. It has exclusive relation to
what may happen some thirty-five years hence when the franchise
expires, supposing of course that the corporation should not be
reorganized and continued after that date. There is nothing in article
95 of the by-laws which is, in our opinion, subject to criticism. The
real point of criticism is that upon the final liquidation of the
corporation years hence there may be in existence a reserve fund out
of all proportion to the requirements that may then fall upon it in the
liquidation of the company. It seems to us that this is matter that may
be left to the prevision of the directors or to legislative action if it
should be deemed expedient to require the gradual suppression of the
reserve funds as the time for dissolution approaches. It is no matter
for judicial interference, and much less could the resumption of the
franchise on this ground be justified. There is no merit in the
fifteenth cause of action.
Sixteenth cause of action. — This part of the complaint assigns as
cause of action that various loans now outstanding have been made
by the respondent to corporations and partnerships, and that these
entities have in some instances subscribed to shares in the respondent
for the sole purpose of obtaining such loans. In this connection it
appears from the stipulation of facts that of the 5,826 shareholders of
El Hogar Filipino, which composed its membership on December 31,
1925, twenty-eight are juridical entities, comprising sixteen
corporations and fourteen partnerships; while of the five hundred
forty-four loans of the association outstanding on the same date, nine
had been made to corporations an five to partnerships. It is also
admitted that some of these juridical entities became shareholders
merely for the purpose of qualifying themselves to take loans from
the association, and the same is said with respect to many natural
persons who have taken shares in the association. Nothing is said in
the agreed statement of facts on the point whether the corporations
and partnerships that have taken loans from the respondent are
qualified by law governing their own organization to enter into these
contracts with the respondent.
In section 173 of the Corporation Law it is declared that "any person"
may become a stockholder in building and loan associations. The
word "person" appears to be here used in its general sense, and there
is nothing in the context to indicate that the expression is used in the
restricted sense of both natural and artificial persons, as indicated in
section 2 of the Administrative Code. We would not say that the
word "person" or persons," is to be taken in this broad sense in every
part of the Corporation Law. For instance, it would seem reasonable
to say that the incorporators of a corporation ought to be natural
persons, although in section 6 it is said that five or more "persons",
although in section 6 it is said that five or more "persons," not
exceeding fifteen, may form a private corporation. But the context
there, as well as the common sense of the situation, suggests that
natural persons are meant. When it is said, however, in section 173,
that "any person" may become a stockholder in a building and loan
association, no reason is seen why the phrase may not be taken in its
proper broad sense of either a natural or artificial person. At any rate
the question whether these loans and the attendant subscriptions were
properly made involves a consideration of the power of the
subscribing corporations and partnerships to own the stock and take
the loans; and it is not alleged in the complaint that they were
without power in the premises. Of course the mere motive with
which subscriptions are made, whether to qualify the stockholders to
take a loan or for some other reason, is of no moment in determining
whether the subscribers were competent to make the contracts. The
result is that we find nothing in the allegations of the sixteenth cause
of action, or in the facts developed in connection therewith, that
would justify us in granting the relief.
Seventeenth cause of action. — Under the seventeenth cause of
action, it is charged that in disposing of real estates purchased by it in
the collection of its loans, the defendant has no various occasions
sold some of the said real estate on credit, transferring the title
thereto to the purchaser; that the properties sold are then mortgaged
to the defendant to secure the payment of the purchase price, said
amount being considered as a loan, and carried as such in the books
of the defendant, and that several such obligations are still
outstanding. It is further charged that the persons and entities to which said
properties are sold under the condition charged are not members or
shareholders nor are they made members or shareholders of the defendant.
This part of the complaint is based upon a mere technicality of bookkeeping.
The central idea involved in the discussion is the provision of the
Corporation Law requiring loans to be stockholders only and on the security
of real estate and shares in the corporation, or of shares alone. It seems to be
supposed that, when the respondent sells property acquired at its own
foreclosure sales and takes a mortgage to secure the deferred payments, the
obligation of the purchaser is a true loan, and hence prohibited. But in
requiring the respondent to sell real estate which it acquires in connection
with the collection of its loans within five years after receiving title to the
same, the law does not prescribe that the property must be sold for cash or
that the purchaser shall be a shareholder in the corporation. Such sales can
of course be made upon terms and conditions approved by the parties; and
when the association takes a mortgage to secure the deferred payments, the
obligation of the purchaser cannot be fairly described as arising out of a
loan. Nor does the fact that it is carried as a loan on the books of the
respondent make it a loan on the books of the respondent make it a loan in
law. The contention of the Government under this head is untenable.
