INTRODUCTION/ CLASSIFICATIONS OF PRIVATE
CORPORATIONS
UNION GLASS & CONTAINER CORPORATION and
CARLOS PALANCA, JR., in his capacity as President of
Union Glass & Container Corporation, petitioners,
vs.
THE SECURITIES AND EXCHANGE COMMISSION and
CAROLINA HOFILEÑA, respondents.
ESCOLIN, J.:ñé+.£ªwph!1
This petition for certiorari and prohibition seeks to
annul and set aside the Order of the Securities and
Exchange Commission, dated September 25, 1981,
upholding its jurisdiction in SEC Case No. 2035,
entitled "Carolina Hofileña, Complainant, versus
Development Bank of the Philippines, et al.,
Respondents."
Private respondent Carolina Hofileña, complainant in
SEC Case No. 2035, is a stockholder of Pioneer Glass
Manufacturing Corporation, Pioneer Glass for short,
a domestic corporation engaged in the operation of
silica mines and the manufacture of glass and
glassware. Since 1967, Pioneer Glass had obtained
various loan accommodations from the Development
Bank of the Philippines [DBP], and also from other
local and foreign sources which DBP guaranteed.
As security for said loan accommodations, Pioneer
Glass mortgaged and/or assigned its assets, real and
personal, to the DBP, in addition to the mortgages
executed by some of its corporate officers over their
personal assets. The proceeds of said financial
exposure of the DBP were used in the construction of
a glass plant in Rosario, Cavite, and the operation of
seven silica mining claims owned by the corporation.
It appears that through the conversion into equity of
the accumulated unpaid interests on the various
loans amounting to P5.4 million as of January 1975,
and subsequently increased by another P2.2 million
in 1976, the DBP was able to gain control of the
outstanding shares of common stocks of Pioneer
Glass, and to get two, later three, regular seats in the
corporation's board of directors.
Sometime in March, 1978, when Pioneer Glass
suffered serious liquidity problems such that it could
no longer meet its financial obligations with DBP, it
entered into a dacion en pago agreement with the
latter, whereby all its assets mortgaged to DBP were
ceded to the latter in full satisfaction of the
corporation's obligations in the total amount of
P59,000,000.00. Part of the assets transferred to the
DBP was the glass plant in Rosario, Cavite, which DBP
leased and subsequently sold to herein petitioner
Union Glass and Container Corporation, hereinafter
referred to as Union Glass.
On April 1, 1981, Carolina Hofileña filed a complaint
before the respondent Securities and Exchange
Commission against the DBP, Union Glass and
Pioneer Glass, docketed as SEC Case No. 2035. Of the
five causes of action pleaded therein, only the first
cause of action concerned petitioner Union Glass as
transferee and possessor of the glass plant. Said first
cause of action was based on the alleged illegality of
the aforesaid dacion en pago resulting from: [1] the
supposed unilateral and unsupported undervaluation
of the assets of Pioneer Glass covered by the
agreement; [2] the self-dealing indulged in by DBP,
having acted both as stockholder/director and
secured creditor of Pioneer Glass; and [3] the
wrongful inclusion by DBP in its statement of account
of P26M as due from Pioneer Glass when the same
had already been converted into equity.
Thus, with respect to said first cause of action,
respondent Hofileña prayed that the SEC issue an
order:têñ.£îhqwâ£
1. Holding that the so called dacion en pago
conveying all the assets of Pioneer Glass and the
Hofileña personal properties to Union Glass be
declared null and void on the ground that the said
conveyance was tainted with.têñ.£îhqwâ£
A. Self-dealing on the part of DBP which was acting
both as a controlling stockholder/director and as
secured creditor of the Pioneer Glass, all to its
advantage and to that of Union Glass, and to the
gross prejudice of the Pioneer Glass,
B. That the dacion en pago is void because there was
gross undervaluation of the assets included in the
so-called dacion en pago by more than 100% to the
prejudice of Pioneer Glass and to the undue
advantage of DBP and Union Glass;
C. That the DBP unduly favored Union Glass over
another buyer, San Miguel Corporation,
notwithstanding the clearly advantageous terms
offered by the latter to the prejudice of Pioneer Glass,
its other creditors and so-called 'Minority
stockholders.'
2. Holding that the assets of the Pioneer Glass taken
over by DBP and part of which was delivered to
Union Glass particularly the glass plant to be
returned accordingly.
3. That the DBP be ordered to accept and recognize
the appraisal conducted by the Asian Appraisal Inc. in
1975 and again in t978 of the asset of Pioneer
Glass. 1
In her common prayer, Hofileña asked that DBP be
sentenced to pay Pioneer Glass actual, consequential,
moral and exemplary damages, for its alleged illegal
acts and gross bad faith; and for DBP and Union Glass
to pay her a reasonable amount as attorney's fees. 2
On April 21, 1981, Pioneer Glass filed its answer. On
May 8, 1981, petitioners moved for dismissal of the
case on the ground that the SEC had no jurisdiction
over the subject matter or nature of the suit.
Respondent Hofileña filed her opposition to said
motion, to which herein petitioners filed a rejoinder.
On July 23, 1981, SEC Hearing Officer Eugenio E.
Reyes, to whom the case was assigned, granted the
motion to dismiss for lack of jurisdiction. However,
on September 25, 1981, upon motion for
reconsideration filed by respondent Hofileña,
Hearing Officer Reyes reversed his original order by
upholding the SEC's jurisdiction over the subject
matter and over the persons of petitioners. Unable
to secure a reconsideration of the Order as well as to
have the same reviewed by the Commission En Banc,
petitioners filed the instant petition for certiorari and
prohibition to set aside the order of September 25,
1981, and to prevent respondent SEC from taking
cognizance of SEC Case No. 2035.
The issue raised in the petition may be propounded
thus: Is it the regular court or the SEC that has
jurisdiction over the case?
In upholding the SEC's jurisdiction over the case
Hearing Officer Reyes rationalized his conclusion
thus:têñ.£îhqwâ£
As correctly pointed out by the complainant, the
present action is in the form of a derivative suit
instituted by a stockholder for the benefit of the
corporation, respondent Pioneer Glass and
Manufacturing Corporation, principally against
another stockholder, respondent Development Bank
of the Philippines, for alleged illegal acts and gross
bad faith which resulted in the dacion en
pago arrangement now being questioned by
complainant. These alleged illegal acts and gross bad
faith came about precisely by virtue of respondent
Development Bank of the Philippine's status as a
stockholder of co-respondent Pioneer Glass
Manufacturing Corporation although its status as
such stockholder, was gained as a result of its being a
creditor of the latter. The derivative nature of this
instant action can also be gleaned from the common
prayer of the complainant which seeks for an order
directing respondent Development Bank of the
Philippines to pay co-respondent Pioneer Glass
Manufacturing Corporation damages for the alleged
illegal acts and gross bad faith as above-mentioned.
As far as respondent Union Glass and Container
Corporation is concerned, its inclusion as a
party-respondent by virtue of its being an
indispensable party to the present action, it being in
possession of the assets subject of the dacion en
pago and, therefore, situated in such a way that it
will be affected by any judgment thereon, 3
In the ordinary course of things, petitioner Union
Glass, as transferee and possessor of the glass plant
covered by the dacion en pago agreement, should be
joined as party-defendant under the general rule
which requires the joinder of every party who has an
interest in or lien on the property subject matter of
the dispute. 4 Such joinder of parties avoids
multiplicity of suits as well as ensures the convenient,
speedy and orderly administration of justice.
But since petitioner Union Glass has no
intra-corporate relation with either the complainant
or the DBP, its joinder as party-defendant in SEC Case
No. 2035 brings the cause of action asserted against
it outside the jurisdiction of the respondent SEC.
The jurisdiction of the SEC is delineated by Section 5
of PD No. 902-A as follows:têñ.£îhqwâ£
Sec. 5. In addition to the regulatory and adjudicative
function of the Securities and Exchange Commission
over corporations, partnerships and other forms of
associations registered with it as expressly granted
under existing laws and devices, it shall have original
and exclusive jurisdiction to hear and decide cases
involving:
a] Devices and schemes employed by or any acts, of
the board of directors, business associates, its
officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the
interest of the public and/or the stockholders,
partners, members of associations or organizations
registered with the Commission
b] Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members or associates; between any
or all of them and the corporation, partnership, or
association of which they are stockholders, members
or associates, respectively; and between such
corporation, partnership or association and the state
insofar as it concerns their individual franchise or
right to exist as such entity;
c] Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations.
