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Loyola Grand Villas v.

CA (1997) 276 SCRA 681

Facts: Loyola Grand Villas Homeowners Associatio, Inc. was organized on February 8, 1983
as the registered sole homeowner’s association for Loyola Grand Villas with the Home Financing
Corporation, which later became Home Insurance Guarantee Corporation (HIGC). However, the
association was not able to file its corporate by-laws in the prescribed date as stated in the
Corporation Code Sec. 46, Adoption of by-laws, “Ever corporation formed under this code MUST
within 1 month after receipt of official notice of the issuance of its certificate of incorporation by
SEC, adopt a code of by-laws for its government not inconsistent with this Code.”

They then discovered that there were other homeowners’ organization within the
subdivision – the North and South Association, and upon inquiry by the LGVHAI to HIGC, it was
discovered that LGVHAI was dissolved for its failure to submit its by-laws within the period required
by the Corporation Code. These paved the way for the formation of the two other associations.
LGVHAI then lodged a complaint and questioned the revocation with the HIGC Hearing Officer Javier.
Hearing Officer Javier ruled in favor of LGVHAI and revoked the registration of the North and South
Associations.

Petitioner South Association appealed the ruling contending that LGVHAI failure to file
automatically dissolved the corporation.

Issue: Is the failure to file LGVHAI’s by-laws within the period prescribed by Sec. 46 of the
Corporation Code had the effect of automatically dissolving the said corporation.

Decision: No, ordinarily the word “must” connotes imposition of duty which must be enforced
however, the word “must” in a statute, (like “shall”) is not always imperative. It may be consistent
with an exercise of discretion. If the language of a statute, considered as a whole 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.

ByLaws are indispensable to corporations, since they are required by law for an orderly
management of corporations. However, failure to file them within the period prescribed does not
equate to the automatic dissolution of a corporation.

Govt. of P. I. v. El Hogar Filipino 50 Phil. 399 (1927)

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 millions.
 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
 The Philippine Government now wants that El Hogar be excluded from all corporate rights and
privileges and effect a final dissolution of said corporation

 BACKGROUND OF RECORDED MORTGAGE:


 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.
 A deed of conveyance in favor of El Hogar was executed and sent to the Register of Deeds of
Tarlac 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.
 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
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. El Hogar 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.

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-
Cause of delay is not the respondent’s fault

2) That respondent is owning and holding a business lot with the structure in excess of its
reasonable requirements and in contravention of Sec. 13(5) of Corpo. Law – COURT FINDS
NO MERIT

Every corporation has the power to purchase, hold and lease such real property which they
may reasonably and necessarily require.

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 – COURT FINDS MERIT
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 – COURT FINDS 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 Hogar’s 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 – COURT FINDS 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 – COURT FINDS 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) 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” – COURT FINDS NO MERIT

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 –
COURT FINDS 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 – COURT FINDS 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 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 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 – COURT FINDS 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 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 – COURT FINDS NO MERIT

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 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.
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 –
COURT FINDS NO MERIT

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

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 –
COURT FINDS NO MERIT

There is no statute expressly declaring that loans may be made by these 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 –
COURT FINDS 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. 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 – COURT FINDS 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 – COURT FINDS NO MERIT
Sec. 173 of Corporation 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 Corporation Law requiring loans
to be stockholders only – COURT FINDS 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

Gokongwei Jr. v. SEC, et al. 89 SCRA 336 (1979)


FACTS:

This is a petition for “declaration of nullity of amended by-laws, cancellation of certificate of filing
of amended by-laws and damages” filed by petitioner John Gokongwei against the majority of the
members of the Board of Directors. He has the ff causes of action:

1. that the Board in amending the by-laws, had no authority to do so because it was based on the
a 1961 authorization and the amendment being contested was in 1976, and the authorization
should have been based on votes made according to the 1976 shares, not the 1961 shares,

2. the authority granted in 1961 had already been exercised in 1962 and 1963, after which the
authority of the Board ceased to exist,

3. membership of the Board changed since 1961, there are 6 new directors,

4. that prior to the amendment of the by-laws1, he had all the qualifications to be a director (he
was a substantial stockholder) and the aamended by-laws disqualified him and deprived him of
a vested right to be voted,

5. that the corporation has no inherent power to disqualify a stockholder from being elected and
therefore it is an ultra vires and void act.

Petitioner also wanted to inspect records and documents of San Miguel Corporation but the request
was denied because the request was said to have been made in bad faith.

Respondents filed their answer to the petition, denying the substantial allegations therein and
stating, by way of affirmative defenses that "the action taken by the Board of Directors on September
18, 1976 resulting in the . . . amendments is valid and legal because the power to 'amend, modify,
repeal or adopt new By-laws' delegated to said Board on March 13, 1961 and long prior thereto has
never been revoked, withdrawn or otherwise nullified by the stockholders of SMC". Also said that the
power of the Board to amend the by-laws are broad, subject only to existing laws.

1Sec 2, Art III—Any stockholder having at least 5000 shared registered in his name may be elected as Director, but he
shall not be qualify or be eligible for nomination or election to the BoD if he is engaged in any business which
competes with or is antagonistic to that of the Corporation…
August 1972, the Universal Robina Corporation (URC), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares amounting to 622,987 shares. In
October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in
respondent corporation that amounted to P543,959.00. On January 12, 1976, petitioner, who is
president and controlling shareholder of URC and CFC (both closed corporations) purchased 5,000
shares of stock of respondent corporation, and thereafter, in behalf of himself, CFC and URC,
"conducted malevolent and malicious publicity campaign against SMC" to generate support from the
stockholder "in his effort to secure for himself and in representation of URC and CFC interests, a seat
in the Board of Directors of SMC". Petitioner was rejected by the stockholders in his bid to secure
a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive
business and his securing a seat would have subjected respondent corporation to grave
disadvantages.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents
from disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of the amendment. SEC held that petitioner should be allowed to run as a director but that
he should not sit as such until SEC has decided on the validity of the by-laws in dispute.

