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CORPORATION

 LAW  CASE  DIGESTS  


3C  &  3S  –  ATTY.  CARLO  BUSMENTE  

LOYOLA  GRAND  VILLAS  vs.  CA   Corporation   Code   resulted   in   the   automatic   dissolution   of   LGVHAI.  
G.R.  No.  -­‐117188  –  August  7,  1997   However,   in   the   Decision   of   August   23,   1994   being   assailed   here,   the  
  Court  of  Appeals  affirmed  the  Resolution  of  the  HIGC  Appeals  Board.  
FACTS:    
Loyola   Grand   Villas   Homeowners   Association   (LGVHAI)   is   the   sole   In   resolving   the   first   issue,   the   Court   of   Appeals   held   that   under   the  
homeowners’   association   in   Loyola   Grand   Villas,   a   duly   registered   Corporation  Code,  a  private  corporation  commences  to  have  corporate  
subdivision   in   Quezon   City   and   Marikina   City.     It   was   organized   on   existence   and   juridical   personality   from   the   date   the   Securities   and  
February   8,   1983   as   the   association   of   homeowners   and   residents   of   Exchange  Commission  (SEC)  issues  a  certificate  of  incorporation  under  
the   said   subdivision.     It   was   registered   with   the   Home   Financing   its   official   seal.     The   requirement   for   the   filing   of   by-­‐laws   under   Section  
Corporation,   the   predecessor   of   herein   respondent   HIGC,   under   46   of   the   Corporation   Code   within   one   month   from   official   notice   of   the  
Certificate  of  Registration  No.  04-­‐197.  For  unknown  reasons,  however,   issuance   of   the   certificate   of   incorporation   presupposes   that   it   is  
LGVHAI   did   not   file   its   corporate   by-­‐laws.   Sometime   in   1988,   the   already  incorporated,  although  it  may  file  its  by-­‐laws  with  its  articles  of  
officers   of   the   LGVHAI   tried   to   register   its   by-­‐laws,   but   they   failed   to   do   incorporation.    
so.  To  the  officers’  consternation,  they  discovered  that  there  were  two    
other  organizations  within  the  subdivision  –  the  North  Association  and   The  CA  held  that:  
the   South   Association.   In   July,   1989,   when   Soliven,   the   developer   and   “Section 46 or other provisions of the Corporation Code are silent on the
president   of   LGVHAI   inquired   about   the   status   of   the   corporation,   the   result of the failure to adopt and file the by-laws within the required period.
head   of   the   legal   department   of   the   HIGC,   informed   the   former   that   Thus, Section 46 and other related provisions of the Corporation Code are
LGVHAI   had   been   automatically   dissolved   because,   among   other   to be construed with Section 6 (1) of P.D. 902-A. This section empowers the
reasons,   it   did   not   submit   its   by-­‐laws   within   the   period   required   by   the   SEC to suspend or revoke certificates of registration on the grounds listed
Corporation  Code.   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
LGVHAI   lodged   a   complaint   with   the   HIGC.   They   questioned   the   or revocation, the same section provides, should be made upon proper
revocation   of   LGVHAI’s   certificate   of   registration   without   due   notice   notice and hearing. Although P.D. 902-A refers to the SEC, the same
and   hearing.   After   due   notice   and   hearing,   private   respondents   principles and procedures apply to the public respondent HIGC as it
obtained   a   favorable   ruling   from   HIGC   recognizing   them   as   the   duly   exercises its power to revoke or suspend the certificates of registration or
registered  and  existing  homeowners  association  for  Loyola  Grand  Villas   homeowners associations.”  
homeowners   and   declaring   the   Certificates   of   Registration   of   Loyola    
Grand   Villas   Homeowners   (North)   Association,   Inc.   and   Loyola   Grand   ISSUE:  
Villas   Homeowners   (South)   Association,   Inc.   as   hereby   revoked   or   Whether   or   not   the   failure   of   LGVHAI   to   file   its   by-­‐laws   within   one  
cancelled.   month   from   the   date   of   its   incorporation,   as   mandated   by   Section   46   of  
  the  Corporation  Code,  result  in  its  automatic  dissolution?  
The   South   Association   appealed   to   the   Appeals   Board   of   the   HIGC   but    
was  dismissed  for  lack  of  merit.  The  South  Association  in  turn  appealed   HELD:  
to  the  Court  of  Appeals  and  raised  that  whether  or  not  LGVHAI’s  failure   No.   Failure   to   file   by-­‐laws   does   not   result   for   the   automatic   dissolution,  
to   file   its   by-­‐laws   within   the   period   prescribed   by   Section   46   of   the   as   it   was   never   the   intention   of   the   legislature.   The   Supreme   Court   held  
as  follows:  