This grant of jurisdiction must be viewed in the light
of the nature and function of the SEC under the law.
Section 3 of PD No. 902-A confers upon the latter
"absolute jurisdiction, supervision, and control over
all corporations, partnerships or associations, who
are grantees of primary franchise and/or license or
permit issued by the government to operate in the
Philippines ... " The principal function of the SEC is
the supervision and control over corporations,
partnerships and associations with the end in view
that investment in these entities may be encouraged
and protected, and their activities pursued for the
promotion of economic development. 5
It is in aid of this office that the adjudicative power of
the SEC must be exercised. Thus the law explicitly
specified and delimited its jurisdiction to matters
intrinsically connected with the regulation of
corporations, partnerships and associations and
those dealing with the internal affairs of such
corporations, partnerships or associations.
Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain to
any of the following relationships: [a] between the
corporation, partnership or association and the
public; [b] between the corporation, partnership or
association and its stockholders, partners, members,
or officers; [c] between the corporation, partnership
or association and the state in so far as its franchise,
permit or license to operate is concerned; and [d]
among the stockholders, partners or associates
themselves.
The fact that the controversy at bar involves the
rights of petitioner Union Glass who has no
intra-corporate relation either with complainant or
the DBP, places the suit beyond the jurisdiction of
the respondent SEC. The case should be tried and
decided by the court of general jurisdiction, the
Regional Trial Court. This view is in accord with the
rudimentary principle that administrative agencies,
like the SEC, are tribunals of limited jurisdiction 6 and,
as such, could wield only such powers as are
specifically granted to them by their enabling
statutes. 7 As We held in Sunset View Condominium
Corp. vs. Campos, Jr.: 8têñ.£îhqwâ£
Inasmuch as the private respondents are not
shareholders of the petitioner condominium
corporation, the instant cases for collection cannot
be a 'controversy arising out of intra-corporate or
partnership relations between and among
stockholders, members or associates; between any
or all of them and the corporation, partnership or
association of which they are stockholders, members
or associates, respectively,' which controversies are
under the original and exclusive jurisdiction of the
Securities & Exchange Commission, pursuant to
Section 5 [b] of P.D. No. 902-A. ...
As heretofore pointed out, petitioner Union Glass is
involved only in the first cause of action of Hofileñas
complaint in SEC Case No, 2035. While the Rules of
Court, which applies suppletorily to proceedings
before the SEC, allows the joinder of causes of action
in one complaint, such procedure however is subject
to the rules regarding jurisdiction, venue and joinder
of parties. 9 Since petitioner has no intra-corporate
relationship with the complainant, it cannot be
joined as party-defendant in said case as to do so
would violate the rule or jurisdiction. Hofileñas
complaint against petitioner for cancellation of the
sale of the glass plant should therefore be brought
separately before the regular court But such action, if
instituted, shall be suspended to await the final
outcome of SEC Case No. 2035, for the issue of the
validity of the dacion en pago posed in the last
mentioned case is a prejudicial question, the
resolution of which is a logical antecedent of the
issue involved in the action against petitioner Union
Glass. Thus, Hofileñas complaint against the latter
can only prosper if final judgment is rendered in SEC
Case No. 2035, annulling the dacion en
pago executed in favor of the DBP.
WHEREFORE, the instant petition is hereby granted,
and the questioned Orders of respondent SEC, dated
September 25, 1981, March 25, 1982 and May 28,
1982, are hereby set aside. Respondent Commission
is ordered to drop petitioner Union Glass from SEC
Case No. 2035, without prejudice to the filing of a
separate suit before the regular court of justice. No
pronouncement as to costs.
SO ORDERED.1äwphï1.ñët
Concepcion, Jr., Guerrero, Abad Santos, De Castro,
Melencio-Herrera, Plana, Relova and Gutierrez, Jr., JJ.,
concur.
SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC.
TRONIC SYSTEMS, INC., petitioners,
vs.
HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL
TRIAL COURT (NATIONAL CAPITAL JUDICIAL REGION,
BRANCH CLX-PASIG), SPOUSES AGAPITO BRAGA AND
VIRGINIA BRAGA, VIRGILIO BRAGA AND NORBERTO
BRAGA, respondents.
No. L-68450-51 May 19, 1987
POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA,
VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA
BRAGA, petitioners,
vs.
THE HONORABLE SECURITIES AND EXCHANGE
COMMISSION, TELECTRONIC SYSTEMS, INC., JOSE
ABEJO, JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE,
SR., ANDRES T. VELARDE AND L. QUIDATO
BANDOLINO, respondents.
TEEHANKEE, C.J.:
These two cases, jointly heard, are jointly herein
decided. They involve the question of who, between
the Regional Trial Court and the Securities and
Exchange Commission (SEC), has original and
exclusive jurisdiction over the dispute between the
principal stockholders of the corporation Pocket Bell
Philippines, Inc. (Pocket Bell), a "tone and voice
paging corporation," namely, the spouses Jose Abejo
and Aurora Abejo (hereinafter referred to as the
Abejos) and the purchaser, Telectronic Systems, Inc.
(hereinafter referred to as Telectronics) of their
133,000 minority shareholdings (for P5 million) and
of 63,000 shares registered in the name of Virginia
Braga and covered by five stock certificates endorsed
in blank by her (for P1,674,450.00), and the spouses
Agapito Braga and Virginia Braga (hereinafter
referred to as the Bragas), erstwhile majority
stockholders. With the said purchases, Telectronics
would become the majority stockholder, holding 56%
of the outstanding stock and voting power of the
corporation Pocket Bell.
With the said purchases in 1982, Telectronics
requested the corporate secretary of the corporation,
Norberto Braga, to register and transfer to its name,
and those of its nominees the total 196,000 Pocket
Bell shares in the corporation's transfer book, cancel
the surrendered certificates of stock and issue the
corresponding new certificates of stock in its name
and those of its nominees.
Norberto Braga, the corporate secretary and son of
the Bragas, refused to register the aforesaid transfer
of shares in t e corporate oo s, asserting that the
Bragas claim preemptive rights over the 133,000
Abejo shares and that Virginia Braga never
transferred her 63,000 shares to Telectronics but had
lost the five stock certificates representing those
shares.
This triggered off the series of intertwined actions
between the protagonists, all centered on the
question of jurisdiction over the dispute, which were
to culminate in the filing of the two cases at bar.
The Bragas assert that the regular civil court has
original and exclusive jurisdiction as against the
Securities and Exchange Commission, while the
Abejos claim the contrary. A summary of the actions
resorted to by the parties follows:
A. ABEJOS ACTIONS IN SEC
1. The Abejos and Telectronics and the latter's
nominees, as new majority shareholders, filed SEC
Cases Nos. 02379 and 02395 against the Bragas on
December 17, 1982 and February 14, 1983,
respectively.
2. In SEC Case No. 02379, they prayed for mandamus
from the SEC ordering Norberto Braga, as corporate
secretary of Pocket Bell to register in their names the
transfer and sale of the aforesaid 196,000 Pocket Bell
shares (of the Abejos 1 and Virginia Braga 2, cancel
the surrendered certificates as duly endorsed and to
issue new certificates in their names.
3. In SEC Case No.02395, they prayed
for injunction and a temporary restraining order that
the SEC enjoin the Bragas from disbursing or
disposing funds and assets of Pocket Bell and from
performing such other acts pertaining to the
functions of corporate officers.
4. Pocket Bell's corporate secretary, Norberto Braga,
filed a Motion to Dismiss the mandamus case (SEC
Case No. 02379) contending that the SEC has no
jurisdiction over the nature of the action since it does
not involve an intracorporate controversy between
stockholders, the principal petitioners therein,
Telectronics, not being a stockholder of record of
Pocket Bell.
5. On January 8, 1983, SEC Hearing Officer Joaquin
Garaygay denied the motion. On January 14, 1983,
the corporate secretary filed a Motion for
Reconsideration. On March 21, 1983, SEC Hearing
Officer Joaquin Garaygay issued an order granting
Braga's motion for reconsideration and dismissed
SEC Case No. 02379.
6. On February 11, 1983, the Bragas filed their
Motion to Dismiss the injunction case, SEC Case No.
02395. On April 8, 1985, the SEC Director, Eugenio
Reyes, acting upon the Abejos'ex-parte motion,
created a three-man committee composed of Atty.
Emmanuel Sison as Chairman and Attys. Alfredo Oca
and Joaquin Garaygay as members, to hear and
decide the two SEC cases (Nos. 02379 and 02395).