Respondents reason out that petitioner is engaged in businesses competitive and antagonistic
to that of respondent SMC and that the Board realized the clear and present danger in competitors
being directors because they would have easy and direct access to SMC’s business and trade secrets.

ISSUE: W/N the amended by-laws of SMC disqualifying a competitor from nomination or election
to the Board of Directors of SMC are valid and reasonable.

HELD/RATIONALE: Amendments are valid.

The validity or reasonableness of a by-law of a corporation is purely a question of law. Petitioner


claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress
the minority and prevent them from having representation in the Board", at the same time depriving
petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

Any person "who buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority
shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and
not forbidden by law."

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds of the
subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights
of the existing shareholders, then the dissenting minority has only one right, viz.: "to object thereto in
writing and demand payment for his share." Under section 22 of the same law, the owners of the majority
of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be
said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the
law at the time such right as stockholder was acquired contained the prescription that the corporate
charter and the by-law shall be subject to amendment, alteration and modification.

Although in the strict and technical sense, directors of a private corporation are not regarded
as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation
and the stockholders as a body are concerned. As agents entrusted with the management of the
corporation, they should act for the collective benefit of the stockholders.

It is a settled state law in the United States that corporations have the power to make by-laws
declaring a person employed in the service of a rival company to be ineligible for the corporation's Board
of Directors. ". . . (A)n amendment which renders ineligible, or if elected, subjects to removal, a director
if he be also a director in a corporation whose business is in competition with or is antagonistic to the
other corporation is valid." This is based upon the principle that where the director is so employed in
the service of a rival company, he cannot serve both, but must betray one or the other. Such an
amendment "advances the benefit of the corporation and is good."

The doctrine of "corporate opportunity" is precisely a recognition that fiduciary standards could not be
upheld where the fiduciary was acting for two entities with competing interests. It is not denied that a
member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly
confidential information.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his personal
concerns.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded
to the corporation in adopting measures to protect legitimate corporate interests. The test must be
whether the business does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristic activity.

Grace Christian HS v. CA (GR 108905; Oct. 23, 1997)

Petitioner Grace Christian High School is an educational institution located at the Grace
Village in Quezon City, while Private respondent Grace Village Association, Inc. ["Association'] is an
organization of lot and/or building owners, lessees and residents at Grace Village.

The original 1968 by-laws provide that the Board of Directors, composed of eleven (11) members,
shall serve for one (1) year until their successors are duly elected and have qualified.

On 20 December 1975, a committee of the board of directors prepared a draft of an amendment to


the
by-laws which provides that "GRACE CHRISTIAN HIGH SCHOOL representative is a permanent
Director of the ASSOCIATION."

However, this draft was never presented to the general membership for approval. Nevertheless,
from 1975 to 1990, petitioner was given a permanent seat in the board of directors of the
association.

On 13 February 1990, the association's committee on election sought to change the by-laws and
informed the Petitioner's school principal "the proposal to make the Grace Christian High School
representative as a permanent director of the association, although previously tolerated in the past
elections should be reexamined."

Following this advice, notices were sent to the members of the association that the provision on
election of directors of the 1968 by-laws of the association would be observed. Petitioner requested
the chairman of the election committee to change the notice to honor the 1975 by-laws provision,
but was denied.
The school then brought suit for mandamus in the Home Insurance and Guaranty Corporation (HIGC)
to compel the board of directors to recognize its right to a permanent seat in the board.

Meanwhile, the opinion of the SEC was sought by the association, and SEC rendered an opinion to
the effect that the practice of allowing unelected members in the board was contrary to the existing
by-laws of the association and to §92 of the Corporation Code (B.P. Blg. 68). This was adopted by the
association in its Answer in the mandamus filed with the HIGC.

The HIGC hearing officer ruled in favor of the association, which decision was affirmed by the HIGC
Appeals Board and the Court of Appeals.

Issue: W/N the 1975 provision giving the petitioner a permanent board seat was valid.

Ruling: No.

Section 23 of the Corporation Code (and its predecessor Section 28 and 29 of the Corporation Law)
leaves no room for doubt that the Board of Directors of a Corporation must be elected from among
the stockholders or members.

There may be corporations in which there are unelected members in the board but it is clear that in
these instances, the unelected members sit as ex officio members, i.e., by virtue of and for as long as
they hold a particular office (e.g. whoever is the Archbishop of Manila is considered a member of the
board of Cardinal Santos Memorial Hospital, Inc.)

But in the case of petitioner, there is no reason at all for its representative to be given a seat in the
board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not
given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws
sought to give it one.

Since the provision in question is contrary to law, the fact that it has gone unchallenged for fifteen
years cannot forestall a later challenge to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity.

It is more accurate to say that the members merely tolerated petitioner's representative and
tolerance cannot be considered ratification.

Nor can petitioner claim a vested right to sit in the board on the basis of "practice." Practice, no
matter how long continued, cannot give rise to any vested right if it is contrary to law.

Salafranca v. Philamlife Homeowners Asso. 300 SCRA 469

FACTS: Petitioner Enrique Salafranca started working with the private respondent Philamlife Village
Homeowners Association on May 1, 1981 as administrative officer for a period of six months.

