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Government of the Philippine Islands v. El Hogar AUTHOR: Magsino, Patricia Marie C.

G.R. No. L-26649 (July 13, 1927) NOTES: 17 causes of action


TOPIC: Corporate Powers The ultra vires doctrine According to the book, causes of action nos. 1, 2, 3, 7, 9, 10, 11,
PONENTE: Street, J. 12, 13, 16, and 17 are relevant to topic of Corporate powers

Under Ultra Vires Doctrine note nos. 2, 3, & 7!


FACTS:
Original Action in the Supreme Court
Quo warranto proceeding by Govt. of the Philippine Islands against El Hogar Filipino purpose is to deprive it of its corporate
franchise, exclude it from all corporate rights, and privileges, and effect a final dissolution of the corporation
El Hogar organized under Sec. 171-190 Act No. 1459, devoted to the subject of building and loan associations, their organization
and administration.
The capital of the corporation was not permitted to exceed P3M, but Act No. 2092 amended the statute, permitting capitalization
to the amount of ten million
El Hogar amended its AOI stating that the amount of capital must not exceed what has been stated in Act No. 2092
This resulted to El Hogar El Hogar having 5,826 shareholders, 125,750 shares with paid-up value of P8.7M, the corporation paid
P7.16M to its withdrawing stockholders
The Government of the Philippine Islands filed an action against El Hogar due to the alleged illegal holding title to real property
for a period exceeding five (5) years after the same was bought in a foreclosure sale. Sec. 13(5) of the Corporation Law states that
corporations must dispose of real estate obtained within 5 years from receiving the title (Cause of Action No. 1)
The Philippine Government now wants that El Hogar be excluded from all corporate rights and privileges and effect a final
dissolution of said corporation

ISSUE(S):

Do the acts of respondent corporation merit its dissolution or deprivation of its corporate franchise, and the exclusion from all
its corporate rights and privileges

HELD:
NO. Court will not dissolve but will confine El Hogar to its legitimate purposes.
confine El Hogar Filipino to its legitimate purposes and to force it to eliminate its illegitimate purposes and The
government has made out its case, but the defendant should be permitted a reasonable time to fulfill the conditions laid down
in this decision.

RATIO: LISTED BELOW ARE THE 17 CAUSES OF ACTIONS AND THE COURTS DECISION AND RATIO.

1) Alleged illegal holding of real property for a period exceeding five years from receipt of title NO MERIT!

o BACKGROUND OF RECORDED MORTGAGE


o El Hogar was the holder of a recorded mortgage on a San Clemente land as security for a P24K loan to El
Hogar, but shareholders and borrowers defaulted in payment so El Hogar foreclosed the mortgage and
purchased the land during the auction sale
o A deed of conveyance in favor of El Hogar was executed and sent to the Register of Deeds of Tarlac in Dec. 28,
1920 with a request that the certificate of title be cancelled and a new one be issued in favor of El Hogar from
the Register of Deeds of Tarlac
o No reply was received so El Hogar filed a complaint with the Chief of the General Land Registration Office.
The certificate of title to the San Clemente land was received by El Hogar in May 7, 1921 and a board
resolution authorizing Vicente Bengzon (agent of corp) to find a buyer was issued
o Eventually a certain Alcantara offered to buy the land, he was given extension of time to make payment but he
defaulted so the contract was treated as rescinded. Efforts were made to find another buyer
o Finally the land was sold to Felipa Alberto in July 30, 1926
o The interval exceeded 5 years but El Hoga contends that the period did not commence to run until May 7, 1921
when the register of deeds delivered the new certificate of title

Court held that El Hogar did not violate the law on disposing real property within 5 years
El Hogar cannot be faulted for the delay on the part of the register of deeds
2) El Hogar is owning and holding a business lot in excess of its reasonable requirements and in contravention of subsection 5 of
section 13 of Corporation Law NO MERIT!