7. On April 13, 1983, the SEC three-man committee
issued an order reconsidering the aforesaid order of
March 21, 1983 of the SEC Hearing Officer Garaygay
(dismissing the mandamus petition SEC Case No.
02379) and directing corporate secretary Norberto
Braga to file his answer to the petitioner therein.
B. BRAGAS' ACTION IN SEC
8. On December 12, 1983, the Bragas filed a petition
for certiorari, prohibition and mandamus with the
SEC en banc, SEC Case No. EB #049, seeking the
dismissal of SEC Cases Nos.' 02379 and 02395 for
lack of jurisdiction of the Comn-iission and the
setting aside of the various orders issued by the SEC
three-man committee in the course of the
proceedings in the two SEC cases.
9. On May 15, 1984, the SEC en banc issued an order
dismissing the Bragas' petition in SEC Case No.
EB#049 for lack of merit and at the same time
ordering the SEC Hearing Committee to continue
with the hearings of the Abejos and Telectronics SEC
Cases Nos. 02379 and 02395, ruhng that the "issue is
not the ownership of shares but rather the
nonperformance by the Corporate Secretary of the
ministerial duty of recording transfers of shares of
stock of the corporation of which he is secretary."
10. On May 15, 1984 the Bragas filed a motion for
reconsideration but the SEC en banc denied the same
on August 9, 1984.
C. BRAGAS' ACTION IN CFI (NOWRTC)
11. On November 25, 1982, following the corporate
secretary's refusal to register the transfer of the
shares in question, the Bragas filed a complaint
against the Abejos and Telectronics in the Court of
First Instance of Pasig, Branch 21 (now the Regional
Trial Court, Branch 160) docketed as Civil Case No.
48746 for: (a) rescission and annulment of the sale of
the shares of stock in Pocket Bell made by the Abejos
in favor of Telectronics on the ground that it violated
the Bragas' alleged pre-emptive right over the Abej
os' shareholdings and an alleged perfected contract
with the Abejos to sell the same shares in their
(Bragas) favor, (Ist cause of action); plus damages for
bad faith; and (b) declaration ofnullity of any transfer,
assignment or endorsement of Virginia Bragas' stock
certificates for 63,000 shares in Pocket Ben to
Telectronics for want of consent and consideration,
alleging that said stock certificates, which were
intended as security for a loan application and were
thus endorsed by her in blank, had been lost
(2nd cause of action).
12. On January 4, 1983, the Abejos filed a Motion to
Dismiss the complaint on the ground that it is the
SEC that is vested under PD 902-A with original and
exclusive jurisdiction to hear and decide cases
involving, among others, controversies "between and
among stockholders" and that the Bragas' suit is such
a controversy as the issues involved therein are the
stockholders' alleged pre-emptive rights, the validity
of the transfer and endorsement of certificates of
stock, the election of corporate officers and the
management and control of the corporation's
operations. The dismissal motion was granted by
Presiding Judge G. Pineda on January 14, 1983.
13. On January 24, 1983, the Bragas filed a motion
for reconsideration. The Abejos opposed. Meanwhile,
respondent Judge Rafael de la Cruz was appointed
presiding judge of the court (renamed Regional Trial
Court) in place of Judge G. Pineda.
14. On February 14, 1983, respondent Judge de la
Cruz issued an order rescinding the January 14, 1983
order and reviving the temporary restraining order
previously issued on December 23, 1982 restraining
Telectronics' agents or representatives from
enforcing their resolution constituting themselves as
the new set of officers of Pocket Bell and from
assuming control of the corporation and discharging
their functions.
15. On March 2, 1983, the Abejos filed a motion for
reconsideration, which motion was duly opposed by
the Bragas. On March 11, 1983, respondent Judge
denied the motion for reconsideration.
D. ABEJOS' PETITION AT BAR
16. On March 26, 1983, the Abejos, alleging that the
acts of respondent Judge in refusing to dismiss the
complaint despite clear lack of jurisdiction over the
action and in refusing to reconsider his erroneous
position were performed without jurisdiction and
with grave abuse of discretion, filed their herein
Petition for certiorari and Prohibition with
Preliminary Injunction. They prayed that the
challenged orders of respondent Judge dated
February 14, 1983 and March 11, 1983 be set aside
for lack of jurisdiction and that he be ordered to
permanently desist from further proceedings in Civil
Case No. 48746. Respondent judge desisted from
further proceedings in the case, dispensing with the
need of issuing any restraining order.
E. BRAGAS' PETITION AT BAR
17. On August 29, 1984, the Bragas, alleging in turn
that the SEC has no jurisdiction over SEC Cases Nos.
02379 and 02395 and that it acted arbitrarily,
whimsically and capriciously in dismissing their
petition (in SEC Case No. EB #049) for dismissal of the
said cases, filed their herein Petition for certiorari
and Prohibition with Preliminary Injunction or TRO.
The petitioner seeks the reversal and/or setting aside
of the SEC Order dated May 15, 1984 dismissing their
petition in said SEC Case No. EB #049 and sustaining
its jurisdiction over SEC Cases Nos. 02379 and 02395,
filed by the Abejos. On September 24, 1984, this
Court issued a temporary restraining order to
maintain the status quo and restrained the SEC
and/or any of its officers or hearing committees from
further proceeding with the hearings in SEC Cases
Nos. 02379 and 02395 and from enforcing any and
all orders and/or resolutions issued in connection
with the said cases.
The cases, having been given due course, were
jointly heard by the Court on March 27, 1985 and the
parties thereafter filed on April 16, 1985 their
respective memoranda in amplification of oral
argument on the points of law that were crystalled
during the hearing,
The Court rules that the SEC has original and
exclusive jurisdiction over the dispute between the
principal stockholders of the corporation Pocket Bell,
namely, the Abejos and
Telectronics, the purchasers of the 56% majority
stock (supra, at page 2) on the one hand, and the
Bragas, erstwhile majority stockholders, on the other,
and that the SEC, through its en banc Resolution of
May 15, 1984 co"ectly ruled in dismissing the Bragas'
Petition questioning its jurisdiction, that "the issue is
not the ownership of shares but rather the
nonperformance by the Corporate Secretary of the
ministerial duty of recording transfers of shares of
stock of the Corporation of which he is secretary."
1. The SEC ruling upholding its primary and exclusive
jurisdiction over the dispute is correctly premised on,
and fully supported by, the applicable provisions of
P.D. No. 902-A which reorganized the SEC with
additional powers "in line with the government's
policy of encouraging investments, both domestic
and foreign, and more active publicParticipation in
the affairs of private corporations and enterprises
through which desirable activities may be pursued
for the promotion of economic development; and, to
promote a wider and more meaningful equitable
distribution of wealth," and accordingly provided
that:
SEC. 3. The Commission shall have absolute
jurisdiction, supervision and control ouer all
corporations, partnerships or associations, who are
the grantees of primary franchise and/or a license or
permit issued by the government to operate in the
Philippines; ...
SEC. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of
associations registered with it as expressly granted
under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide
cases involving:
a) Devices or schemes employed by or any acts, of
the board of directors, business associations, its
officers or partners, amounting to fruud and
misrepresentation which may be detrimental to the
interest of the public andlor of the stockholder,
partners, members of associations or organizations
registered with the Commission.
b) Controversies arising out of intracorporate or
partnership relations, between and among
stockholders, members, or associates; between any
andlor all of them and the corporation, partnership
or association of which they are stockholders,
members or assmiates, respectively; and between
such corporation, partnership or assmiation and the
state insofar as it concems their individual franchise
or right to exist as such entity;
c) Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations. 3
Section 6 further grants the SEC "in order to
effectively exercise such jurisdiction," the
power, inter alia, "to issue preliminary or permanent
injunctions, whether prohibitory or mandatory, in all
cases in which it has jurisdiction, and in which cases
the pertinent provisions of the Rules of Court shall
apply."