As administrative officer, petitioner was generally responsible for the management of the
villages day to day activities. After petitioners term of employment expired on December 31, 1983,
he still continued to work in the same capacity, albeit, without the benefit of a renewed contract.
Sometime in 1987, private respondent decided to amend its bylaws. Included therein was a
provision regarding officers, specifically, the position of administrative officer under which said
officer shall hold office at the pleasure of the Board of Directors.

He continued working until his termination in December 1992. Claiming that his services had been
unlawfully and unceremoniously dispensed with, petitioner filed a complaint for illegal dismissal
with money claims and for damages.

ISSUE:Whether or not petitioner is illegally dismissed

RULING:There is illegal dismissal.

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. In all these instances, it is the private
respondent, being the employer, who must prove the validity of the dismissal.

The right to amend the bylaws lies solely in the discretion of the employer, this being in the
exercise of management prerogative or business judgment. However this right, extensive as it may
be, cannot impair the obligation of existing contracts or rights.

It would enable an employer to remove any employee from his employment by the simple
expediency of amending its bylaws and providing that his/her position shall cease to exist upon the
occurrence of a specified event.

China Banking Corp. v. CA (270 SCRA 503)

Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc.
(VGCCI), pledged his Stock Certificate 1219 to China Banking Corporation (CBC). On 16 September
1974, CBC wrote VGCCI requesting that the pledge agreement be recorded in its books. In a letter
dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in CBC's
favor was duly noted in its corporate books. On 3 August 1983, Calapatia obtained a loan of
P20,000.00 from CBC, payment of which was secured by the pledge agreement still existing between
Calapatia and CBC. Due to Calapatia's failure to pay his obligation, CBC, on 12 April 1985, filed a
petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting
the latter to conduct a public auction sale of the pledged stock.

On 14 May 1985, CBC informed VGCCI of the foreclosure proceedings and requested that
the pledged stock be transferred to its name and the same be recorded in the corporate books.
However, on 15 July 1985, VGCCI wrote CBC expressing its inability to accede to CBC's request in
view of Calapatia's unsettled accounts with the club. Despite the foregoing, Notary Public de Vera
held a public auction on 17 September 1985 and CBC emerged as the highest bidder at P20,000.00
for the pledged stock. Consequently, CBC was issued the corresponding certificate of sale.
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his
overdue account in the amount of P18,783.24. Said notice was followed by a demand letter dated 12
December 1985 for the same amount and another notice dated 22 November 1986 for P23,483.24.
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m.
Included therein was Calapatia's own share of stock (Stock Certificate 1219). Through a letter dated
15 December 1986, VGCCI informed Calapatia of the termination of his membership due to the sale
of his share of stock in the 10 December 1986 auction. On 5 May 1989, CBC advised VGCCI that it is
the new owner of Calapatia's Stock Certificate 1219 by virtue of being the highest bidder in the 17
September 1985 auction and requested that a new certificate of stock be issued in its name.

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold
at the public auction held on 10 December 1986 for P25,000.00. On 9 March 1990, CBC protested
the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial
Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new
stock certificate in its name. On 18 June 1990, the Regional Trial Court of Makati dismissed the
complaint for lack of jurisdiction over the subject matter on the theory that it involves an intra-
corporate dispute and on 27 August 1990 denied CBC's motion for reconsideration. On 20
September 1990, CBC filed a complaint with the Securities and Exchange Commission (SEC) for the
nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate
issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of
VGCCI, stating in the main that considering that the said share is delinquent, VGCCI had valid reason
not to transfer the share in the name of CBC in the books of VGCCI until liquidation of delinquency.
Consequently, the case was dismissed. On 14 April 1992, Hearing Officer Perea denied CBC's motion
for reconsideration. CBC appealed to the SEC en banc and on 4 June 1993, the Commission issued an
order reversing the decision of its hearing officer; holding that CBC has a prior right over the pledged
share and because of pledgor's failure to pay the principal debt upon maturity, CBC can proceed
with the foreclosure of the pledged share; declaring that the auction sale conducted by VGCCI on 10
December 1986 is declared NULL and VOID; and ordering VGCCI to issue another membership
certificate in the name of CBC. VGCCI sought reconsideration of the order. However, the SEC denied
the same in its resolution dated 7 December 1993. The sudden turn of events sent VGCCI to seek
redress from the Court of Appeals.

On 15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside
the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter
and, consequently, dismissed CBC's original complaint. The Court of Appeals declared that the
controversy between CBC and VGCCI is not intra-corporate; nullifying the SEC orders and dismissing
CBC’s complaint. CBC moved for reconsideration but the same was denied by the Court of Appeals in
its resolution dated 5 October 1994. CBC filed the petition for review on certiorari.

Issue: Whether CBC is bound by VGCCI's by-laws.

Held: In order to be bound, the third party must have acquired knowledge of the pertinent by-laws
at the time the transaction or agreement between said third party and the shareholder was entered
into. Herein, at the time the pledge agreement was executed. VGCCI could have easily informed CBC
of its by-laws when it sent notice formally recognizing CBC as pledgee of one of its shares registered
in Calapatia's name. CBC's belated notice of said by-laws at the time of foreclosure will not suffice.

By-laws signifies 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. In other
words, by-laws are the relatively permanent and continuing rules of action adopted by the
corporation for its own government and that of the individuals composing it and having the
direction, management and control of its affairs, in whole or in part, in the management and control
of its affairs and activities.