Government alleges that the acquisition of the lot, the construction of a new office building, and the subsequent renting of
it are ultra vires acts on the part of El Hogar
Government deems that the proper penalty is the dissolution of El Hogar
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
The law expressly declares that a corporation may acquire real estate that will be reasonably necessary to enable them to
carry out the corporations purpose/s
Court held that owning a business lot, the construction of a building, and the maintenance of an office is reasonably
necessary for a building and loans association

3) That respondent is engaged in activities different to the purposes for which the corporation was created and not reasonably
necessary to its legitimate purpose NO MERIT as to 1st and 2nd, finds merit in 3rd!

Government specifies three different activities which they allege is foreign to the purpose of the corporation
o First: administration of offices in the El Hogar building and the renting of those offices to the public the court held
that this was within the powers of the corporation (see cause of action no. 2)

o Second: administration and management of properties belonging to delinquent shareholders of the association; in
case of delinquency on the part of the shareholder in payment of interests, premiums, and dues, the association will
take over and manage the property the court held that there was no reason to doubt the validity of a clause giving
the association the right to take over the property and manage it in view of a shareholders delinquency

o Third: management of some parcels of improved real estate owned by shareholders; El Hogar rendered services to
shareholders by renting out their land, paying their real estate taxes and insurance, causing the repairs for the upkeep,
and collecting rent due from tenants of those parcels, in exchange El Hogar will receive compensation in the form of
commission upon the gross receipts from those properties (rates vary from 2.5% - 5%) the court held that this
practice is unauthorized by law! The administration of property in the manner that El Hogar is doing is more
appropriate for a real estate agent or trust company rather than a building and loan association

Despite finding merit in 3rd activity, the court held that dissolution of the corporation is not the proper remedy, but it will
enjoin the unauthorized activity in the future (referring to 3rd)

4) That the by-laws of the association stating that, the board of directors by the vote of an absolute majority of its members is
empowered to cancel shares and to return the balance to the owner by reason of their conduct or any other motive or
liquidation is in direct conflict with Sec. 187 of the Corporation Law which provides that the board of directors shall not have
the power to force the surrender and withdrawal of unmatured stock except in case of liquidation or forfeiture of stock for
delinquency NO MERIT!

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 be largely increased.

5) Art. 61 of El Hogars by-laws states that attendance in person or by proxy by shareholders owning one-half plus one of the
shareholders shall be necessary to constitute a quorum for the election of directors is contrary to Sec. 31 of the Corpo Law
which provides that owners of the majority of the subscribed capital stock entitled to vote must be present either in person or
by proxy at all elections of directors NO MERIT!

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

6) That the directors of El Hogar, instead of receiving nominal pay or serving without pay, have been receiving large
compensation, varying in amount from time to time, out of respondents profits NO MERIT!

With the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would
probably this cant be corrected in this court. Nor can it properly be made a basis for depriving respondent of its franchise or
enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, the remedy is to lie rather in
publicity and competition.

7) El Hogars promoter and organizer was Mr. Antonio Melian, in the early stages of the organization of the association, the
board of directors authorized the association to make a contract with him the government alleges that the royalty given to him
as founder is unconscionable, excessive and out of proportion to the services rendered NO MERIT!

The court held that there is no doubt as to the power of a corporation to enter into a contract for services rendered and to
be rendered by a promoter in connection with organizing and maintaining the corporation
The Melian contract was not an ultra vires act by the corporation because corporation has power to enter into this
contract
The fact that the compensation paid under this contract is in excess of what may be considered appropriate is not a proper
ground for the court to order the dissolution of El Hogar

8) That Art. 70 of El Hogars by-laws, requiring persons elected as board of directors to be holders of shares of the paid up value
of P5,000 which shall be held as security, is objectionable since a poor member or wage earner cannot serve as a director
irrespective of other qualifications NO MERIT!

Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualification of its directors
and the requirement of security from them for the proper discharge of the duties of their office in the manner prescribed in Art.
70 is highly prudent and in conformity with good practice.

9) That respondent abused its franchise in issuing special shares alleged to be illegal and inconsistent with the plan and
purposes of building and loan associations NO MERIT!