2. Basically and indubitably, the dispute at bar, as
held by the SEC, is an intracorporate dispute that has
arisen between and among the principal
stockholders of the corporation Pocket Bell due to
the refusal of the corporate secretary, backed up by
his parents as erstwhile majority shareholders, to
perform his "ministerial duty" to record the transfers
of the corporation's controlling (56%) shares of stock,
covered by duly endorsed certificates of stock, in
favor of Telectronics as the purchaser thereof.
mandamus in the SEC to compel the corporate
secretary to register the transfers and issue new
certificates in favor of Telectronics and its nominees
was properly resorted to under Rule XXI, Section 1 of
the SEC's New Rules of Procedure, 4 which provides
for the filing of such petitions with the SEC. Section 3
of said Rules further authorizes the SEC to "issue
orders expediting the proceedings ... and also [to]
grant a preliminary injunction for the preservation of
the rights of the parties pending such proceedings, "
The claims of the Bragas, which they assert in their
complaint in the Regional Trial Court, praying for
rescission and annulment of the sale made by the
Abejos in favor of Telectronics on the ground that
they had an alleged perfected preemptive right over
the Abejos' shares as well as for annulment of sale to
Telectronics of Virginia Braga's shares covered by
street certificates duly endorsed by her in blank, may
in no way deprive the SEC of its primary and
exclusive jurisdiction to grant or not the writ of
mandamus ordering the registration of the shares so
transferred. The Bragas' contention that the question
of ordering the recording of the transfers ultimately
hinges on the question of ownership or right thereto
over the shares notwithstanding, the jurisdiction
over the dispute is clearly vested in the SEC.
3. The very complaint of the Bragas for annulment of
the sales and transfers as filed by them in the regular
court questions the validity of the transfer and
endorsement of the certificates of stock, claiming
alleged pre-emptive rights in the case of the Abejos'
shares and alleged loss of thio certificates and lack of
consent and consideration in the case of Virginia
Braga's shares. Such dispute c learly involve's
controversies "between and among stockholders, "
as to the Abej os' right to sell and dispose of their
shares to Telectronics, the validity of the latter's
acquisition of Virginia Braga's shares, who between
the Bragas and the Abejos' transferee should be
recognized as the controlling shareholders of the
corporation, with the right to elect the corporate
officers and the management and control of its
operations. Such a dispute and case clearly fag within
the original and exclusive jurisdiction of the SEC to
decide, under Section 5 of P.D. 902-A, above-quoted.
The restraining order issued by the Regional Trial
Court restraining Telectronics agents and
representatives from enforcing their resolution
constituting themselves as the new set of officers of
Pocket Bell and from assuming control of the
corporation and discharging their functions patently
encroached upon the SEC's exclusive jurisdiction over
such specialized corporate controversies calling for
its special competence. As stressed by the Solicitor
General on behalf of the SEC, the Court has held that
"Nowhere does the law [PD 902-A] empower any
Court of First Instance [now Regional Trial Court] to
interfere with the orders of the Commission," 5 and
consequently "any ruling by the trial court on the
issue of ownership of the shares of stock is not
binding on the Commission 6 for want of jurisdiction.
4. The dispute therefore clearly falls within the
general classification of cases within the SEC's
original and exclusive jurisdiction to hear and decide,
under the aforequoted governing section 5 of the
law. Insofar as the Bragas and their corporate
secretary's refusal on behalf of the corporation
Pocket Bell to record the transfer of the 56% majority
shares to Telectronics may be deemed a device or
scheme amounting to fraud and misrepresentation
emplolyed by them to keep themselves in control of
the corporation to the detriment of Telectronics (as
buyer and substantial investor in the corporate stock)
and the Abejos (as substantial stockholders-sellers),
the case falls under paragraph (a). The dispute is
likewise an intra-corporate controversy between and
among the majority and minority stockholders as to
the transfer and disposition of the controlling shares
of the corporation, failing under paragraph (b). As
stressed by the Court in DMRC Enterprises v. Este del
Sol Mountain Reserve, Inc, 7 Considering the
announced policy of PD 902-A, the expanded
jurisdiction of the respondent Securities and
Exchange Commission under said decree extends
exclusively to matters arising from contracts
involving investments in private corporations,
partnerships and associations." The dispute also
concerns the fundamental issue ofwhether the
Bragas or Telectronics have the right to elect the
corporate directors and officers and manage its
business and operations, which falls under paragraph
(c).
5. Most of the cases that have come to this Court
involve those under paragraph (b), i.e. whether the
controversy is an intra-corporate one, arising
"between and among stockholders" or "between any
or allof them and the corporation." The parties have
focused their arguments on this question. The
Bragas' contention in his field must likewise fail.
In Philex Mining Corp. v. Reyes, 8 the Court spelled
out that"'an intra-corporate controversy is one which
arises between a stockholder and the corporation.
There is no distinction, qualification, nor any
exemption whatsoever. The provision is broad and
covers all kinds of controversies between
stockholders and corporations. The issue of whether
or not a corporation is bound to replace a
stockholder's lost certificate of stock is a matter
purely between a stockholder and the corporation. It
is a typical intra-corporate dispute. The quqsjion of
damage's raised is merely incidental to that main
issue. The Court rejected the stockholders' theory of
excluding his complaint (for replacement of a lost
stock [dividend] certificate which he claimed to have
never received) from the classification of
intra-corporate controversies as one that "does not
square with the intent of the law, which is to
segregate from the general jurisdiction of regular
Courts controversies involving corporations and their
stockholders and to bring them to the SEC for
exclusive resolution, in much the same way that
labor disputes are now brought to the Ministry-of
Labor and Employment (MOLE) and the National
Labor Relations Commission (NLRC), and not to the
Courts."
(a) The Bragas contend that Telectronics, as
buyertransferee of the 56% majority shares is not a
registered stockholder, because they, through their
son the corporate secretary, appear to have refused
to perform "the ministerial duty of recording
transfers of shares of stock of the corporation of
which he is the secretary," and that the dispute is
therefore, not an intracorporate one. This contention
begs the question which must properly be resolved
by the SEC, but which they would prevent by their
own act, through their son, of blocking the due
recording of the transfer and cannot be sanctioned.
It can be seen from their very complaint in the
regular courts that they with their two sons
constituting the plaintiffs are all stockholders while
the defendants are the Abejos who are also
stockholders whose sale of the shares to Telectronics
they would annul.
(b) There can be no question that the dispute
between the Abejos and the Bragas as to the sale
and transfer of the former's shares to Telectronics
for P5 million is an intracorporate one under section
5 (b), prescinding from the applicability of section 5
(a) and (c), (supra, par. 4) lt is the SEC which must
resolve the Bragas' claim in their own complaint in
the court case filed by them of an alleged
pre-emptive right to buy the Abejos' shares by virtue
of "on-going negotiations," which they may submit as
their defense to the mandamus petition to register
the sale of the shares to Telectronics. But asserting
such preemptive rights and asking that the same be
enforced is a far cry from the Bragas' claim that "the
case relates to questions of ownership" over the
shares in question. 9 (Not to mention, as pointed out
by the Abejos, that the corporation is not a close
corporation, and no restriction over the free
transferability of the shares appears in the Articles of
Incorporation, as well as in the by-laws 10 and the
certificates of stock themselves, as required by law
for the enforcement of such restriction. See Go Soc &
Sons, etc. v. IAC, G.R. No. 72342, Resolution of
February 19, 1987.)
(c) The dispute between the Bragas and Telectronics
as to the sale and transfer for P1,674,450.00 of
Virginia Braga's 63.000 shares covered by Street
certificates duly endorsed in blank by her is within
the special competence and jurisdiction of the SEC,
dealing as it does with the free transferability of
corporate shares, particularly street certificates," as
guaranteed by the Corporation Code and its
proclaimed policy of encouraging foreign and
domestic investments in Philippine private corpora.