 CORPO  CASE  DIGESTS  3C  &  3S    ||     1  


CORPORATION  LAW  CASE  DIGESTS  
3C  &  3S  –  ATTY.  CARLO  BUSMENTE  

  15,  1994  decision  of  the  Court  of  Appeals  nullifying  the  Securities  and  
”Taken  as  a  whole  and  under  the  principle  that  the  best  interpreter  of  a   Exchange   Commission's   order   and   resolution   for   lack   of   jurisdiction.  
statute   is   the   statute   itself   (optima   statuli   interpretatix   est   ipsum   Similarly   impugned   is   the   Court   of   Appeals'   resolution   which   denied  
statutum),   Section   46   aforequoted   reveals   the   legislative   intent   to   petitioner's  motion  for  reconsideration.  
attach  a  directory,  and  not  mandatory,  meaning  for  the  word  “must”  in  
the   first   sentence   thereof.     Note   should   be   taken   of   the   second   On  August  21,  1974,  Galicano  Calapatia,  Jr.  (Calapatia)  a  stockholder  of  
paragraph  of  the  law  which  allows  the  filing  of  the  by-­‐laws  even  prior  to   private   respondent   Valley   Golf   &   Country   Club,   Inc.   (VGCCI),   pledged  
incorporation.     This  provision  in  the  same  section  of  the  Code  rules  out   his  Stock  Certificate  No.  1219  to  petitioner  China  Banking  Corporation  
mandatory   compliance   with   the   requirement   of   filing   the   by-­‐laws   (CBC).  
“within  one  (1)  month  after  receipt  of  official  notice  of  the  issuance  of    
its   certificate   of   incorporation   by   the   Securities   and   Exchange   On   September   16,   1974,   petitioner   wrote   VGCCI   requesting   that   the  
Commission.”       aforementioned   pledge   agreement   be   recorded   in   its   books.   On  
  September   27,   VGCCI   replied   that   the   deed   of   pledge   executed   by  
It  necessarily  follows  that  failure  to  file  the  by-­‐laws  within  that  period   Calapatia  in  petitioner's  favor  was  duly  noted  in  its  corporate  books.  
does   not   imply   the   “demise”   of   the   corporation.     By-­‐laws   may   be    
necessary   for   the   “government”   of   the   corporation   but   these   are   On   August   3,   1983,   Calapatia   obtained   a   loan   of   P20,000.00   from  
subordinate   to   the   articles   of   incorporation   as   well   as   to   the   petitioner,   payment   of   which   was   secured   by   the   aforestated   pledge  
Corporation   Code   and   related   statutes.   There   are   in   fact   cases   where   agreement  still  existing  between  Calapatia  and  petitioner.  
by-­‐laws  are  unnecessary  to  corporate  existence  or  to  the  valid  exercise    
of  corporate  powers,  thus:   Due  to  Calapatia's  failure  to  pay  his  obligation,  petitioner,  on  April  12,  
  1985,  filed  a  petition  for  extrajudicial  foreclosure  before  Notary  Public  
 “In   the   absence   of   charter   or   statutory   provisions   to   the   contrary,   by-­‐ Antonio  T.  de  Vera  of  Manila,  requesting  the  latter  to  conduct  a  public  
laws  are  not  necessary  either  to  the  existence  of  a  corporation  or  to  the   auction  sale  of  the  pledged  stock.  
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   Petitioner   then   informed   VGCCI   of   the   above-­‐mentioned   foreclosure  
where   the   governing   statute   in   express   terms   confers   upon   the   proceedings  and  requested  that  the  pledged  stock  be  transferred  to  its  
corporation   the   power   to   adopt   by-­‐laws,   the   failure   to   exercise   the   (petitioner's)   name   and   the   same   be   recorded   in   the   corporate   books.  
power  will  be  ascribed  to  mere  nonaction  which  will  not  render  void   However,   VGCCI   wrote   petitioner   expressing   its   inability   to   accede   to  
any  acts  of  the  corporation  which  would  otherwise  be  valid.”   petitioner's   request   in   view   of   Calapatia's   unsettled   accounts   with   the  
club.  
   