The said special shares are generally known as advance payment shares which were evidently created for the purpose of
meeting the condition caused by the prepayment of dues that is permitted.
Sec. 178 of Corpo Law allows payment of dues or interest to be paid in advance but the corporation shall not allow interest on
advance payment greater than 6% per annum nor for a period longer than one year. The amount is satisfied by applying a
portion of the shareholders participation in the annual earnings.
The mission of special shares does not involve any violation of the principle that the shares must be sold at par.
Note: Please see cases El Hogar Filipino v Rafferty and Severino v. El Hogar Filipino (elaborates on special shares not
really that important but it will help cause court did not discuss this cause of action that much anymore)

10) That in making purchases at foreclosure sales constituting as security for 54 of the loans, El Hogar bids the full amount after
deducting the withdrawal value, alleged to be pursuing a policy of depreciating at the rate of 10 percent per annum, the value
of the real properties it acquired and that this rate is excessive NO MERIT!

The board of directors possesses discretion in this matter; there is no provision of law prohibiting the association from writing
off a reasonable amount for depreciation on its assets for the purpose of determining its real profits.
Art. 74 of its by-laws expressly authorize the board of directors to determine each year the amount to be written down upon
the expenses for the installation and the property of the corporation.
The court held that it cant control the discretion of the board of directors about an administrative matter as to which they have
no legitimate power of action

11) That respondent maintains excessive reserve funds NO MERIT!

The function of the reserve fund is to insure stockholders against losses, when the reserve becomes excessive; the remedy is in
the hands of the Legislature. No prudent person would be inclined to take a policy in a company which had conducted its
affairs poorly that it only retained a fund barely sufficient to pay its present liabilities and was in a condition where any
change by the reduction of interest upon or depreciation in the value of securities or increase of mortality would render it
insolvent and subject to be placed in the hands of a receiver.
Court held that maintaining an excessive reserve fund was not in violation of the law
Although the Corporation Law does not expressly grant this power, the court held that it is implied

12) That the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 percent per centum
regardless of losses suffered and profits made by the corporation, in contravention with the requirements of Sec. 188 of the
Corporation law NO MERIT!
The board of directors determines the profits and losses so they exercise the usual discretion in allocating a portion of the
annual profits for the welfare of the corporation.
The law contemplates distribution of earnings and losses after legitimate obligations have been met.

13) That El Hogar has made loans to the knowledge of its officers which were intended to be used by the borrowers for other
purposes than the building of homes and no attempt has been made to control the borrowers with respect to the use made of
the borrowed funds NO MERIT!

There is no statute expressly declaring that loans should be made by associations SOLELY for the purpose of building homes
The building of homes in Sec. 171 of Corporation Law is only one among several ends, which building and loan associations
are designed to promote and Sec. 181 authorizes the board of directors of the association to fix the premium to be charged.

14) That the loans made by defendant for purposes other than building or acquiring homes have been extended in extremely large
amounts and to wealthy persons and large companies NO MERIT!

The question of whether the making of large loans constitutes a misuser of the franchise which would justify the court in
depriving the association of its corporate life; is a matter confided to the discretion of the board of directors.
The law states no limit as to the size of the loans to be made by the association
Remedy is in the hands of the legislature because this issue is cannot be fixed by the court

15) That when the franchise expires, supposing the corporation is not reorganized, upon final liquidation of the corporation, a
reserve fund may exist which is out of all proportion to the requirements that may fall upon it in the liquidation of the
company NO MERIT!

This matter may be left to the discretion of the board of directors or to legislative action if it should be more efficient to
require the gradual suppression of reserve funds as the dissolution approaches.
The court held that this is no matter for judicial interference and much less could the resumption of the franchise be justified
on this ground.

16) That various outstanding loans have been made by the respondent to corporations and partnerships and such entities
subscribed to respondents shares for the sole purpose of obtaining such loans NO MERIT!

El Hogar has 5,826 shareholders (mentioned:16 corporations, 14 partnerships, other shareholders not mentioned)
Sec. 173 of Corporation Law declares that any person may become a stockholder in building and loan associations.
The phrase any person should be taken in its general sense, person should be understood to include natural and juridical
personalities

17) That in disposing real estate purchased by it, some of the properties were sold on credit and the persons and entities to which it
was sold are not members nor shareholders nor were they made members or shareholders, contrary to the provision of
Corporation Law requiring loans to be stockholders only NO MERIT!

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 be made upon the terms and conditions approved by the parties

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):