tions and more active public participation therein for
the Promotion of economic development. Here again,
Virginia Braga's claim of loss of her street
certificates 11 or theft thereof (denounced by
Telectronics as 11 perjurious" 12 ) must be pleaded
by her as a defense against Telectronics'petition for
mandamus and recognition now as the controlling
stockholder of the corporation in the light of the joint
affidavit of Geneml Cerefino S. Carreon of the
National Telecommunications Commission and
private respondent Jose Luis Santiago of Telectronics
narrating the facts and circumstances of how the
former sold and delivered to Telectronics on behalf
of his compadres, the Bragas, Virginia Braga's street
certificates for 63,000 shares equivalent to 18% of
the corporation's outstanding stock and received the
cash price thereof. 13 But as to the sale and transfer
of the Abejos' shares, the Bragas cannot oust the SEC
of its original and exclusive jurisdiction to hear and
decide the case, by blocking through the corporate
secretary, their son, the due recording of the transfer
and sale of the shares in question and claiming that
Telectronics is not a stockholder of the corporation –
which is the very issue that the SEC is called upon to
resolve. As the SEC maintains, "There is no
requirement that a stockholder of a corporation
must be a registered one in order that,the Securities
and Exchange Commission may take cognizance of a
suit seeking to enforce his rights as such
stockholder." 14 This is because the SEC by express
mandate has "absolute jurisdiction, supervision and
control over all corporations" and is called upon to
enforce the provisions of the Corporation Code,
among which is the stock purchaser's right to secure
the corresponding certificate in his name under the
provisions of Section 63 of the Code. Needless to say,
any problem encountered in securing the certificates
of stock representing the investment made by the
buyer must be expeditiously dealt with through
administrative mandamus proceedings with the SEC,
rather than through the usual tedious regular court
procedure. Furthermore, as stated in the SEC order
of April 13, 1983, notice given to the corporation of
the sale of the shares and presentation of the
certificates for transfer is ,equivalent to registration:
"Whether the refusal of the (corporation) to effect
the same is ivalid or not is still subject to the
outcome of the hearing on the merits of the case. 15
6. In the fifties, the Court taking cognizance of the
move to vest jurisdiction in administrative
commissions and boards the power to resolve
specialized disputes in the field of labor (as in
corporations, public transportation and public
utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of
labor-management controversies likely to cause
strikes or lockouts meant such jurisdiction to be
exclusive, although it did not so expressly state in the
law. The Court held that under the "sense-making
and expeditious doctrine of primary jurisdiction ...
the courts cannot or will n6t determine a controversy
involving a question which is within the jurisdiction of
an administrative tribunal, where the question
demands the exercise of sound administrative
discretion requiring the special knowledge,
experience, and seruices of the administratiue
tribunal to determine technical and intricate matters
of fact, and a uniformity of ruling is essential to
comply uith the purposes of the regulatory statute
administered " 16
In this era of clogged court dockets, the need for
specialized administrative boards or commissions
with the special knowledge, experience and
capability to hear and determine promptly disputes
on technical matters or essentially factual matters,
subject to judicial review in case of grave abuse of
discretion, has become well nigh indispensable. Thus,
in 1984, the Court noted that "between the power
lodged in an administrative body and a court, the
unmistakable trend has been to refer it to the former.
'Increasingly, this Court has been committed to the
view that unless the law speaks clearly and
unequivocably, the choice should fall on [an
administrative agency.]' " 17 The Court in the earlier
case of Ebon vs. De Guzman 18 noted that the
lawmaking authority, in restoring to the labor
arbiters and the NLRC their jurisdiction to award all
kinds of damages in labor cases, as against the
previous P.D. amendment splitting their jurisdiction
with the regular courts, "evidently ... had second
thoughts about depriving the Labor Arbiters and the
NLRC of the jurisdiction to award damages in labor
cases because that setup would mean duplicity of
suits, splitting the cause of action and possible
conflicting findings and conclusions by two tribunals
on one and the same claim."
7. Thus, the Corporation Code (B.P. No. 178) enacted
on May 1, 1980 specifically vests the SEC with the
Rule-making power in the discharge of its task of
implementing the provisions of the Code and
particularly charges it with the duty of preventing
fraud and abuses on the part of controlling
stockholders, directors and officers, as follows:
SEC. 143. Rule-making power of the Securities and
Exchange Commission. — The Securities and
Exchange Commission shall have the power and
authority to implement the provisions of this Code,
and to promulgate rules and regulations reasonably
necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud and
abuses on the part of the controlling stockholders,
members, directors, trustees or officers. (Emphasis
supplied)
The dispute between the contending parties for
control of thecorporation manifestly fans within the
primary and exclusive jurisdiction of the SEC in whom
the law has reserved such jurisdiction as an
administrative agency of special competence to deal
promptly and expeditiously therewith.
As the Court stressed in Union Glass & Container
Corp. v. SEC, 19 "This grant of jurisdiction [in Section
51 must be viewed in the light of the nature and
functions of the SEC under the law. Section 3 of PD
No. 902-A confers upon the latter 'absolute
jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are
grantees of primary franchise and/or license or
permit issued by the government to operate in the
Philippines ... The principal function of the SEC is the
supervision and control over corporations,
partnerships and associations with the end in view
that investment in these entities may be encouraged
and protected, and their activities pursued for the
promotion of economic development.
"It is in aid of this office that the adjudicative power
of the SEC must be exercised. Thus the law explicitly
specified and delin-dted its jurisdiction to matters
intrinsically connected with the regulation of
corporations, partnerships and associations and
those dealing with the internal affairs of such
corporations, partnerships or associations.
"Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain to
any of the following relationships: [al between the
corporation, partnership or association and the
public; [b] between the corporation, partnership or
association and its stockholders, partners, members,
or officers; [c] between the corporation, partnership
or association and the state in so far as its franchise,
permit or license to operate is concerned; and Id]
among the stockholders, partners or associates
themselves." 20
Parenthetically, the cited case of Union
Glass illustrates by way of contrast what disputes do
not fall within the special jurisdiction of the SEC. In
this case, the SEC had properly assumed jurisdiction
over the dissenting stockholders' com. Plaint against
the corporation Pioneer Glass questioning its dacion
en pago of its glass plant and all its assets in favor of
the DBP which was clearly an intra-corporate
controversy dealing with its internal affairs. But the
Court held that the SEC had no jurisdiction over
petitioner Union Glass Corp., imPle,aded as third
party purchaser of the plant from DBP in the action
to annul the dacion en pago. The Court held that
such action for recovery of the glass plant could be
brought by the dissenting stockholder to the regular
courts only if and when the SE C rendered final
judgment annulling the dacion en pago and
furthermore subject to Union Glass' defenses as a
third party buyer in good faith. Similarly, in
the DMRC case, therein petitioner's,tomplaint for
collection of the amounts due to it as payment of
rentals for the lease of its heavy equipment in the
form mainly of cash and part in shares of stock of the
debtor-defendant corporation was held to be not
covered by the SEC's exclusive jurisdiction over
intracorporate disputes, since "to pass upon a money
claim under a lease contract would be beyond the
competence Of the Securities and Exchange
Commission and to separate the claim for money
from the claim for shares of stock would be splitting
a single cause of action resulting in a multiplicity of
suitS." 21 Such an action for collection of a debt does
not involve enforcement Of rights and obligations
under the Corporation Code nor the in. temal or
intracorporate affairs of the debtor corporation. But
in aR disputes affecting and dealing With the
interests of the corporation and its stockholders,
following the trend and clear legislative intent of
entmsting all disputes of a specialized nature to
administrative agencies possessing. the requisite
competence, special knowledge, experience and
services and facilities to expeditiously resolve them
and determine the essential facts including technical
and intricate matters, as in labor and public utilities
rates disputes, the SEC has been given "the original
and exclusive jurisdiction to hear anddecide" them
(under section 5 of P.D. 902-A) "in addition to [its]
regulatory and adjudicative functions" (under Section
3, vesting in it "absolute jurisdiction, supervision and
control over all corporations" and the Rule-making
power granted it in Section 143 of the Corporation
Code, supra). As stressed by the Court in
the Philex case, supra, "(T)here is no distinction,
qualification, nor any exemption whatsoever. The
provision is broad and covers all kinds of
controversies between stockholders and
corporations."
It only remains now to deal with the Order dated
April 15, 1983 (Annex H, Petition) 22 of the SEC's
three-member Hearing Conunittee granting
Telectronics' motion for creation of a receivership or
management committee with the ample powers
therein enumerated for the preservation pendente
lite of the corporation's assets and in discharge of its
"power and duty to preserve the rights of the parties,
the stockholders, the public availing of the
corporation's services and the rights of creditors," as
well as "for reasons of equity and justice ... (and) to
prevent possible paralization of corporate business."
The said Order has not been implemented
notwithstanding its having been upheld per the SEC
en banc's Order of May 15, 1984 (Annex "V", Petition)
dismissing for lack of merit the petition for certiorari,
prohibition and mandamus with prayer for
restraining order or injunction filed by the Bragas
seeking the disbandment of the Hearing Committee
and the setting aside of its Orders, and its Resolution
of August 9, 1984, denying reconsideration (Annex
"X", Petition), due to the Bragas' filing of the petition
at bar.
Prescinding from the great concern of damage and
prejudice expressed by Telectronics due to the
Bragas having remained in control of the corporation
and having allegedly committed acts of gross
mismanagement and misapplication of funds, the
Court finds that under the facts and circumstances of
record, it is but fair and just that the SEC's order
creating a receivership committee be implemented
forthwith, in accordance with its terms, as follows:
The three-man receivership committee shall be
composed of a representative from the commission,
in the person of the Director, Examiners and
Appraisers Department or his designated
representative, and a representative from the
petitioners and a representative of the respondent.