In conclusion, the respondent is enjoined in the future from administering
real property not owned by itself, except as may be permitted to it by
contract when a borrowing shareholder defaults in his obligation. In all
other respects the complaint is dismissed, without costs. So ordered.
Avanceña, C. J., Johnson, Villamor and Vila-Real, JJ., concur.
Separate Opinions
MALCOLM, J., with whom concur OSTRAND and
JOHNS, JJ., dissenting:
For the second time in the history of the court — so counsel for plaintiff
inform us — we must try a corporation for the violation of a law which
carries with it a death warrant — so counsel for defendant intimates. That
the corporation at bar is wealthy and powerful should neither prejudice us
against it nor cause us to cringe before its might. The court has a duty to
perform and should perform it with fairness to the corporation and with
justice to the public, whose interests are involved. El Hogar Filipino,
deserves exactly the same consideration as any other litigant. No more, no
less.
The proceeding is one of quo warranto, begun by the Government of the
Philippine Islands under authority of section 190-A of the Corporation Law,
and of sections 197-216, 519 of the Code of Civil Procedure. The complaint
contains seventeen causes of action. To all of them, the defendant has made
answer. The facts have been covered by stipulation. The government asks
for an order of dissolution. Defendant tenaciously resists.
El Hogar de Filipino is a corporation organized as a mutual building and
loan association under the provisions of the Corporation Law (Act No.
1459). The law last mentioned, it may recalled, is divided into two parts.
Chapter one is entitled "General Provisions." In chapter two is entitled
"Special Provisions". In chapter two, section 171 to 190, inclusive, are
found the special provisions pertaining to building and loan corporations.
Section 171 thereof is indicative of the legislative purpose. It provides:
All corporations whose capital stock is required or is permitted to be paid in
by the stockholders in regular, equal, periodical payments and whose
purpose is to accumulate the savings of its stockholders, to repay to said
stockholder their accumulated savings and profits upon surrender of their
stock, to encourage industry, frugality, and home building among its
stockholders, and to loan its funds and funds borrowed for the purpose to
stockholders on the security of unencumbered real estate and the pledge of
shares of capital stock owned by the stockholders as collateral security,
shall be known as building and loan corporation, and the words mutual
building and loan association shall form part of the name of every such
corporation.
The articles of incorporation of El Hogar Filipino show that the purpose of
the corporation are: (1) The accumulation of the savings of its shareholders;
(2) the return to said shareholders of their accumulated savings and profits
upon the surrender and cancellation of their shares; (3) the encouragement
of industry, frugality, and home building among its shareholders; (4) the
loan of its funds and funds borrowed for the purpose to its shareholders on
the security of unencumbered real estate and the pledge of shares of
capital stock of the company owned by its shareholders as collateral
security; and (5) the borrowing of money upon the credit of the
corporation and the issuance of bonds or other documents evidencing
the existence of such obligations. The capital of the corporation is
made not to exceed P10,000,000. At the end of 1925 it had 5,826
shareholders holding 125,750 shares, the total paid up value of which
was P8,703,602.25.
El Hogar Filipino having been incorporated under Philippine law as a
mutual building and loan association, the primary inquiry should
naturally be as to the nature, purposes, and operations of mutual
building and loan associations.
In the case of El Hogar Filipino vs. Rafferty ([1918] 37 Phil.,
995),this court had presented the question of whether El Hogar
Filipino, as a building and loan association, was relieved from the
necessity of paying an income tax. It was held that it was. Mr. Justice
Johnson, speaking for the court, said:
A building and loan association is an organization created for the
purpose of accumulating a fund by the monthly subscription or
saving of its members, to assist them in building or purchasing for
themselves dwellings or real estate, by loaning to them the requisite
money from the funds of the society. To all particular intent it may
be said to be to enable a number of associates to have and invest their
savings to mutual advantage, so that, from time to time, any
individual among them may receive, out of the accumulation of the
pittances which each contributes periodically, a sum, by way of loan,
wherewith to build or pay for a home, and ultimately making it
absolutely his own by the payment of such small amounts from time
to time. (Rhodes vs. Missouri Savings & Loan Co., 173 Ill., 621; 42
L. R. A., 93.)
The same opinion quoted from Endlich on Building Associations,
section 7, who was termed a leading authority upon such associations,
on the subject of the primary designs and general operation of
building associations, the following:
The idea which first gave rise to the institution of building
associations, which furnished their ostensible and legitimate raison
d'etre, and which secured to them their popularity and their, in many
respects, exceptionally favored position before the law, is that of
enabling persons belonging to a class whose earning are small, and
with whom the slowness of the accumulation discourages the effort,
to become by a process of gradual and compulsory savings, either at
the end of a certain period, or by anticipation of it, the owners of
homesteads. The operation of the scheme may be easily understood.