The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law. Therefore, it is the generally accepted
rule that third persons are not bound by by-laws, except when they have knowledge of the
provisions either actually or constructively. For the exception to the general accepted rule that third
persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the
provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect
pledgee's right over the pledged share. Article 2087 of the Civil Code provides that it is also of the
essence of these contracts that when the principal obligation becomes due, the things in which the
pledge or mortgage consists maybe alienated for the payment to the creditor.

Further, VGCCI's contention that CBC is duty-bound to know its by-laws because of Article
2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the
diligence of a good father of a family, fails to convince. CBC was never informed of Calapatia's
unpaid accounts and the restrictive provisions in VGCCI's by-laws. Furthermore, Section 63 of the
Corporation Code which provides that "no shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI.

The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and
not to any indebtedness which a subscriber or stockholder may owe the corporation arising from
any other transaction." Herein, the subscription for the share in question has been fully paid as
evidenced by the issuance of Membership Certificate 1219. What Calapatia owed the corporation
were merely the monthly dues. Hence, Section 63 does not apply.

Valley Golf Club v. Vda. De Caram 585 SCRA 218 (2009)


FACTS:

Petitioner is a duly constituted non-stock, non-profit corporation which operates a golf course.
The members and their guests are entitled to play golf on the said course and avail of the
facilities and privilege. The shareholders are likewise assessed monthly membership dues.

Cong. Fermin Z. Caram, Jr., respondent’s husband, subscribed and paid in full 1 Golf Share
of the petitioner and was subsequently issued with a stock certificate which indicated a par
value of P9,000.00. It was alleged by the petitioner that Caram stopped paying his monthly
dues and that it has sent 5 letters to Caram concerning his delinquent account. The Golf Share
was subsequently sold at public auction for P25,000.00 after the BOD had authorized the sale
and the Notice of Auction Sale was published in the Philippine Daily Inquirer

Caram thereafter died and hiis wife initiated intestate proceedings before the RTC of
IloIlo. Unaware of the pending controversy over the Golf Share, the Caram family and
the RTC included the Golf Share as part of Caram’s estate. The RTC approved a project of
partition of Caram’s estate and the Golf Share was adjudicated to the wife, who paid the
corresponding estate tax due, including that on the golf Share.

It was only through a letter that the heirs of Caram learned of the sale of the Golf Share
following their inquiry with Valley Golf about the Golf Share. After a series of correspondence,
the Caram heirs were subsequently informed in a letter that they were entitled to the refund of
P11,066.52 out of the proceeds of the sale of the Golf Share, which amount had been in the
custody of the petitioner.

Caram’s wife filed an action for reconveyance of the Golf Share with damages before the SEC
against Valley Golf. The SEC Hearing Officer rendered a decision in favor of the wife,
ordering Valley Golf to convey ownership of the Golf Share, or in the alternative. to issue one
fully paid share of stock of Valley Golf of the same class as the Golf Share to the wife.
Damages totaling P90,000.00 were also awarded to the wife.

The SEC hearing officer ruled that under Section 67, paragraph 2 of the Corporation Code, a
share stock could only be deemed delinquent and sold in an extrajudicial sale at public auction
only upon the failure of the stockholder to pay the unpaid subscription or balance for the share.
However, the section could not have applied in Caram’s case since he had fully paid for the
Golf Share and he had been assessed not for the share itself but for his delinquent club dues.
Proceeding from the foregoing premises, the SEC hearing officer concluded that the auction
sale had no basis in law and was thus a nullity. The SEC en banc and the Court of Appeals
affirmed the hearing officer’s decision, and so the petitioner appealed before SC.

ISSUE: WON a non-stock corporation seize and dispose of the membership share of a
fully-paid member on account of its unpaid debts to the corporation when it is
authorized to do so under the corporate by-laws but not by the Articles of
Incorporation?

RULING:

The Supreme Court ruled that there is a specific provision under Title XI on Non-Stock
Corporations of the Corporation Code dealing with the termination of membership in a non-
stock corporation such as Valley Golf.
Section 91 of the Corporation Code provides:

SEC. 91. Termination of membership.—Membership shall be terminated in the manner


and for the causes provided in the articles of incorporation or the by-laws. Termination
of membership shall have the effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise provided in the articles of incorporation
or the by-laws. (Emphasis supplied)

A share can only be deemed delinquent and sold at public auction only upon the failure of the
stockholder to pay the unpaid subscription. Delinquency in monthly club dues was merely an
ordinary debt enforceable by judicial action in a civil case. A provision creating a lien upon
shares of stock for unpaid debts, liabilities, or assessments of stockholders to the corporation,
should be embodied in the Articles of Incorporation, and not merely in the by-laws. Moreover,
the by-laws of petitioner should have provided formal notice and hearing procedure
before a member’s share may be seized and sold.

The procedure for stock corporation’s recourse on unpaid subscription is not


applicable in member’s shares in a non-stock corporation.

SC proceeded to declare the sale as invalid. SC found that Valley Golf acted in bad faith when
it sent the final notice to Caram under the pretense they believed him to be still alive, when in
fact they had very well known that he had already died. The Court stated:

Whatever the reason Caram was unable to respond to the earlier notices, the fact
remains that at the time of the final notice, Valley Golf knew that Caram, having died
and gone, would not be able to settle the obligation himself, yet they persisted in
sending him notice to provide a color of regularity to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of the
Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the Court of
Appeals.

Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the final
notice to Caram on the deliberate pretense that he was still alive could bring into operation
Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code. These
provisions enunciate a general obligation under law for every person to act fairly and in good
faith towards one another. Non-stock corporations and its officers are not exempt from that
obligation.