The petitioners and respondent are therefore
directed to sub. mit to the Commission the name of
their designated representative within three (3) days
from receipt of this order. The Conunission shall
appoint the other representatives if either or both
parties fafl to comply with the requirement within
the stated time.
ACCORDINGLY, judgment is hereby rendered:
(a) Granting the petition in G.R. No. 63558, annulling
the challenged Orders of respondent Judge clated
February 14, 1983 and March i 1, 1983 (Annexes "L"
and "P" of the Abejos' petition) and prohibiting
respondent Judge from further proceeding in Civil
Case No. 48746 filed in his Court other than to
dismiss the same for lack or jurisdiction over the
subject-matter;
(b) Dismissing the petition in G.R. Nos. 68450-51 and
lifting the temporary restraining order issued on
September 24, 1984, effective immediately upon
promulgation hereof,
(c) Directing the SEC through its Hearing Committee
to proceed immediately with hearing and resolving
the pending mandamus petition for recording in the
corporate books the transfer to Telectronics and its
nominees of the majority (56%) shares of stock of the
corporation Pocket Bell pertaining to the Abejos and
Virginia Braga and all related issues, taking into
consideration, without need of resubmittal to it, the
pleadings, annexes and exhibits filed by the
contending parties in the cases at bar; and
(d) Likewise directing the SEC through its Hearing
Committee to proceed immediately with the
implementation of its receivership or management
committee Order of April 15, 1983 in SEC Case No.
2379 and for the purpose, the contending parties are
ordered to submit to said Hearing Committee the
name of their designated representatives in the
receivership/management committee within three (3)
days from receipt of this decision, on pain of
forfeiture of such right in case of failure to comply
herewith, as provided in the said Order; and ordering
theBragas to perform only caretaker acts in the
corporation pending the organization of such
receivership/management committee and
assumption of its functions.
This decision shall be immediately executory upon its
promulgation.
SO ORDERED.
ALMA MAGALAD, petitioner,
vs.
PREMIERE FINANCING CORP., respondent.
PARAS, J.:
This is an appeal originally filed with the Court of
Appeals but certified to this court for disposition
since it involves purely questions of law from the
decision of the Regional Trial Court (RTC), Branch
LXXXV, Quezon City, dated May 22, 1984, in Civil
Case No. Q-40392, ordering the defendant-appellant
Premiere Financing Corporation (Premiere for short)
to pay to the plaintiff-appellee Alma Magalad
(Magalad for short) the sum of:
(a) P50,000.00, the principal obligation, plus interest
at the legal rate from September 12, 1983, until the
full amount is paid; (b) P10,000.00, both for moral
and exemplary damages; (c) P5,000.00, for and as
attorney's fees and (d) the costs of suit.
The antecedent facts of the case are as follows:
Premiere is a financing company engaged in soliciting
and accepting money market placements or deposits
(Original Record, p. 29).
On September 12, 1983 with expired permit to issue
commercial papers (Ibid., p. 8) and with intention not
to pay or defraud its creditors, Premiere induced and
misled Magalad into making a money market
placement of P50,000.00 at 22% interest per
annum for which it issued a receipt (Ibid., Exh. "B", p.
8). Aside from the receipt, Premier likewise issued
two (2) post-dated checks in the total sum of
P51,079.00 (Ibid., Exh. "C", p. 9) and assigned to
Magalad its receivable from a certain David Saman
for the same amount (Ibid., Exh. "C", p. 10).
When the said checks were presented for payment
on their due dates, the drawee bank dishonored the
checks for lack of sufficient funds to cover the
amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12). Despite
demands by Magalad for the replacement of said
checks with cash, Premiere, for no valid reason,
failed and refused to honor such demands and due
to fraudulent acts of Premiere, Magalad suffered
sleepless nights, mental anguish, fright, serious
anxiety, considering the fact that the money she
invested is blood money and is the only source of
support for her family (Ibid., p. 4).
Magalad in order to seek redress and retrieve her
blood money, availed of the service of counsel for
which she agreed to pay twenty percent (20%) of the
amount due as and for attorney's fees (Ibid.)
On January 10, 1984, Magalad filed a complaint for
damages with prayer for writ of preliminary
attachment with the RTC, Branch LXXXV, Quezon City,
docketed as Civil Case No. Q-40392 against herein
Premiere (Ibid., p. 3-6).
Premiere having failed to file an answer and acting
on Magalad's motion, the lower court declared
Premiere in default by virtue of an order dated April
5, 1984 allowing Magalad to present
evidence ex-parte (Ibid., pp. 21; 22)
On May 22, 1984 the lower court rendered a default
judgment against Premiere, the dispositive portion of
which reads:
From the foregoing evidence, the court finds that
plaintiff has fully established her claim that
defendant had indeed acted fraudulently in incurring
the obligation and considering that no evidence has
been adduced by the defendant to contradict the
same, judgment is hereby rendered ordering the
defendant to pay plaintiff as follows:
(a) P50,000.00, the principal obligation, plus interest
at the legal rate from September 12, 1983 until the
full amount is paid;
(b) P10,000.00 both for moral and exemplary
damages;
(c) P5,000.00 for and as attorney's fees; and
(d) the costs of suit.
SO ORDERED. (Ibid., p. 30)
Premiere filed a motion for reconsideration of the
foregoing decision, based principally on a question of
law alleging that the Securities and Exchange
Commission (SEC) has exclusive and original
jurisdiction over a corporation under a state of
suspension of payments (Ibid., pp. 32-41).
Magalad filed an opposition to the motion for
reconsideration on January 8, 1985 alleging among
others that the regular court has jurisdiction over the
case to the exclusion of the SEC. (Ibid., pp. 51-53).
On May 28, 1986 the lower court issued an order
denying the motion for reconsideration (Ibid., p. 61).
On June 11, 1986 Premiere filed his notice of appeal
which led to the issuance of the order of the lower
court dated July 29, 1986 elevating the case to the
Court of Appeals (CA) (Ibid., pp. 62-63).
The Court of Appeals in its resolution dated
September 8, 1987 dismissed the case for failure of
Premiere to file its brief despite the ninety-day
extension granted to it, which expired on June 10,
1987 (Rollo, p. 16).
An omnibus motion for reconsideration and
admission of late filing of Premiere's brief was filed
on September 22, 1987 (Rollo, pp. 17-19; 32).
On September 30, 1987 the Court of Appeals issued
a resolution which reconsidered its previous
resolution dated September 5, 1987 and admitted
the Premiere's brief (Rollo, p. 26).
On January 31, 1989 the Court of Appeals issued a
resolution certifying the instant case to this Court on
the ground that the case involves a question of law,
the dispositive part of which stating:
ACCORDINGLY, pursuant to Rule 50, Sec. 3, in
relation to the Judiciary Act of 1948, Sec. 17, par. 4(3)
(4), the Appeal in this case is hereby certified to the
Supreme Court on the ground that the only issue
raised concerns the jurisdiction of the trial court and
only a question of law. (Rollo, p. 33)
Hence, this appeal.
The pivotal issue in this case is whether or not the
court a quo had jurisdiction to try the instant case.
At the very core of this appeal assailing the aforesaid
pronouncement of the lower court, and around
which revolve the arguments of the parties, is the
applicability of Presidential Decree No. 902-A
(Reorganization of the SEC with Additional Powers),
as amended by Presidential Decrees Nos. 1653, 1758
and 1799. Magalad submits that the legal suit which
she has brought against Premiere is an ordinary
action for damages with the preliminary attachment
cognizable solely by the RTC. Premiere, on the other
hand, espouses the original and exclusive jurisdiction
of the Securities and Exchange Commission.
Presidential Decree No. 902-A, Section 3, provides:
Sec. 3. The Commission shall have absolute
jurisdiction, supervision and control over all
corporations, partnerships or associations, who are
the grantees of primary franchises and/or a license
or permit issued by the government to operate in the
Philippines; and in the exercise of its authority, it
shall have the power to enlist the aid and support of
and to deputize any and all enforcement agencies of
the government, civil or military as well as any
private institution, corporation, firm, association or
person. (As amended by Presidential Decree No.
1758).
Sec. 3 of Pres. Decree No. 902-A should also be read
in conjunction with Sec. 5 of the same law, providing:
Sec. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of
associations registered with it as expressly granted
under the existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and
decide cases involving:
a) Devises or schemes employed by or any acts of the
Board of Directors, business associates, its officers or
partners, amounting to fraud and misrepresentation
which may be detrimental to the public and/or to the
stockholders, partners, members of associations or
organizations registered with the Commission.