The same opinion quoted from Thornton and Blackledge in their
work on Building and Loan Associations, at page 6 the following:
Societies, known as building, loan fund, and savings association, are
now recognized as important factors in the social and economic
development of this country. The controlling idea is the massing of
the separate earnings of wage-workers, and the savings of persons of
small means, in such a manner as to aid them in procuring homes. It
is the organization of thrift and self-help; a practical application of
the maxim that in "union there is strength." The effect of such a
movement is to dignify the home; to foster morality, and to make
thoughtful, wise, and responsible citizens. It is for such reason that
the law and the courts, where such associations have been properly
conducted, have looked upon them with favor. Whether they shall
retain the favorable estimation of legislatures and courts will depend
in large measure upon the wise forecast and determined purpose of
those who control such institutions. Those departures from the
original idea, intended to enhance the profits of investors, without in
any degree aiding those who are endeavoring to build homes, have
been, and in the future probably will be, severely censured by the
courts.
In the case of Lopez and Javelona vs. El Hogar Filipino and
Registrar of Deeds of Occidental Negros ([1925], 47 Phil., 249), the
principal issue had to do with the relation of El Hogar Filipino to the
Usury Law permitting it to charge a higher rate of interest than
persons or entities, charge than similarly organized mutual building
and loan associations. Mr. Justice Johns, in a vigorous dissenting opinion,
said:
There must be and is valid reason for the exception made in the statute
which permits building and loan associations to charge and receive 18 per
cent per annum as interest, and which limits all other loans made by any
other person, firm or corporation to interest at 12 per cent per annum.
All building and loan associations are founded, and exceptions made in
their favor as to the rate of interest, upon the theory that they will enable a
person with small means or small income who has a family to support, to
build a home in which to live and to improve his property and develop the
country. When the exception was made by the Legislature, it was never
intended that the El Hogar Filipino or any other corporation, under the guise
of a building and loan association, should make a loan upon a sugar
plantation of the nature of the one in question.
xxx xxx xxx
It will be noted that the exception made in the statute above quoted is for
mutual building and loan societies incorporated under the Corporation Act.
The use of the word mutual is significant and important. Under the statute,
it is not sufficient that the corporation should be a building and loan
association. It must be a mutual building and loan association.
In the same dissent, reference was made to the case of El Hogar Filipino vs.
Rafferty, supra, and the remarks of Endlich, and Thornton and Blackledge
on the purposes of mutual building and loan associations. Fletcher,
Cyclopedia of Corporation, volume 1, page 136, was also quoted from as
follows:
An incorporated building and loan association is a corporation for the
purpose of raising, by periodical subscriptions of members, a stock or fund
to assist members by advances or loans, generally on mortgage security, in
building or purchasing homes. Such corporations are different from
corporations formed for pecuniary profit.
The term (building and loan association) does not generally include
corporations unless their purpose is to accumulate funds and lend the same
to members to assists them in purchasing or building homes . . . (Cases
cited.) It does not include a corporation . . . for the purpose of purchasing
and improving real estate and advancing money on mortgages . . . or a
corporation merely for the purpose of loaning money.
In the same dissent, reference was made to what Corpus Juris, volume 9,
page 920, contains on the subject of the object and purpose of building and
loan associations, namely:
As it is sometimes stated in the statutes relating to, and in the charters and
constitutions of, building and loan associations, the principal object of a
building and loan association is to create a loan fund for the benefit of its
borrowing members, the underlying idea being that, by means of the system
of small periodical payments provided, people of limited means will be
enabled to become the owners of homes, and thrift, economy, and good
citizenship will thereby be promoted. By reason of the favorable results
attending the operation of these associations, and their beneficent purposes,
they have, especially before they attained their present tremendous growth,
been favored and granted special privileges by the various legislatures, such
as permission to charge high rates of interest and exemption from
taxation. . . ." In lieu of asterisk the next succeeding sentence from Corpus
Juris could also have been appropriately used: "However, with the growth
of these organizations, evils have crept in, the privileges granted have in
many instances been abused by unscrupulous officers, and, in recent years,
the courts have been compelled to subject their transactions to closer
scrutiny.