CHINA  BANK  vs.  CA   Despite  the  foregoing,  Notary  Public  de  Vera  held  a  public  auction  and  
G.R.  No.  117604  –  March  26,  1997   petitioner   emerged   as   the   highest   bidder   at   P20,000.00   for   the   pledged  
  stock.   Consequently,   petitioner   was   issued   the   corresponding  
FACTS:   certificate  of  sale.  
Herein   petitioner,   through   a   petition   for   review   on   certiorari   under    
Rule  45  of  the  Revised  Rules  of  Court,  seeks  the  reversal  of  the  August  

 CORPO  CASE  DIGESTS  3C  &  3S    ||     2  


CORPORATION  LAW  CASE  DIGESTS  
3C  &  3S  –  ATTY.  CARLO  BUSMENTE  

On   November   21,   1985,   VGCCI   sent   Calapatia   a   notice   demanding   full   Petitioner   appealed   to   the   SEC   en   banc   and   on   4   June   1993,   the  
payment   of   his   overdue   account   in   the   amount   of   P18,783.24.   Said   Commission   issued   an   order   reversing   the   decision   of   its   hearing  
notice   was   followed   by   a   demand   letter   for   the   same   amount   and   officer.  It  declared  thus:  
another  notice  for  P23,483.24.    
  The  Commission  en  banc  believes  that  appellant-­‐petitioner  has  a  prior  
On  December  4,  1986,  VGCCI  caused  to  be  published  in  the  newspaper   right   over   the   pledged   share   and   because   of   pledgor's   failure   to   pay   the  
Daily   Express   a   notice   of   auction   sale   of   a   number   of   its   stock   principal  debt  upon  maturity,  appellant-­‐petitioner  can  proceed  with  the  
certificates,   to   be   held   on   10   December   1986   at   10:00   a.m.   Included   foreclosure  of  the  pledged  share.  
therein  was  Calapatia's  own  share  of  stock  (Stock  Certificate  No.  1219).    
  VGCCI   sought   reconsideration   of   the   abovecited   order.   However,   the  
VGCCI   then   informed   Calapatia   of   the   termination   of   his   membership   SEC   denied   the   same.The   sudden   turn   of   events   sent   VGCCI   to   seek  
due  to  the  sale  of  his  share  of  stock  in  the  December  10,  1986  auction.   redress  from  the  Court  of  Appeals.  
   
Thereafter,   petitioner   advised   VGCCI   that   it   is   the   new   owner   of   On   appeal,   CA   nullified   and   set   aside   the   orders   of   the   SEC   and   its  
Calapatia's   Stock   Certificate   No.   1219   by   virtue   of   being   the   highest   hearing   officer   on   ground   of   lack   of   jurisdiction   over   the   subject   matter  
bidder   in   the   17   September   1985   auction   and   requested   that   a   new   and,   consequently,   dismissed   petitioner's   original   complaint.   The   CA  
certificate   of   stock   be   issued   in   its   name.   However,   VGCCI   replied   that   declared   that   the   controversy   between   CBC   and   VGCCI   is   not   intra-­‐
"for   reason   of   delinquency"   Calapatia's   stock   was   sold   at   the   public   corporate.    
auction  for  P25,000.00.    
  Petitioner   moved   for   reconsideration   but   the   same   was   denied   by   the  
Petitioner  protested  the  sale  made  by  VGCCI  of  the  said  share  of  stock   Court  of  Appeals  in  its  resolution  dated  5  October  1994.  21  
and   filed   a   case   with   the   RTC   of   Makati   for   the   nullification   of   the    
December   10,   1986   auction   and   for   the   issuance   of   a   new   stock   Hence,  this  petition.  
certificate  in  its  name.    
  ISSUES:    
RTC  of  Makati  dismissed  the  complaint  for  lack  of  jurisdiction  over  the   WON  CA  erred  when  it  nullified  and  set  aside  the  orders  of  the  SEC  en  
subject  matter  on  the  theory  that  it  involves  an  intra-­‐corporate  dispute.   banc,   and   when   it   dismissed   the   complaint   of   petitioner   against  
It  then  prompted  petitioner  to  file  the  complaint  with  the  SEC.     respondent  Valley  Golf  for  lack  of  jurisdiction  over  the  subject  matter  of  
  the  case  
On   January   3,   1992,   SEC   Hearing   Officer   Manuel   P.   Perea   rendered   a    
decision  in  favor  of  VGCCI,  stating  in  the  main  that  "(c)onsidering  that   WON   VGCCI   is   correct   in   maintaining   that   petitioner   CBC   is   bound   by  
the   said   share   is   delinquent,   (VGCCI)   had   valid   reason   not   to   transfer   the  former’s  by-­‐laws  
the   share   in   the   name   of   the   petitioner   in   the   books   of   (VGCCI)   until    
liquidation  of  delinquency."  Consequently,  the  case  was  dismissed.   HELD:    
  The  petition  is  granted.  
 