(Emphasis supplied)
Considering that Magalad's complaint sufficiently
alleges acts amounting to fraud and
misrepresentation committed by Premiere, the SEC
must be held to retain its original and exclusive
jurisdiction over the case, despite the fact that the
suit involves collection of sums of money paid to said
corporation, the recovery of which would ordinarily
fall within the jurisdiction of regular courts. The fraud
committed is detrimental to the interest of the public
and, therefore, encompasses a category of
relationship within the SEC jurisdiction.
Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain to
any of the following relationships: (a) between the
corporation, partnership or association and the
public; (b) between the corporation, partnership or
association and its stockholders, partners, members
or officers; (c) between the corporation, partnership
or association and the state so far as its franchise,
permit or license to operate is concerned; and (d)
among the stockholders, partners or associates
themselves (Union Glass & Container Corp. v. SEC,
126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA
654, 1987).
In this case, the recitals of the complaint sufficiently
allege that devices or schemes amounting to fraud
and misrepresentation detrimental to the interest of
the public have been resorted to by Premiere
Corporation. It can not but be conceded, therefore,
that the SEC may exercise its adjudicative powers
pursuant to Sec. 5(a) of Pres. Decree No. 902-A
(Supra).
The fact that Premiere's authority to engage in
financing already expired will not have the effect of
divesting the SEC of its original and exclusive
jurisdiction. The expanded jurisdiction of the SEC was
conceived primarily to protect the interest of the
investing public. That Magalad's money placements
were in the nature of investments in Premiere can
not be gainsaid. Magalad had reasonably expected to
receive returns from moneys she had paid to
Premiere. Unfortunately, however, she was the
victim of alleged fraud and misrepresentation.
Reliance by Magalad on the cases of DMRC v. Este
del Sol, (132 SCRA 293) and Union Glass & Container
Corp. v. SEC (126 SCRA 31), where the jurisdiction of
the ordinary Courts was upheld, is misplaced for, as
explicitly stated in those cases, nowhere in the
complaints therein is found any averment of fraud or
misrepresentation committed by the respective
corporations involved. The causes of action,
therefore, were nothing more than simple money
claims.
Further bolstering the jurisdiction of the SEC in this
case is the fact that said agency had already
appointed a Rehabilitation Receiver for Premiere and
has directed all proceedings or claims against it be
suspended. This, pursuant to Sec. 6(c) of Pres.
Decree No. 902-A providing that "upon appointment
of a . . . rehabilitation receiver . . . all actions for
claims against corporations . . . under receivership
pending before any court, tribunal, board or body
shall be suspended accordingly."
By so doing, SEC has exercised its original and
exclusive jurisdiction to hear and decide cases
involving:
a) Petitions of corporations, partnerships or
associations to be declared in the state of suspension
of payments in cases where the corporation,
partnership or association possesses sufficient
property to cover all its debts but foresees the
impossibility of meeting them when they respectively
fall due or in cases where the corporation,
partnership or association has no sufficient assets to
cover its liabilities but is under the management of a
Rehabilitation Receiver or Management of a
Rehabilitation Receiver or Management Committee
created pursuant to this Decree. (Section 5(d) of Pres.
Decree No. 902-A as added by Pres. Decree 1758).
In fine, the adjudicative powers of the SEC being
clearly defined by law, its jurisdiction over this case
has to be upheld.
PREMISES CONSIDERED, the instant appeal is
GRANTED, and the order of the Presiding Judge of
the Regional Trial Court, Quezon City, Branch LXXXV
dated May 22, 1984, in Civil Case No. Q-40392 is
REVERSED and SET ASIDE, without prejudice to the
filing by Alma Magalad of the appropriate complaint
against Premiere Financing Corporation with the
Securities and Exchange Commission.
SO ORDERED.
HE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court
of Tax Appeals, reversing the decision of the
Collector of Internal Revenue, assessing against and
demanding from the "Club Filipino, Inc. de Cebu", the
sum of P12,068.84 as fixed and percentage taxes,
surcharge and compromise penalty, allegedly due
from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club
Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation organized under the laws of the
Philippines with an original authorized capital stock
of P22,000.00, which was subsequently increased to
P200,000.00, among others, to it "proporcionar,
operar, y mantener un campo de golf, tenis,
gimnesio (gymnasiums), juego de bolos (bowling
alleys), mesas de billar y pool, y toda clase de juegos
no prohibidos por leyes generales y ordenanzas
generales; y desarollar y cultivar deportes de toda
clase y denominacion cualquiera para el recreo y
entrenamiento saludable de sus miembros y
accionistas" (sec. 2, Escritura de Incorporacion del
Club Filipino, Inc. Exh. A). Neither in the articles or
by-laws is there a provision relative to dividends and
their distribution, although it is covenanted that
upon its dissolution, the Club's remaining assets,
after paying debts, shall be donated to a charitable
Philippine Institution in Cebu (Art. 27, Estatutos del
Club, Exh. A-a.).
The Club owns and operates a club house, a bowling
alley, a golf course (on a lot leased from the
government), and a bar-restaurant where it sells
wines and liquors, soft drinks, meals and short orders
to its members and their guests.
The bar-restaurant was a necessary incident to the
operation of the club and its golf-course. The club is
operated mainly with funds derived from
membership fees and dues. Whatever profits it had,
were used to defray its overhead expenses and to
improve its golf-course. In 1951. as a result of a
capital surplus, arising from the re-valuation of its
real properties, the value or price of which increased,
the Club declared stock dividends; but no actual cash
dividends were distributed to the stockholders. In
1952, a BIR agent discovered that the Club has never
paid percentage tax on the gross receipts of its bar
and restaurant, although it secured B-4, B-9(a) and
B-7 licenses. In a letter dated December 22, 1852,
the Collector of Internal Revenue assessed against
and demanded from the Club, the following sums: —
As percentage tax on its gross receipts
during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00
The Club wrote the Collector, requesting for the
cancellation of the assessment. The request having
been denied, the Club filed the instant petition for
review.
The dominant issues involved in this case are
twofold:
1. Whether the respondent Club is liable for the
payment of the sum of 12,068.84, as fixed and
percentage taxes and surcharges prescribed in
sections 182, 183 and 191 of the Tax Code, under
which the assessment was made, in connection with
the operation of its bar and restaurant, during the
periods mentioned above; and
2. Whether it is liable for the payment of the sum of
P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless
otherwise provided, every person engaging in a
business on which the percentage tax is imposed
shall pay in full a fixed annual tax of ten pesos for
each calendar year or fraction thereof in which such
person shall engage in said business." Section 183
provides in general that "the percentage taxes on
business shall be payable at the end of each calendar
quarter in the amount lawfully due on the business
transacted during each quarter; etc." And section
191, same Tax Code, provides "Percentage tax . . .
Keepers of restaurants, refreshment parlors and
other eating places shall pay a tax three per centum,
and keepers of bar and cafes where wines or liquors
are served five per centum of their gross receipts . . .".
It has been held that the liability for fixed and
percentage taxes, as provided by these sections,
does not ipso facto attach by mere reason of the
operation of a bar and restaurant. For the liability to
attach, the operator thereof must be engaged in the
business as a barkeeper and restaurateur. The plain
and ordinary meaning of business is restricted to
activities or affairs where profit is the purpose or
livelihood is the motive, and the term business when
used without qualification, should be construed in its
plain and ordinary meaning, restricted to
activities for profit or livelihood (The Coll. of Int. Rev.
v. Manila Lodge No. 761 of the BPOE [Manila Elks
Club] & Court of Tax Appeals, G.R. No. L-11176, June
29, 1959, giving full definitions of the word
"business"; Coll. of Int. Rev. v. Sweeney, et al.
[International Club of Iloilo, Inc.], G.R. No. L-12178,
Aug. 21, 1959, the facts of which are similar to the
ones at bar; Manila Polo Club v. B. L. Meer, etc., No.
L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to
develop and cultivate sports of all class and
denomination, for the healthful recreation and
entertainment of its stockholders and members; that
upon its dissolution, its remaining assets, after paying
debts, shall be donated to a charitable Philippine
Institution in Cebu; that it is operated mainly with
funds derived from membership fees and dues; that
the Club's bar and restaurant catered only to its
members and their guests; that there was in fact no
cash dividend distribution to its stockholders and
that whatever was derived on retail from its bar and
restaurant was used to defray its overall overhead
expenses and to improve its golf-course
(cost-plus-expenses-basis), it stands to reason that
the Club is not engaged in the business of an
operator of bar and restaurant (same authorities,
cited above).