Speaking of the purposes for which loans can be made by building and loan
associations, Rosenthal, in his work on Building, Loan and Savings
Associations, third edition, page 108, says:
In our opinion, the object of building, loan and savings associations is to
furnish funds for homes rather than for mercantile or manufacturing
improvements. Some of the larger associations have granted loans of this
character, and we consider it a dangerous departure from the purposes for
which these associations were created.
Thompson on Building Associations, page 5, 23, 24, 232 and 558,
says:
The building association as now existing is a private corporation
designed for the accumulation, by the members, of their money, by
periodical payments into its treasury, to be invested from time to time
in loans to the members upon real estate for home purposes,
The building association is a home builder. The member by its
system is enabled to acquire a home, and to pay for it he pledges his
future savings. . . . It enforces economy, and awakens thoughts of
citizenship in its better sense of offering homes. This is the first
purpose of these institutions. The language of the Supreme Court of
Georgia is timely: "The they have improved our towns by leading to
the erection of a number of new buildings, furnished many families
with homes of their own, that could not otherwise have possessed the,
given a considerable impulse to mechanical enterprise, and in many
other ways promoted the prosperity and welfare of the communities
where they exist, is undoubtedly true. But whether they will continue
to be entitled to the epithet of the "poor man's exchequer," and
whether they will, as they promise to do, enable every man to
become his own landlord, will depend entirely upon the manner in
which they conduct their business . . ."
These institutions are well known all over the United States to be
depositories of money savings, and investors of those savings in
homes for members. The legislature has created them in the interest
of good citizenship, to enable the people to save their money and
acquire homes and become steady citizens. The ultimate legislative
purpose is home-building. If it was merely a depository of savings it
would have no strong reason for existence, because the savings banks
furnish that; but it goes further, and is designed by law to use those
savings in procuring homes for its members. And the courts should
promptly curb any disposition to depart from the corporate purposes.
. . . But a building association is not an ordinary corporation; in fact,
it exercises some extraordinary privileges, particularly in not being
amenable to the usury laws. It is created for the declared purposes of
accumulating money and lending the accumulation to members to
build or acquire homes for themselves. The legislature devised this
plan of cooperative accumulations for the purpose of assisting each
member to become his own landlord. The state has a selfish motive
in the promotion of a building association, as through its workings it
is planting deeply the roots of citizenship. The drifting, thriftless
classes are offered a school of economy, and the earnest and
economical classes are given an opportunity. There is, then, the
formation of a steady, energetic and accumulating citizen. The cares
of the state are lessened by decreasing poverty, and its prosperity is
increased by growing material wealth. We may clearly conceive,
then, that the intention of the legislature in the creation of building
associations is, first, to encourage savings; second, to secure homes
for the savers.
In the case of Mandlin vs. American Savings and Loan
Association ([1896],63 Minn., 358), the court said:
So-called "building societies," operated on the plan of the defendant,
have so often become the instrument of oppression and extortion as
to call down the censure of some eminent courts. The original
purpose of building societies, viz., to enable people of small means to
build or buy homes, is entirely wanting.
"Such a body" says Follet, J., in Seibel vs. Victoria Building
Association (43 Ohio St., 371, p. 373), "exists for the equal benefit of
all its members, who are presumed to be persons whose earnings are
small, and who seek to use weekly savings in procuring suitable
homesteads. Every member is presumed to become after sometime a
borrower to the extent of his interest. Building associations are not
intended to enable money lenders to obtain extraordinary interest, but
they are intended to help in securing homes with the aid of small
incomes." (Barry Law of Building Societies, p. 3, sec. 4.)
In case of North American Building Associaton vs. Sutton ([1860], 35
Pa., 463), the court said:
It is well known that the original design of the legislature was to
encourage the erection of buildings. The motive for the grant of the
franchise was public improvement. But the practical working of the
associations formed under the law has not been what was anticipated.
Though called "building societies," they are, in truth, only agencies by
which a greater than legal interest is obtained from the necessitous and
unwary.
In the case of Continental National Building and Loan Association vs.
Miller ([1902], 44 Fla., 757), the court said:
When local in their operations and prudently managed they have served a
useful purpose enabling the man of small means to build his modest homes
or to make a safe and profitable investment of his meager earnings; but
when they branch out and forget the original purposes and limitations that
have given them this favored position, trouble not infrequently arises.