 CORPO  CASE  DIGESTS  3C  &  3S    ||     3  


CORPORATION  LAW  CASE  DIGESTS  
3C  &  3S  –  ATTY.  CARLO  BUSMENTE  

The  basic  issue  we  must  first  hurdle  is  which  body  has  jurisdiction  over   An   important   consideration,   moreover,   is   the   nature   of   the   controversy  
the  controversy,  the  regular  courts  or  the  SEC.   between  petitioner  and  private  respondent  corporation.  VGCCI  claims  a  
  prior   right   over   the   subject   share   anchored   mainly   on   Sec.   3,   Art   VIII   of  
P.   D.   No.   902-­‐A   conferred   upon   the   SEC   pertinent   powers.   The   its  by-­‐laws  which  provides  that  "after  a  member  shall  have  been  posted  
aforecited   law   was   expounded   upon   in   Viray   v.   CA     and   in   the   recent   as   delinquent,   the   Board   may   order   his/her/its   share   sold   to   satisfy   the  
cases   of   Mainland   Construction   Co.,   Inc.v.   Movilla   and   Bernardo   v.   CA,   claims   of   the   Club.   .   ."   It   is   pursuant   to   this   provision   that   VGCCI   also  
thus:   sold   the   subject   share   at   public   auction,   of   which   it   was   the   highest  
  bidder.   VGCCI   caps   its   argument   by   asserting   that   its   corporate   by-­‐laws  
The   better   policy   in   determining   which   body   has   jurisdiction   over   a   should   prevail.   The   bone   of   contention,   thus,   is   the   proper  
case   would   be   to   consider   not   only   the   status   or   relationship   of   the   interpretation   and   application   of   VGCCI's   aforequoted   by-­‐laws,   a  
parties   but   also   the   nature   of   the   question   that   is   the   subject   of   their   subject  which  irrefutably  calls  for  the  special  competence  of  the  SEC.  
controversy.    
  In  this  case,  the  need  for  the  SEC's  technical  expertise  cannot  be  over-­‐
Applying  the  foregoing  principles  in  the  case  at  bar,  to  ascertain  which   emphasized   involving   as   it   does   the   meticulous   analysis   and   correct  
tribunal   has   jurisdiction   we   have   to   determine   therefore   whether   or   interpretation   of   a   corporation's   by-­‐laws   as   well   as   the   applicable  
not  petitioner  is  a  stockholder  of  VGCCI  and  whether  or  not  the  nature   provisions  of  the  Corporation  Code  in  order  to  determine  the  validity  of  
of   the   controversy   between   petitioner   and   private   respondent   VGCCI's   claims.   The   SEC,   therefore,   took   proper   cognizance   of   the  
corporation  is  intra-­‐corporate.   instant  case.  
   
As   to   the   first   query,   there   is   no   question   that   the   purchase   of   the   Having   resolved   the   issue   on   jurisdiction,   instead   of   remanding   the  
subject  share  or  membership  certificate  at  public  auction  by  petitioner   whole   case   to   the   Court   of   Appeals,   this   Court   likewise   deems   it  
(and   the   issuance   to   it   of   the   corresponding   Certificate   of   Sale)   procedurally   sound   to   proceed   and   rule   on   its   merits   in   the   same  
transferred   ownership   of   the   same   to   the   latter   and   thus   entitled   proceedings.  
petitioner  to  have  the  said  share  registered  in  its  name  as  a  member  of    
VGCCI.   It   is   readily   observed   that   VGCCI   did   not   assail   the   transfer   The  procedural  niceties  settled,  we  proceed  to  the  merits.  VGCCI  assails  
directly   and   has   in   fact,   in   its   letter   of   27   September   1974,   expressly   the   validity   of   the   pledge   agreement   executed   by   Calapatia   in  
recognized   the   pledge   agreement   executed   by   the   original   owner,   petitioner's  favor.  It  contends  that  the  same  was  null  and  void  for  lack  
Calapatia,   in   favor   of   petitioner   and   has   even   noted   said   agreement   in   of  consideration  because  the  pledge  agreement  was  entered  into  on  21  
its   corporate   books.   In   addition,   Calapatia,   the   original   owner   of   the   August   1974   33   but   the   loan   or   promissory   note   which   it   secured   was  
subject  share,  has  not  contested  the  said  transfer.   obtained  by  Calapatia  much  later  or  only  on  3  August  1983.34  
   
By   virtue   of   the   afore-­‐mentioned   sale,   petitioner   became   a   bona   fide   VGCCI's   contention   is   unmeritorious.   A   careful   perusal   of   the   pledge  
stockholder   of   VGCCI   and,   therefore,   the   conflict   that   arose   between   agreement   will   readily   reveal   that   the   contracting   parties   explicitly  
petitioner   and   VGCCI   aptly   exemplies   an   intra-­‐corporate   controversy   stipulated  therein  that  the  said  pledge  will  also  stand  as  security  for  any  
between  a  corporation  and  its  stockholder  under  Sec.  5(b)  of  P.D.  902-­‐ future  advancements  (or  renewals  thereof)  that  Calapatia  (the  pledgor)  
A.   may  procure  from  petitioner.  

