G.R. No.

L-26649 July 13, 1927

THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-General), plaintiff, vs. EL HOGAR
FILIPINO, defendant.

FACTS:
The Philippine Commission enacted Act No. 1459, also known as the Corporation Law, on March 1, 1906. El Hogar
Filipino, organized in 1911 under the laws of the Philippine Islands, was the first corporation organized under Sec. 171-190 Act
No. 1459, devoted to the subject of building and loan associations, their organization and administration. In the said law, 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 millions.

El Hogar took advantage of the amendment of Act No. 1459 and amended its AOI as a result thereof, stating that the
amount of capital must not exceed what has been stated in Act No. 2092. This resulted to 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. The Philippine Government
also prays that El Hogar be excluded from all corporate rights and privileges and effecting a final dissolution of said corporation.

It appears from the records that El Hogar was the holder of a recorded mortgage on the San Clemente land as security
for a P24K loan to El Hogar. However, shareholders and borrowers defaulted in payment so El Hogar foreclosed the mortgage
and purchased the land during the auction sale. A deed of conveyance in favor of El Hogar was executed and sent to the
Register of Deeds of Tralac 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. However, no reply was received. 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 and a board resolution
authorizing Benzon to find a buyer was issued. Alcantara, the buyer of the land, was given extension of time to make payment
but defaulted so the contract treated rescinded. Efforts were made to find another buyer. Respondent acquired title in
December 1920 until the property was finally sold to Felipa Alberto in July 1926. The interval exceeded 5 years but the period
did not commence to run until May 7, 1921 when the register of deeds delivered the new certificate of title. It has been held
that a purchaser of land registered under the Torrens system cannot acquire the status of an innocent purchaser for value
unless the vendor is able to place the owner’s duplicate in his hands showing the title to be in the vendor. During the period
before May 1921, El Hogar was not in a position to pass an indefeasible title to any purchaser. Therefore, El Hogar cannot be
held accountable for this delay which was not due to its fault. Likewise, the period from March 25, 1926 to April 20, 1926 must
not be part of the five-year period because this was the period where respondent was under the obligation to sell the property
to Alcantara prior to the contract’s rescission due to Alcantara’s non-payment.

Another circumstance causing the delay is the fact that El Hogar purchased the property in the full amount of the loan
made by the former owner which is nearly P24K when it was subsequently found that the property was not salable and later
sold for P6K notwithstanding El Hogar’s efforts to find a purchaser upon better terms.

ISSUE: W/N the acts of respondent corporation merit its dissolution or deprivation of its corporate franchise and to exclude it
from all corporate rights and privileges

HELD: SUSTAINED only as to administering of real property not owned by it and when permitted by contract.

Causes of action:

1) Alleged illegal holding of real property for a period exceeding five years from receipt of title-Cause of delay is not
respondent’s fault

2) That respondent is owning and holding a business lot with the structure thereon in excess of its reasonable
requirements and in contravention of Sec. 13(5) of Corpo. Law- WITHOUT MERIT
Every corporation has the power to purchase, hold and lease such real property as the transaction would of the lawful
business may reasonably and necessarily require.

3) That respondent is engaged in activities foreign to the purposes for which the corporation was created and not
reasonably necessary to its legitimate ends-VALID
 The administration of property, payment of real estate taxes, causing necessary repairs, managing real properties of non-
borrowing shareholders is more befitting to the business of a real estate agent or a trust company than a building and loan
association.

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-WITHOUT 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 Hogar’s by-laws which 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- WITHOUT MERIT
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 in meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which
things have been conducted. 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- WITHOUT MERIT
With the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would
probably be necessary is a matter that cannot be corrected in this action. 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) That the promoter and organizer of El Hogar was Mr. Antonio Melian and that in the early stages of the organization
of the association, the board of directors authorized the association to make a contract with him and that the royalty
given to him as founder is “unconscionable, excessive and out of proportion to the services rendered”-NOT
SUSTAINED
The mere fact that compensation is in excess of what may be considered appropriate is not a proper consideration for the court
to resolve. That El Hogar is in contact with its promoter did not affect the association’s legal character. The court is of the
opinion that the traditional respect for the sanctity of the contract obligation should prevail over the radical and innovating
tendencies.

8) That Art. 70 of El Hogar’s 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- NOT SUSTAINED
Corpo. 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 pffice 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- WITHOUT 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 grater than 6% per annum nor
for a period longer than one year. The amount is satisfied by applying a portion of the shareholder’s participation in the annual
earnings.The mission of special shares does not involve any violation of the principle that the shares must be sold at par.

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 pusuing 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-UNSUSTAINABLE
The board of directors possess 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 authorizes the board of directors to determine each year the amount to be written down upon the expenses for
the installation and the property of the corporation. The court cannot control the discretion of the board of directors about an
administrative matter as to which they have no legitimate power of action.

11) That respondent maintains excessive reserve funds-UNFOUNDED

The function of this fund is to insure stockholders against losses. When the reserves become 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 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 securities or increase of mortality would render it insolvent and
subject to be placed in the hands of a receiver.

12) That the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 percent per
centum regardless of losses suffered and profits made by the corporation, in contravention with the requirements of Sec. 188
of the Corpo law- UNFOUNDED
As provided in the previous cause of action, 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 of the welfare of the association. 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- UNFOUNDED
There is no statute expressly declaring that loans may be made by these associations SOLELY for the purpose of
building homes. The building of himes in Sec. 171 of Corpo 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- WITHOUT MERIT
The question of whether the making of large loans constitutes a misuser of the franchise as 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. Resort should be had to the legislature because it is not a matter
amenable to judicial control

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 deemed
expedient to require the gradual suppression of reserve funds as the time for dissolution approaches. It 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
Sec. 173 of Corpo Law declares that “any person” may become a stockholder in building and loan associations. The
phrase ANY PERSON does not prevent a finding that the phrase may not be taken in its proper and broad sense of either a
natural or artificial person.

17) That in disposing real estate purchased by it, some of the properties were sold on credit and the persons and entities to
which it was sold are not members nor shareholders nor were they made members or shareholders, contrary to the provision
of Corpo Law requiring requiring loans to be stockholders only- NOT SUSTAINED
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.

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.