Calatagan v. Clemente GR 165443 April 16, 2009


Facts: Clemente applied to purchase one share stock of Calatagan, indicating in his application his
mailing address, complete residential address, office and residence telephone numbers as well as
the company with which he was connected. Calatagan issued to him a Certificate of Stock. Calatagan
charges monthly dues to meet expenses for general operations, costs for upkeep and improvement
of grounds and facilities as provided for by its Articles of Incorporation. After paying the monthly
dues initially, Clemente failed to pay and Calatagan demanded payment for the monthly dues
through letters which were sent to his mailing address but were sent back to sender with the postal
note that the address has been closed , twice.

Calatagan declared Clemente delinquent for failing to pay his monthly dues and included
him in its list of delinquent members. Calatagan's board of directors adopted a resolution
authorizing the foreclosure of shares of delinquent members and the public acution of these shares.
Calatagan sent a third and final letter to the same address containing a warning that unless
Clemente settles his outstanding dues, his share will be included among the shares to be sold at the
public auction. Clemente's share was sold with the notice of foreclosure published in the issue of
Business World. Clemente learned of the sale after 4 years and filed a claim with SEC seeking to
restore his shareholding in Calatagan with damages.

SEC dismissed the complaint, citing Sec. 69 of the Corporation Code which provides that the
sale of share at an auction sale can only be questioned within 6 months and Clemente's claim was
filed long after the period provided. SEC further held hat Calatagan complied with all the
requirements for a valid sale of the share, Clemente failing to inform Calatagan that the address he
supplied was no longer his address and that Clemente acted in bad faith assuming as he claimed that
his non-payment of dues would merely render his share inactive. CA reversed SEC's ruling, restoring
the share and awarded damages minnus the unpaid monthly dues Clemente owed.

CA found that SEC erred in citing a case it decided, Caram v Valley Golf Country Club that
Sec. 69 specifically refers to unpaid subscriptions to capital stock and not to any other debt of
stockholders. CA employed Art. 1140 of the Civil Code as the proper rule of prescription which is at 8
years since Sec. 69 does not apply to unpaid membership dues in non-stock corporations. Also
Calatagan knew that the previous 2 letters it sent were sent back to them and so the demand letter
would not be received by Clemente.

Issue: W/N Calatagan is liable for damages under Art. 19 of the Civil Code.

Ruling: Sec. 69 of the Corporation Code refers specifically to unpaid subscriptions to capital stock.
The sale of delinquent stock is the non-payment of the subscription price for the share of stock itself
and the stockholder has yet to fully pay for the value of the shares subscribed. Clemente had already
fully paid for the share and Calatagan no longer had any outstanding obligation to deprive him of full
title to his share. Section 69 will only be applicable if Clemente still has not fully paid for the share
and the non-stock corporation decided to sell such share as a consequence which is not the case at
bar. Sec. 91 of the Corp. Code provides that termination of membership in non-stock corporations
are governed by its articles of incorporation or by-laws.

In accordance with it's by-laws, Calatagan sent the third and final demand letter with the
warning but it was sent ot the mailing address which Calatagan knew was already closed. The
Corporate Secretary under its by-laws is required by law to keep a record of the addresses of all
stockholder and that the Secretary needs to notify the shareholder of the order to sell at auction of
said shareholder's stock. The Corporate Secretary being a lawyer is knowledgeable on the law and of
corporate records and should have known that the third demand letter would still have been sent
back to them. Due diligence was not exercised by the Corporate Secretary, there was even no
inquiry as to the mailing address or verification of the other addresses on record provided by
Clemente and knowing that the PO box was already closed it still persisted in sending the final
demand and warning letter to the same PO box which constituted bad faith.

Calatagan's bad faith and failure to observe its own by-laws resulted not merely in the loss
of Clemente's privilege to enjoy Calatagan's facilities but also in significant pecuniary damage to him.
Knowing as Clemente did that Calatagan was in possession of his home address as well as residence
and office telephone numbers, he had every reason to assume that the club would not be at a loss
should it need to contact him. A non-stock corporation like Calatagan is not exempt from the
obligation laid down by Articles 19-21 which obliges under law every person to act fairly and in good
faith towards one another.

Clemente has sustained pecuniary injry by reason of Calatagan's wrongful violation of its
own by-laws and CA's award of moral and exemplary damages as well as attorney's fees are
warranted. Calatagan was cited in violation of Art. 32 of the CC by CA which allows recovery of
damages from any private individual who directly or indirectly obstructs, defeats, violates or in any
manner impeded or impairs the right against deprivation of property without due process of laws.
CA's decision is affirmed with costs against Calatagan.

PMI Colleges v. NLRC 277 SCRA 462 (1997)


FACTS: On July 7, 1991, petitioner, an educational institution offering courses on basic seaman's
training and other marine-related courses, hired private respondent as contractual instructor with
an agreement that the latter shall be paid at an hourly rate of P30.00 to P50.00, depending on the
description of load subjects and on the schedule for teaching the same.

Pursuant to this engagement, private respondent then organized classes in marine


engineering. Initially, private respondent and other instructors were compensated for services
rendered during the first three periods of the abovementioned contract. However, for reasons
unknown to private respondent, he stopped receiving payment for the succeeding rendition of
services. This claim of non-payment was embodied in a letter dated March 3, 1992, written by
petitioner's Acting Director, Casimiro A. Aguinaldo, addressed to its President, Atty. Santiago Pastor,
calling attention to and appealing for the early approval and release of the salaries of its instructors
including that of private respondent.