 CORPO  CASE  DIGESTS  3C  &  3S    ||     4  


CORPORATION  LAW  CASE  DIGESTS  
3C  &  3S  –  ATTY.  CARLO  BUSMENTE  

  In  order  to  be  bound,  the  third  party  must  have  acquired  knowledge  of  
The  validity  of  the  pledge  agreement  between  petitioner  and  Calapatia   the  pertinent  by-­‐laws  at  the  time  the  transaction  or  agreement  between  
cannot   thus   be   held   suspect   by   VGCCI.   As   candidly   explained   by   said   third   party   and   the   shareholder   was   entered   into,   in   this   case,   at  
petitioner,   the   promissory   note   of   August   3,   1983   in   the   amount   of   the   time   the   pledge   agreement   was   executed.   VGCCI   could   have   easily  
P20,000.00  was  but  a  renewal  of  the  first  promissory  note  covered  by   informed   petitioner   of   its   by-­‐laws   when   it   sent   notice   formally  
the  same  pledge  agreement.   recognizing   petitioner   as   pledgee   of   one   of   its   shares   registered   in  
  Calapatia's   name.   Petitioner's   belated   notice   of   said   by-­‐laws   at   the   time  
VGCCI   likewise   insists   that   due   to   Calapatia's   failure   to   settle   his   of  foreclosure  will  not  suffice.    
delinquent   accounts,   it   had   the   right   to   sell   the   share   in   question   in    
accordance  with  the  express  provision  found  in  its  by-­‐laws.   The  ruling  of  the  SEC  en  banc  is  particularly  instructive:  
  By-­‐laws   signifies   the   rules   and   regulations   or   private   laws   enacted   by   the  
Private  respondent's  insistence  comes  to  naught.  It  is  significant  to  note   corporation   to   regulate,   govern   and   control   its   own   actions,   affairs   and  
that   VGCCI   began   sending   notices   of   delinquency   to   Calapatia   after   it   concerns   and   its   stockholders   or   members   and   directors   and   officers   with  
was   informed   by   petitioner   (through   its   letter   dated   14   May   1985)   of   relation   thereto   and   among   themselves   in   their   relation   to   it.   In   other  
the  foreclosure  proceedings  initiated  against  Calapatia's  pledged  share,   words,   by-­‐laws   are   the   relatively   permanent   and   continuing   rules   of  
although   Calapatia   has   been   delinquent   in   paying   his   monthly   dues   to   action  adopted  by  the  corporation  for  its  own  government  and  that  of  the  
the  club  since  1975.  Stranger  still,  petitioner,  whom  VGCCI  had  officially   individuals   composing   it   and   having   the   direction,   management   and  
recognized   as   the   pledgee   of   Calapatia's   share,   was   neither   informed   control  of  its  affairs,  in  whole  or  in  part,  in  the  management  and  control  
nor   furnished   copies   of   these   letters   of   overdue   accounts   until   VGCCI   of  its  affairs  and  activities.  (9  Fletcher  4166,  1982  Ed.)  
itself   sold   the   pledged   share   at   another   public   auction.   By   doing   so,    
VGCCI   completely   disregarded   petitioner's   rights   as   pledgee.   It   even   The  purpose  of  a  by-­‐law  is  to  regulate  the  conduct  and  define  the  duties  
failed   to   give   petitioner   notice   of   said   auction   sale.   Such   actuations   of   of  the  members  towards  the  corporation  and  among  themselves.  They  
VGCCI  thus  belie  its  claim  of  good  faith.   are   self-­‐imposed   and,   although   adopted   pursuant   to   statutory  
  authority,  have  no  status  as  public  law.  (Ibid.)  
In   defending   its   actions,   VGCCI   likewise   maintains   that   petitioner   is    
bound   by   its   by-­‐laws.   It   however,   misunderstood   the   import   of   our   Therefore,   it   is   the   generally   accepted   rule   that   third   persons   are   not  
ruling  in  Fleischer  v.  Botica  Nolasco  Co.   bound  by  by-­‐laws,  except  when  they  have  knowledge  of  the  provisions  
  either   actually   or   constructively.   In   the   case   of   Fleisher   v.Botica  
And   moreover,   the   by-­‐law   now   in   question   cannot   have   any   effect   on   Nolasco,   47   Phil.   584,   the   Supreme   Court   held   that   the   by-­‐law  
the   appellee.   He   had   no   knowledge   of   such   by-­‐law   when   the   shares   restricting   the   transfer   of   shares   cannot   have   any   effect   on   the  
were  assigned  to  him.  He  obtained  them  in  good  faith  and  for  a  valuable   transferee   of   the   shares   in   question   as   he   "had   no   knowledge   of   such  
consideration.  He  was  not  a  privy  to  the  contract  created  by  said  by-­‐law   by-­‐law   when   the   shares   were   assigned   to   him.   He   obtained   them   in  
between  the  shareholder  Manuel  Gonzales  and  the  Botica  Nolasco,  Inc.   good   faith   and   for   a   valuable   consideration.   He   was   not   a   privy   to   the  
Said  by-­‐law  cannot  operate  to  defeat  his  rights  as  a  purchaser.   contract   created   by   the   by-­‐law   between   the   shareholder   .   .   .and   the  
  Botica  Nolasco,  Inc.  Said  by-­‐law  cannot  operate  to  defeat  his  right  as  a  
purchaser.  