In the case of St. Joseph and Kansas Loan and Building Association vs.
Thompson ([1877], 19 Kansas, 321), the court said:
It was never intended that these corporations, organized as this one was for
the purpose of giving to its members through their savings an easy way to
discharge encumbrances and to build homes, should loan their funds to
others than their own members.
In case of Parker vs. Fulton Loan and Building Association ([1872],46 Ga.,
166), the court said:
Whether such a contract though legal upon its face, was, in fact, illegal,
would depend upon the object of the association. If it were, in truth, a mere
devise to evade the usury laws, then it would depend upon the object of the
association. If it were, in truth, a mere devise to evade the usury laws, then
it would be illegal, if in fact more was taken for the use of money than 7 per
cent per annum. But if the organization were in fact and bona fide a plan
with the real intent and object of accumulating a fund by monthly
subscriptions or savings of the members thereof, to assist them in procuring
for themselves such real estates as they may deem proper,' then it would not
be illegal.
The practical application of the resources of these institutions (building and
loan associations) to the building of homes and aiding their members to
change their conditions from rent-paying tenants to home-owning citizens
has been recognized as a work of vital importance and of the highest
helpfulness to the interest of the state and nation. (Rosenthal Cyc. of
Building, Loan & Savings Association, p. 73.)
The aim and purpose of a building association is to aid and encourage its
members to learn and practice thrift by regular systematic saving, and to
provide ways and means so that every family may procure home.
(Rosenthal Cyc. of Building, Loan & Savings Association, p. 9.)
The funds of the first associations were applied to aid its members to
procure homes. This was in fact the one outstanding feature of the plan and
the high purpose for which the association was organized. The wish and
desire to own their own home, was, in fact the primary, fundamental
inspiration on which the first building association was formed, and has ever
continued to be the shining pole star which has guided and directed the
progress of these building associations to the present day. The desire to own
a home is one of the primary, natural instincts of every real man or woman.
An institution organized and operated on a fair and equitable plan which
has for its object the gratifying of that desire, is sure to make a strong
appeal to all humanity. The constant appeal which building associations
have always made to this deep-seated human desire, is the real secret of
their great success. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 13.)
A recent president of the United States League of Local Building and Loan
Associations said the "Our associations are serving just two classes of
customers: receiving the savings of thrifty and farseeing people, and
loaning these funds to members who wish to buy or build a home. Never
was the need for building or owning a home greater than in the past few
years, and as you well know, lack of sufficient funds has been one of our
problems."
Building and Loan Associations started as neighborhood clubs in most parts
of the country. Neighbors wished to become home owners and began
contributing a certain sum monthly to a treasurer. The aggregate of these
monthly payments was soon sufficient to buy or build a home for one of the
members. The fund was then loaned to one of them, and as other
funds accumulated, others could borrow. The joint purposes of thrift
and home ownership are inseparable and are of equal importance.
There could be no cooperative building and loan association without
both. (Clark and Chase Building and Loan Association, p. 4).
The Commissioner of Internal Revenue of the United States in article
515 of his new regulations, outlines the particular associations
entitled to exemption, under the Federal Law as follows:
In general, a building and loan association entitled to exemption is
one organized pursuant to the laws of any state, territory or the
District of Colulmbia, which accumulates funds to be loaned
primarily to the shareholders for the purpose of building or acquiring
homes. (Rosenthal Cyc. of Building, Loan & Savings Association, p.
94.)
The authorities could be piled up mountain high. They all disclose
that mutual building and loan associations are peculiar and special
corporations. They can exercise only such powers as are conferred by
the legislative body creating them, either by express terms or by
necessary implication. Their basic and essential idea is mutuality.
The primary object is to encourage thrift and to assist in home
building. "El Hogar Filipino" — or as it is in English "The Filipino
Home" — that is the magic thought which attracts small investors.
But when pseudo associations branch out and forget the original
purposes and limitations that have given them their favored positions,
it is incumbent on the judiciary to place them back in their rightful
places. We are frank to say that it is these elementary principles,
which, in our opinion, the majority have failed to grasp, which have
led them into error in the decision of this case.
Why are mutual building and loan associations granted special
privileges? Why are mutual building and loan associations exempted
from taxation, as disclosed in El Hogar Filipino vs. Rafferty, supra?
Why are building and loan associations permitted to charge high
rates of interest, as disclosed in Lopez and Javelona vs. El Hogar
Filipino, and Registrar of Deeds of Occidental Negros, supra? Why?