Private respondent's claims, were resisted by petitioner. Later in the proceedings, PMI
Colleges manifested that Mr. Tomas Cloma Jr., a member of the board of trustees write a letter to
the Chairman of the Board, clarifying the case of Galvan and stating therein, inter alia, that under
PMI’s by-laws only the Chairman is authorized to sign any contract and that Galvan, in any event,
failed to submit documents on the alleged shipyard and plant visits in Cavite Naval Base.

ISSUE: Whether or not the contract of employment of Galvan valid even if the signatory
therein was not the Chairman of the Board.

RULING: YES. The contract of employment is valid. The contract remained valid even if the signatory
thereon was not the chairman of the board which allegedly violated petitioner’s by-laws. Since by-
laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge of the same.
No proof appears on record that private respondent ever knew anything about the provisions of the
said by-laws. In fact, petitioner itself merely asserts the same without even bothering to attach a
copy or excerpt thereof to show that there is such provision. That this allegation has never been
denied to private respondent nor necessarily signify admission of its existence because technicalities
of law and procedure and the rules obtaining in the courts of law do not strictly apply to proceeding
of this nature.

Sawadjaan v. CA 459 SCRA 516 (2005)

FACTS OF THE CASE: Petitioner Sappari K. Sawadjaan was among the first employees of the
Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264.
Sometime in 1988, while still designated as appraiser/investigator, he was assigned to inspect the
properties offered as collaterals by Compressed Air Machineries and Equipment Corporation
(CAMEC) for a credit line of Five Million Pesos (P5,000,000.00).

The properties consisted of two parcels of land covered by Transfer Certificates of Title
(TCTs). On the basis of his Inspection and Appraisal Report, the PAB granted the loan application.
When the loan matured, CAMEC requested an extension to repay the loan. In January 1990,
Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which created the
PAB). All assets, liabilities and capital accounts of the PAB were transferred to the AIIBP, and the
existing personnel of the PAB were to continue to discharge their functions unless discharged.

In the ensuing reorganization, Sawadjaan was among the personnel retained by the AIIBP. When
CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP, discovered
that one of the TCT was spurious, the property described therein non-existent, and that the property
covered by the other TCT had a prior existing mortgage. The Board of Directors of the AIIBP created
an Investigating Committee to look into the CAMEC transaction, which had cost the bank Six Million
Pesos (P6, 000,000.00) in losses.

The Board of Directors of AIIBP adopted Resolution No. 2309 finding petitioner guilty of
Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of
the Service and imposing the penalty of Dismissal from the Service. On reconsideration, they
adopted the Resolution No. 2332 reducing the penalty imposed on petitioner from dismissal to
suspension for a period of six (6) months and one (1) day

Petitioner filed a notice of appeal to the Merit System Protection Board (MSPB). The CSC
adopted Resolution No. 94-4483 dismissing the appeal for lack of merit and affirming Resolution No.
2309 of the Board of Directors of AIIBP. The CSC adopted Resolution No. 95-2574 denying
petitioner’s Motion for Reconsideration. Hence this petition for certiorari under Rule 65 of the Rules
of Court.

ISSUE: Whether or not the failure of AIIBP to file its by-laws within the period prescribed
results to a nullity of all actions and proceedings it has initiated.

RULING Petitioner’s efforts are unavailing, and we deny his petition for its procedural and
substantive flaws. Petitioner’s recurrent argument, tenuous at its very best, is premised on the fact
that since respondent AIIBP failed to file its bylaws within the designated 60 days from the
effectively of Rep. Act No. 6848, all proceedings initiated by AIIBP and all actions resulting therefrom
are a patent nullity.

Petitioner already raised the question of AIIBP’s corporate existence and lack of jurisdiction
in his Motion for New Trial/Motion for Reconsideration and was denied by the Court of Appeals.
Despite the volume of pleadings he has submitted thus far, he has added nothing substantial to his
arguments. The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts
business, has shareholders, corporate officers, a board of directors, assets, and personnel.

It is, in fact, here represented by the Office of the Government Corporate Counsel, "the
principal law office of government-owned corporations, one of which is respondent bank." At the
very least, by its failure to submit its by-laws on time, the AIIBP may be considered a de facto
corporation who’s right to exercise corporate powers may not be inquired into collaterally in any
private suit to which such corporations may be a party.

Moreover, a corporation which has failed to file its by-laws within the prescribed period
does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the
Certificate of Registration of Corporations, details the procedures and remedies that may be availed
of before an order of revocation can be issued. There is no showing that such a procedure has been
initiated in this case.
Wherefore, the petition is dismissed.

SMC v. Mandaue Packing Products 467 SCRA 107 (2005)

Facts: mOn 15 June 1998, respondent, identifying itself as an affiliate of Federation of Free
Workers (FFW), filed a petition for certification election with the DOLE Regional Office No.
VII. In the petition, respondent stated that it sought to be certified and to represent the
permanent rank-and-file monthly paid employees of the petitioner. The following documents
were attached to the petition: (1) a Charter Certificate issued by FFW on 5 June 1998
certifying that respondent as of that date was duly certified as a local or chapter of FFW; (2)
a copy of the constitution of respondent prepared by its Secretary and attested by its
President; (3) a list of respondent’s officers and their respective addresses; (4) a certification
signifying that respondent had just been organized and no amount had yet been collected
from its members, signed by respondent’s treasurer and (5) a list of all the rank-and-file
monthly paid employees of the Mandaue Packaging Products Plants and Mandaue Glass
Plant.

On 27 July 1998, petitioner filed a motion to dismiss the petition for certification
election on the sole ground that herein respondent is not listed or included in the roster of
legitimate labor organizations based on the certification issued by the Officer-In-Charge,
Regional Director of the DOLE Regional Office No. VII, Atty. Jesus B. Gabor, on 24 July
1998.