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  the   corporate   books   has   been   made.   (12-­‐A   Fletcher   5634,   1982   ed.,  
By   analogy   of   the   above-­‐cited   case,   the   Commission   en   banc   is   of   the   citing  Snyder  v.  Eagle  Fruit  Co.,  75  F2d739)  
opinion   that   said   case   is   applicable   to   the   present   controversy.    
Appellant-­‐petitioner   bank   as   a   third   party   can   not   be   bound   by   Similarly,  VGCCI's  contention  that  petitioner  is  duty-­‐bound  to  know  its  
appellee-­‐respondent's  by-­‐laws.  It  must  be  recalled  that  when  appellee-­‐ by-­‐laws   because   of   Art.   2099   of   the   Civil   Code   which   stipulates   that   the  
respondent   communicated   to   appellant-­‐petitioner   bank   that   the   pledge   creditor  must  take  care  of  the  thing  pledged  with  the  diligence  of  a  good  
agreement  was  duly  noted  in  the  club's  books  there  was  no  mention  of   father  of  a  family,  fails  to  convince.  The  case  of  Cruz  &  Serrano  v.  Chua  
the   shareholder-­‐pledgor's   unpaid   accounts.   The   transcript   of   A.  H.  Lee,  is  clearly  not  applicable:  
stenographic   notes   of   the   June   25,   1991   Hearing   reveals   that   the    
pledgor   became   delinquent   only   in   1975.   Thus,   appellant-­‐petitioner   In   applying   this   provision   to   the   situation   before   us   it   must   be   borne   in  
was  in  good  faith  when  the  pledge  agreement  was  contracted.   mind   that   the   ordinary   pawn   ticket   is   a   document   by   virtue   of   which  
  the   property   in   the   thing   pledged   passes   from   hand   to   hand   by   mere  
The   Commission   en   banc   also   believes   that   for   the   exception   to   the   delivery   of   the   ticket;   and   the   contract   of   the   pledge   is,   therefore,  
general  accepted  rule  that  third  persons  are  not  bound  by  by-­‐laws  to  be   absolvable   to   bearer.   It   results   that   one   who   takes   a   pawn   ticket   in  
applicable  and  binding  upon  the  pledgee,  knowledge  of  the  provisions   pledge   acquires   domination   over   the   pledge;   and   it   is   the   holder   who  
of   the   VGCI   By-­‐laws   must   be   acquired   at   the   time   the   pledge   agreement   must  renew  the  pledge,  if  it  is  to  be  kept  alive.  
was   contracted.   Knowledge   of   said   provisions,   either   actual   or    
constructive,   at   the   time   of   foreclosure   will   not   affect   pledgee's   right   It  is  quite  obvious  from  the  aforequoted  case  that  a  membership  share  
over   the   pledged   share.   Art.   2087   of   the   Civil   Code   provides   that   it   is   is   quite   different   in   character   from   a   pawn   ticket   and   to   reiterate,  
also  of  the  essence  of  these  contracts  that  when  the  principal  obligation   petitioner   was   never   informed   of   Calapatia's   unpaid   accounts   and   the  
becomes   due,   the   things   in   which   the   pledge   or   mortgage   consists   restrictive  provisions  in  VGCCI's  by-­‐laws.  
maybe  alienated  for  the  payment  to  the  creditor.    
  Finally,   Sec.   63   of   the   Corporation   Code   which   provides   that   "no   shares  
To   cancel   the   pledged   certificate   outright   and   the   issuance   of   new   of  stock  against  which  the  corporation  holds  any  unpaid  claim  shall  be  
certificate   to   a   third   person   who   purchased   the   same   certificate   transferable   in   the   books   of   the   corporation"   cannot   be   utilized   by  
covered   by   the   pledge,   will   certainly   defeat   the   right   of   the   pledgee   to   VGCCI.   The   term   "unpaid   claim"   refers   to   "any   unpaid   claim   arising  
resort   to   its   collateral   for   the   payment   of   the   debt.   The   pledgor   or   his   from   unpaid   subscription,   and   not   to   any   indebtedness   which   a  
representative   or   registered   stockholders   has   no   right   to   require   a   subscriber   or   stockholder   may   owe   the   corporation   arising   from   any  
return   of   the   pledged   stock   until   the   debt   for   which   it   was   given   as   other  transaction."  In  the  case  at  bar,  the  subscription  for  the  share  in  
security   is   paid   and   satisfied,   regardless   of   the   length   of   time   which   question   has   been   fully   paid   as   evidenced   by   the   issuance   of  
have  elapsed  since  debt  was  created.  (12-­‐A  Fletcher  409)   Membership  Certificate  No.  1219.  What  Calapatia  owed  the  corporation  
A  bona  fide  pledgee  takes  free  from  any  latent  or  secret  equities  or  liens   were  merely  the  monthly  dues.  Hence,  the  aforequoted  provision  does  
in  favor  either  of  the  corporation  or  of  third  persons,  if  he  has  no  notice   not  apply.  
thereof,   but   not   otherwise.   He   also   takes   it   free   of   liens   or   claims   that    
may  subsequently  arise  in  favor  of  the  corporation  if  it  has  notice  of  the  
pledge,  although  no  demand  for  a  transfer  of  the  stock  to  the  pledgee  on  