Need answers be given. If so, it is so that mutual building and loan
associations may with one hand accept favors rightfully theirs, and
with the other hand grasp favors properly belonging to strictly private
corporations or loan societies.
El Hogar Filipino has offended against the law of its creation, and
has departed from the fundamental purposes of mutual building and
loan associations in this:
A. In that it has engaged in business activities entirely foreign to and
not reasonably necessary for the purposes for which it was organized,
such as the administration of properties and the management of
properties not mortgaged;
B. In that it has inserted in article 10 of its by-laws a provision giving
the board of directors, by majority vote, the unqualified right to
cancel and forfeit shares by merely returning to their owners the
amount which may result from the accounting, in violation of the
Corporation Law;
period of life of the defendant, and under which Mr. Melian has received a
total sum of P615,834;
F. In that articles 70 and 76 of its by-laws are contrary to law, since they
only permit the election or appointment to the board of directors of persons
owning P5,000 worth of paid up shares, which is made a condition
precedent to eligibility to the board of directors;
G. In that it has issued so-called special shares, in violation both of the
letter and spirit of the Corporation Law;
H. In that it has maintained out of its profits an unnecessarily large reserve
fund, classified into general reserve fund and special reserve fund, instead
of distributing its profits among its members;
I. In that it has made large loans to persons and companies, such as a loan
of P2,320,000 to the Pacific Warehouse Company, which so depleted the
funds of the corporation that for sometime it was unable to act on
applications for small loans and for the retirement of shares;
J. In that under articles 92 and 95 of the by-laws of the corporation, upon
the expiration of its period of life or upon earlier liquidation of its business,
the accumulated reserves and other properties will be distributed among and
will benefit only its directors and its founder, together with a few other
persons;
K. In that its membership is in part composed of corporations, companies,
and associations, for instance of sixteen corporations and fourteen
partnerships;
L. In that it has disposed of real estate purchased by it in the collection of its
loans on credit, thereafter accepting mortgages on the property transferred,
in violation of the Corporation Law;
M. And, lastly, in the El Hogar Filipino has failed to carry our and fulfill
the main purpose for which it was created, and in consideration of which it
has been granted special privileges and exemptions.
The foregoing are not trivial or isolated infractions of the law to be brushed
away with a wave of the hand. They constitute grave abuses. They disclose
El Hogar Filipino as an octopus whose tentacles have reached out to
embrace and stifle vital public interests. The court would be entirely
justified in peremptorily decreeing the dissolution of the corporation for
misuse of its powers.
Section 190-A of the Corporation Law, inserted by section 3 of Act No.
2792, makes it the imperative duty of the court to dissolve a corporation for
any violation which it has committed. It is believed, however, that counsel
for the defendant is entirely correct in his argument to the effect that the
legislature is without power to diminish the jurisdiction of the court, and to
direct a particular judgment in a particular case. Rather would we prefer to
follow the precedent in the case of the Government of the Philippine
Islands vs. Philippine Sugar Estates Development Company ([1918], 38
Phil., 15),wherein in was ordered that the corporation be dissolved and
prohibited from continuing to do business in the Philippine Islands unless it
complied with the conditions mentioned in the decision.

In amplification of the above suggestion, it must be said that El Hogar

C. In that its board of directors has become a permanent and self-
Filipino is the possessor of important property rights which should not be
perpetuating body, since with the exception of the years 1911, 1912,
disastrously disturbed. It must also be said that a mutual building and loan
and 1917, there has been no election of directors and since between
association properly conducted is an institution which should be encourage
1912 and 1917, and from 1917 until the present, the membership of
in the community. The result should, therefore, be to confine El Hogar
the board has not been changed, except to fill vacancies which have
Filipino to its legitimate purposes and to force it to eliminate its illegitimate
been filled by the board itself, in violation of the Corporation Law,
purposes and The government has made out its case, but the defendant
and of the by-laws of the corporation;
should be permitted a reasonable time to fulfill the conditions laid down in
this decision.
D. In that the directors, instead of serving without pay or for nominal
salaries, have been receiving relatively large compensations out of
the profits in accordance with article 92 of the by-laws, providing
that 5 percent of the annual profits shall be devoted to the
compensation of the directors, according to their attendance at the
meetings;

E. In that the corporation has been giving to Antonio Melian, its

founder, under provisions of article 92 of its by-laws 5 per cent of the
yearly net profits, and will continue to do so, for the full fifty-year