On 20 August 1998, petitioner filed a petition to cancel the union registration of


respondent. However, this petition was denied, and such denial was subsequently affirmed
by the Court of Appeals in a decision that has since become final.
Respondent promptly appealed the 15 September 1998 Order to the DOLE. On 22
February 1999, DOLE Undersecretary rendered a Decision reversing the Order.

Issue: WON the Union acquired legal personality.

Held: Yes. Section 3, Rule VI of Department Order No. 9 provides when the local/chapter
acquires legal personality.

Section 3. Acquisition of legal personality by local chapter. – A local/chapter


constituted in accordance with Section 1 of this Rule shall acquire legal personality from the
date of filing of the complete documents enumerated therein. Upon compliance with all the
documentary requirements, the Regional Office or Bureau shall issue in favor of the
local/chapter a certificate indicating that it is included in the roster of legitimate labor
organizations.

It is evident based on this rule that the local/chapter acquires legal personality from
the date of the filing of the complete documentary requirements, and not from the issuance of
a certification to such effect by the Regional Office or Bureau. On the other hand, a labor
organization is deemed to have acquired legal personality only on the date of issuance of its
certificate of registration, which takes place only after the Bureau of Labor Relations or its
Regional Offices has undertaken an evaluation process lasting up until thirty (30) days,
within which period it approves or denies the application. In contrast, no such period of
evaluation is provided in Department Order No. 9 for the application of a local/chapter, and
more importantly, under it such local/chapter is deemed to acquire legal personality “from the
date of filing” of the documents enumerated under Section 1, Rule VI, Book V.

Long v. Basa G.R. 134963 - 64 (Sept. 27, 2001)


Facts: In 1973, a religious group known as "The Church In Quezon City (Church Assembly
Hall), Incorporated" (CHURCH), located at 140 Talayan St., Talayan Village, Quezon City, was
organized as "an entity of the brotherhood in Christ.'' It was registered in the same year with the
Securities and Exchange Commission (SEC) as a non-stock, non-profit religious corporation for the
administration of its temporalities or the management of its properties. The Articles of Incorporation
and By-laws of the CHURCH decree that its affairs and operation shall be managed by a Board of
Directors consisting of 6 members, 3 who shall be members of the CHURCH.

Zealous in upholding and guarding their Christian faith, and to ensure unity and
uninterrupted exercise of their religious belief, the members of the CHURCH vested upon the Board
of Directors the absolute power "(to preserve and protect the(ir) faith" and to admit and expel a
member of the CHURCH. Admission for membership in the CHURCH is so exacting.

Only "persons zealous of the Gospel, faithful in Church work and of sound knowledge of the
Truth, as the Board of Directors shall admit to membership, shall be members of the (CHURCH)." The
procedure for the expulsion of an erring or dissident member is prescribed in Article VII (paragraph
4) of the CHURCH By-laws, which provides that "If it is brought to the notice of the Board of
Directors that any member has failed to observe any regulations and By-laws of the Institution
(CHURCH) or the conduct of any member has been dishonorable or improper or otherwise injurious
to the character and interest of the Institution, the Board of Directors may by resolution without
assigning any reason therefor expel such member from such Institution and he shall then forfeit his
interest, rights and privileges in the Institution."

As early as 1988, the Board of Directors observed that certain members of the CHURCH,
including Alfredo Long, Joseph Lim, Liu Yek See, and Felix Almeria, exhibited "conduct which was
dishonorable, improper and injurious to the character and interest of the (CHURCH)" by "introducing
(to the members) doctrines and teachings which were not based on the Holy Bible" and the
Principles of Faith embraced by the CHURCH. Confronted with this situation, Lydia Basa, Anthony
Sayheeliam and Yao Chek, as members of the Board of Directors, and some responsible members of
the CHURCH, advised Long, et al. "to correct their ways" and warned them that if they persist in their
highly improper conduct, they will be dropped from the membership of the CHURCH; during Sunday
worship gatherings, "in small group meetings and even one-on-one personal talk with them." Long
et al. ignored these repeated admonitions.

Alarmed that Long, et al.'s conduct will continue to undermine the integrity of the Principles
of Faith of the CHURCH, the Board of Directors, during its 30 August 1993 regular meeting held for
the purpose of reviewing and updating the membership list of the CHURCH, removed from the said
list certain names of members, including the names of Joseph Lim, Liu Yek See, Alfredo Long and
Felix Almeria.

They were removed for espousing doctrines inimical or injurious to the Principles of Faith of
the CHURCH. The Board also updated the list by removing the names of those who have migrated to
other countries, those deceased and those whom the CHURCH had lost contact with. All the then 6
members of the Board, namely, Directors Lim Che Boon, Tan Hon Koc, Anthony Sayheeliam, Leandro
Basa, Yao Chec and Lydia L. Basa "were duly informed" of that meeting. However, Directors Lim Che
Boon and Tan Hon Koc did not appear.

Thus, the resolution was signed only by Directors Anthony Sayheeliam, Leandro Basa, Yao
Chec and Lydia L. Basa who composed the majority of the Board. The updated membership list
approved by the Board on 30 August 1993, together with the minutes of the meeting, were duly
filed with the SEC on 13 September 1993. On 29 September 1993, Lim Che Boon, Tan Hon Koc,
Joseph Lim, Liu Yek See and others questioned their expulsion by filing with the SEC Securities
Investigation and Clearing Department a petition (SEC Case 09 93-4581, and later a supplemental
petition) against Directors Yao Chek, Leandro Basa, Lydia Basa and Anthony Sayheeliam.