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WHEREFORE,   premises   considered,   the   assailed   decision   of   the   Court   co-­‐terminus   with   the   term   of   Office   of   the   Board   of   Directors.   2.)  
of  Appeals  is  REVERSED  and  the  order  of  the  SEC  en  banc  dated  4  June   Records   show   that   complainant   had   been   hired   in   1981   while   the  
1993  is  hereby  AFFIRMED.   Amendment   of   the   respondents'   By-­‐Laws   making   the   position   of   an  
SO  ORDERED.   Administrative   Officer   co-­‐terminus   with   the   term   of   the   Board   of  
Directors  was  made  in  1987.  Meaning,  the  said  Amendment  would  not  
be   applicable   to   the   case   of   complainant   who   had   become   a   regular  
SALAFRANCA  vs.  PHILAMLIFE  (PAMPLONA)   employee   long   time   before   the   Amendment   took   place.   Moreover,   the  
G.R.  No.    121791  –  December  23,  1998   Amendment  should  be  applied  prospectively  and  not  retroactively.  
   
FACTS:   NLRC  decision:  reversed  LA  decision.  Dismissal  of  petitioner  by  PR  is  a  
Petitioner   Enrique   Salafranca   started   working   with   the   private   valid  act.  Decreased  monetary  award  in  favor  of  petitioner  to  ½  month  
respondent  Philamlife  Village  Homeowners  Association  on  May  1,  1981   pay  for  every  year  of  services  covering  his  retirement  pay.  Reason?  The  
as  administrative  officer  for  a  period  of  six  months.  From  this  date  until   fact   that   he   continued   to   perform   the   function   of   the   office   of  
December   31,   1983,   he   was   reappointed   to   his   position   three   more   administrative  officer  without  extension  or  re-­‐appointment  thereafter,  
times.   As   administrative   officer,   he   was   generally   responsible   for   the   did  not  in  any  way  make  his  employment  permanent.  His  reply  claiming  
management   of   the   village's   day   to   day   activities.   After   his   term   of   his   employment   regular,   and   viz   a   viz,   referring   to   submit   his   medical  
employment   expired,   he   still   continued   to   work   in   the   same   capacity,   certificate,   merely   underscored   the   need   to   define   his   position   as,   in  
albeit,  without  the  benefit  of  a  renewed  contract.   fact,   the   Association's   Rules   and   Regulations   were   amended   if   but   to  
put  to  rest  the  tenural  (sic)  limit  of  the  office  of  the  Administrative  
 In   1987,   private   respondent   Philamlife   decided   to   amend   its   by-­‐laws.   Officer   in   accordance   with   its   earlier   intention,   that   it   is   co-­‐
Included   therein   was   a   provision   regarding   officers,   specifically,   the   terminus  with  that  of  the  members  of  the  Board  of  Directors.  
position   of   administrative   officer   under   which   said   officer   shall   hold    
office   at   the   pleasure   of   the   Board   of   Directors.   In   view   of   this   Hence,  case  was  elevated  by  petitioner  to  the  regular  courts  .  
development,   private   respondent,   on   July   3,   1987,   informed   the    
petitioner   that   his   term   of   office   shall   be   co-­‐terminus   with   the   Board   of   ISSUE:    
Directors   which   appointed   him   to   his   position.   Furthermore,   until   he   WON   the   TERMINATION   of   the   petitioner   by   the   private   respondent  
submits   a   medical   certificate   showing   his   state   of   health,   his   BASED  ON  AMENDED  BY-­‐LAWS  is  a  valid  act?  
employment   shall   be   on   a   month-­‐to-­‐month   basis.   Even   though    
Salafrance   failed   to   submit   said   medical   certificate,   he   continued   HELD:  
working   until   his   termination   in   December   1992.   Claiming   that   his   NO.   TERMINATION   BASED   ON   AMENDED   BY-­‐LAWS   CANNOT  
services   had   been   unlawfully   and   unceremoniously   dispensed   with,   IMPAIR   OBLIGATION   OF   EXISTING   CONTRACTS   OR   RIGHTS.  
petitioner  filed  a  complaint  for  illegal  dismissal  with  money  claims  and   Admittedly,   the   right   to   amend   the   by-­‐laws   lies   solely   in   the  
for  damages.   discretion   of   the   employer,   this   being   in   the   exercise   of  
  management   prerogative   or   business   judgment.   However   this  
LA   decision:   ordered   private   respondent   to   pay   the   petitioner   the   right,   extensive   as   it   may   be,   cannot   impair   the   obligation   of  
amount   of   P257,833.33   representing   his   backwages,   separation   pay   existing  contracts  or  rights.  If  private  respondent  wanted  to  make  
and  13th  month  pay.  Reasons?  1.)  Petitioner’s  term  of  employment  was  

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the   petitioner's   position   co-­‐terminus   with   that   of   the   Board   of    


Directors,  then  the  amendment  must  be  effective  after  petitioner's   Ruling   of   NLRC   is   reversed   and   set   aside.   Private   respondent   Philamlife  
stay   with   the   private   respondent,   not   during   his   term.   Obviously,   Village   Homeowners   Association   is   ORDERED:   (1)   to   pay   petitioner  
the  measure  taken  by  the  private  respondent  in  amending  its  by-­‐ Enrique   Salafranca   separation   pay   equivalent   to   one   month   salary   for  
laws   is   nothing   but   a   devious,   but   crude,   attempt   to   circumvent   every   year   of   service;   (2)   to   pay   his   full   backwages   ;   (3)   to   pay   his  
petitioner's   right   to   security   of   tenure   as   a   regular   employee   retirement   pay   in   accordance   with   Article   287   of   the   Labor   Code,   as  
guaranteed   under   the   Labor   Code.  Interestingly,  the  Solicitor  General   amended   by   Republic   Act   No.   7641,   (4)   to   pay   moral   and   exemplary  
is   of   the   view   that   what   actually   transpired   was   that   petitioner   was   damages  in  the  amount  of  twenty  thousand  (P20,000.00)  pesos  and  ten  
retired  from  his  employment,  considering  the  fact  that  in  1992  he  was   thousand  (P10,000.00)  pesos,  respectively;  44  and  (5)  to  pay  ten  (10%)  
already   70   years   old   and   not   terminated.   While   there   seems   to   be   a   percent  of  the  total  amount  due  to  petitioner,  as  attorney's  fees.  
semblance  of  plausibility  in  this  contention  for  the  matter  of  extension    
of   service   of   such   employee   or   official   is   addressed   to   the   sound    
discretion   of   the   employer,   still   we   have   no   doubt   that   this   was   just   a  
mere  after-­‐thought  —  a  dismissal  disguised  as  retirement.  
 
On   the   outset,   there   is   no   dispute   that   petitioner   had   already   attained  
the   status   of   a   regular   employee,   as   evidenced   by   his   eleven   years   of  
service  with  the  private  respondent.  Accordingly,  petitioner  enjoys  the  
right  to  security  of  tenure  and  his  services  may  be  terminated  only  for  
causes  provided  by  law.  Viewed  in  this  light,  while  private  respondent  
has   the   right   to   terminate   the   services   of   petitioner,   this   is   subject   to  
both   substantive   and   procedural   grounds.   The   substantive   causes   for  
dismissal  are  those  provided  in  Articles  282  and  283  of  the  Labor  Code,  
while   the   procedural   grounds   refer   to   the   observance   of   the  
requirement   of   due   process.   15   In   all   these   instances,   it   is   the   private  
respondent   being   the   employer,   who   must   prove   the   validity   of   the  
dismissal.  HOWEVER  IN  THIS  CASE,  private  respondent,  specifically  its  
President   Dazo,   utterly   failed   to   substantiate   petitioner's   dismissal,  
rendering  the  latter's  termination  illegal.  
 
 (In  short,  sinasabi  ni  Philamlife  coterminous  ang  term  ni  Salafranca  sa  
BOD  as    provided  for  in  the  amended  by  laws,  pero  sabi  ng  court  hindi  
kasi   nga   regular   employee   na   itong   petitioner   since   he   worked   for   11  
years  hence  may  security  of  tenure  siya,  so  pwede  lang  idismiss  si  P  if  it  
falls  under  Art  282  and  283  of  LC.  Itong  amendment  of  by-­‐laws  sabi  ng  
court  e  paraan  lang  to  circumvent  right  of  tenure  of  P.)  

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