It sought mainly the annulment of the 30 August 1993 membership list and the
reinstatement of the original list on the ground that the expulsion was made without prior notice
and hearing; and prayed for the issuance of a temporally restraining order (TRO) and a writ of
preliminary injunction principally to enjoin the Board of Directors from holding any election of a new
set of directors among the members named in the 30 August 1993 list of corporate membership.

After conducting a hearing on the application for a writ of preliminary injunction, SEC
Hearing Officer Manuel Perea denied the same in an order dated 22 February 1994. Lim Che Boon,
et al. elevated Perea's order to the SEC en banc via a petition for certiorari (SEC EB Case 389). The
SEC, in an en banc decision dated 11 July 1994, affirmed the Perea ruling and "dismissed for lack of
merit" the petition. Lim Che Boon et al. did not appeal from the decision of the SEC en banc.
Subsequently, the SEC, through a hearing panel, conducted further proceedings to hear and
decide the permissive counterclaim and third-party complaint incorporated in Basa, et al.'s
supplemental answer, including their prayer for injunctive relief to prevent Long, Lim Che Boon, et
al. from interfering and usurping the functions of the Board of Directors. Long, et al. subsequently
filed motions to dismiss/strike out the counterclaim and third-party complaint. The hearing panel in
its omnibus order dated 2 October 1995 denied the motions, and declined to act on Basa, et al.'s
third-party complaint's prayer for injunctive relief since there is a case pending before another
Hearing Officer in SEC Case 4994 for the declaration of nullity of the general membership meeting
held on 12 February 1995.

Upon denial of the separate motions for reconsideration of both parties, Basa, et al. filed
with the SEC en banc a petition for review on certiorari (SEC EB Case 484), which interposed the
issue as to the validity of the questioned expulsion already resolved by the SEC en banc in its
decision dated 11 July 1994 in SEC EB Case 389 which had attained finality.

On 31 July 1996, the SEC en banc, issued an order in SEC EB Case 484, setting aside the
expulsion of certain members of the CHURCH approved by its Board of Directors on 30 August 1993
for being void and ordering the reinstatement of Long, et al. as members of the CHURCH. Promptly,
Sayheeliam and Basa filed a petition for review with the Court of Appeals (CA-GR SP 41551). Yao
Check, for his part, filed a motion for reconsideration of the same order.

Upon denial of his motion he also filed with the Court of Appeals a petition for review (CA-
GR SP 43389), which was consolidated with CA-GR SP 41551). On 29 May 1998, the Court of Appeals
promulgated its decision granting Basa, et al.'s consolidated petitions and reversing the 31 July 1996
order of the SEC en banc in SEC EB Case 484. Long, et al. filed a motion for reconsideration but was
denied by the appellate court in a resolution dated 18 August 1998. Long, Lim Che Boon, et al. filed
the petitions for review, which were subsequently consolidated.

Issue: Whether the expulsion of Joseph Lim, Liu Yek See, Alfredo Long and Felix Almeria from
the membership of the CHURCH by its Board of Directors through a resolution issued on August 30,
1993 is in accordance with law.

Held: The By-laws of the CHURCH, which the members have expressly adhered to, does not
require the Board of Directors to give prior notice to the erring or dissident members in cases of
expulsion. In the By-law provision, the only requirements before a member can be expelled or
removed from the membership of the CHURCH are: (a) the Board of Directors has been notified that
a member has failed to observe any regulations and By-laws of the CHURCH, or the conduct of any
member has been dishonorable or improper or otherwise injurious to the character and interest of
the CHURCH, and (b) a resolution is passed by the Board expelling the member concerned, without
assigning any reason therefor.

Thus, a member who commits any of the causes for expulsion enumerated in paragraph 4 of
Article VII may be expelled by the Board of Directors, through a resolution, without giving that erring
member any notice prior to his expulsion. The resolution need not even state the reason for such
action. The CHURCH By-law provision on expulsion, as phrased, may sound unusual and
objectionable as there is no requirement of prior notice to be given to an erring member before he
can be expelled; but that is how peculiar the nature of a religious corporation is vis-a-vis an ordinary
corporation organized for profit. It must be stressed that the basis of the relationship between a
religious corporation and its members is the latter's absolute adherence to a common religious or
spiritual belief . Once this basis ceases, membership in the religious corporation must also cease.
Thus, generally, there is no room for dissension in a religious corporation.

And where any member of a religious corporation is expelled from the membership for
espousing doctrines and teachings contrary to that of his church, the established doctrine in this
jurisdiction is that such action from the church authorities is conclusive upon the civil courts.
Obviously recognizing the peculiarity of a religious corporation, the Corporation Code leaves the
matter of ecclesiastical discipline to the religious group concerned. Section 91 of the Corporation
Code, which has been made explicitly applicable to religious corporations by the second paragraph
of Section 109 of the same Code, provides for the termination of membership. It provides that
"Membership shall be terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws.

Termination of membership shall have the effect of extinguishing all rights of a member in
the corporation or in its property, unless otherwise provided in the articles of incorporation or the
by-laws." In fact, Long, et al. really have no reason to bewail the lack of prior notice in the By-laws.
They have waived such notice by adhering to those By-laws. They became members of the CHURCH
voluntarily. They entered into its covenant and subscribed to its rules. By doing so, they are bound
by their consent. Even assuming that Long, et al.'s expulsion falls within the Constitutional provisions
on "prior notice" or "due process," still the Court can not conclude that Basa, et al. committed a
constitutional infraction. Long, et al. were given more than sufficient notice of their impending
expulsion, as shown by the records.