It is conceded that the Club derived profit from the
operation of its bar and restaurant, but such fact
does not necessarily convert it into a profit-making
enterprise. The bar and restaurant are necessary
adjuncts of the Club to foster its purposes and the
profits derived therefrom are necessarily incidental
to the primary object of developing and cultivating
sports for the healthful recreation and entertainment
of the stockholders and members. That a Club makes
some profit, does not make it a profit-making Club.
As has been remarked a club should always strive,
whenever possible, to have surplus (Jesus Sacred
Heart College v. Collector of Int. Rev., G.R. No. L-6807,
May 24, 1954; Collector of Int. Rev. v. Sinco
Educational Corp., G.R. No. L-9276, Oct. 23,
1956).1äwphï1.ñët
It is claimed that unlike the two cases just cited
(supra), which are non-stock, the appellee Club is a
stock corporation. This is unmeritorious. The facts
that the capital stock of the respondent Club is
divided into shares, does not detract from the finding
of the trial court that it is not engaged in the business
of operator of bar and restaurant. What is
determinative of whether or not the Club is engaged
in such business is its object or purpose, as stated in
its articles and by-laws. It is a familiar rule that the
actual purpose is not controlled by the corporate
form or by the commercial aspect of the business
prosecuted, but may be shown by extrinsic evidence,
including the by-laws and the method of operation.
From the extrinsic evidence adduced, the Tax Court
concluded that the Club is not engaged in the
business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two
requisites must be complied with, to wit: (1) a capital
stock divided into shares and (2) an authority to
distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the
shares held (sec. 3, Act No. 1459). In the case at bar,
nowhere in its articles of incorporation or by-laws
could be found an authority for the distribution of its
dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock corporation,
within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be
deemed imposed upon fraternal, civic, non-profit,
nonstock organizations, unless the intent to the
contrary is manifest and patent" (Collector v. BPOE
Elks Club, et al., supra), which is not the case in the
present appeal.
Having arrived at the conclusion that respondent
Club is not engaged in the business as an operator of
a bar and restaurant, and therefore, not liable for
fixed and percentage taxes, it follows that it is not
liable for any penalty, much less of a compromise
penalty.
WHEREFORE, the decision appealed from is affirmed
without costs
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E.
DULAY AND NEPOMUCENO REDOVAN, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, EDGARDO D.
PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V.
VELOSO AND CASTRENSE C. VELOSO, respondents.
Virgilio E. Dulay for petitioners.
Torres, Tobias, Azura & Jocson for private
respondents.
NOCON, J.:
This is a petition for review on certiorari to annul and
set aside the decision 1 of the Court of Appeals
affirming the decision2 of the Regional Trial Court of
Pasay, Branch 114 Civil Cases Nos. 8198-P, and
2880-P, the dispositive portion of which reads, as
follows:
Wherefore, in view of all the foregoing
considerations, in this Court hereby renders
judgment, as follows:
In Civil Case No. 2880-P, the petition filed by Manuel
R. Dulay Enterprises, Inc. and Virgilio E. Dulay for
annulment or declaration of nullity of the decision of
the Metropolitan Trial Court, Branch 46, Pasay City,
in its Civil Case No. 38-81 entitled "Edgardo D.
Pabalan, et al., vs. Spouses Florentino Manalastas, et
al.," is dismissed for lack of merits;
In Civil Case No. 8278-P, the complaint filed by
Manuel R. Dulay Enterprises, Inc. for cancellation of
title of Manuel A. Torres, Jr. (TCT No. 24799 of the
Register of Deeds of Pasay City) and reconveyance, is
dismissed for lack or merit, and,
In Civil Case No. 8198-P, defendants Manuel R. Dulay
Enterprises, Inc. and Virgilio E. Dulay are ordered to
surrender and deliver possession of the parcel of
land, together with all the improvements thereon,
described in Transfer Certificate of Title No. 24799 of
the Register of Deeds of Pasay City, in favor of
therein plaintiffs Manuel A. Torres, Jr. as owner and
Edgardo D. Pabalan as real estate administrator of
said Manuel A. Torres, Jr.; to account for and return
to said plaintiffs the rentals from dwelling unit No.
8-A of the apartment building (Dulay Apartment)
from June 1980 up to the present, to indemnify
plaintiffs, jointly and severally, expenses of litigation
in the amount of P4,000.00 and attorney's fees in the
sum of P6,000.00, for all the three (3) cases.
Co-defendant Nepomuceno Redovan is ordered to
pay the current and subsequent rentals on the
premises leased by him to plaintiffs.
The counterclaim of defendants Virgilio E. Dulay and
Manuel R. Dulay Enterprises, Inc. and N. Redovan,
dismissed for lack of merit. With costs against the
three (3) aforenamed defendants. 3
The facts as found by the trial court are as follows:
Petitioner Manuel R. Dulay Enterprises, Inc, a
domestic corporation with the following as members
of its Board of Directors: Manuel R. Dulay with
19,960 shares and designated as president, treasurer
and general manager, Atty. Virgilio E. Dulay with 10
shares and designated as vice-president; Linda E.
Dulay with 10 shares; Celia Dulay-Mendoza with 10
shares; and Atty. Plaridel C. Jose with 10 shares and
designated as secretary, owned a property covered
by TCT No. 17880 4 and known as Dulay Apartment
consisting of sixteen (16) apartment units on a six
hundred eighty-nine (689) square meters lot, more
or less, located at Seventh Street (now Buendia
Extension) and F.B. Harrison Street, Pasay City.
Petitioner corporation through its president, Manuel
Dulay, obtained various loans for the construction of
its hotel project, Dulay Continental Hotel (now
Frederick Hotel). It even had to borrow money from
petitioner Virgilio Dulay to be able to continue the
hotel project. As a result of said loan, petitioner
Virgilio Dulay occupied one of the unit apartments of
the subject property since property since 1973 while
at the same time managing the Dulay Apartment at
his shareholdings in the corporation was
subsequently increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of
Board Resolution
No 186 of petitioner corporation sold the subject
property to private respondents spouses Maria
Theresa and Castrense Veloso in the amount of
P300,000.00 as evidenced by the Deed of Absolute
Sale.7 Thereafter, TCT No. 17880 was cancelled and
TCT No. 23225 was issued to private respondent
Maria Theresa Veloso. 8 Subsequently, Manuel Dulay
and private respondents spouses Veloso executed a
Memorandum to the Deed of Absolute Sale of
December 23, 1976 9 dated December 9, 1977 giving
Manuel Dulay within (2) years or until December 9,
1979 to repurchase the subject property for
P200,000.00 which was, however, not annotated
either in TCT No. 17880 or TCT No. 23225.
On December 24, 1976, private respondent Maria
Veloso, without the knowledge of Manuel Dulay,
mortgaged the subject property to private
respondent Manuel A. Torres for a loan of
P250,000.00 which was duly annotated as Entry No.
68139 in TCT No. 23225. 10
Upon the failure of private respondent Maria Veloso
to pay private respondent Torres, the subject
property was sold on April 5, 1978 to private
respondent Torres as the highest bidder in an
extrajudicial foreclosure sale as evidenced by the
Certificate of Sheriff's Sale 11 issued on April 20,
1978.
On July 20, 1978, private respondent Maria Veloso
executed a Deed of Absolute Assignment of the Right
to Redeem 12 in favor of Manuel Dulay assigning her
right to repurchase the subject property from private
respondent Torres as a result of the extra sale held
on April 25, 1978.
As neither private respondent Maria Veloso nor her
assignee Manuel Dulay was able to redeem the
subject property within the one year statutory period
for redemption, private respondent Torres filed an
Affidavit of Consolidation of Ownership 13 with the
Registry of Deeds of Pasay City and TCT No.
24799 14 was subsequently issued to private
respondent Manuel Torres on April 23, 1979.
On October 1, 1979, private respondent Torres filed
a petition for the issuance of a writ of possession
against private respondents spouses Veloso and
Manuel Dulay in LRC Case No. 1742-P. However,
when petitioner Virgilio Dulay was never authorized
by the petitioner corporation to sell or mortgage the
subject property, the trial court ordered private
respondent Torres to implead petitioner corporation
as an indispensable party but the latter moved for
the dismissal of his petition which was granted in an
Order dated April 8, 1980.
On June 20, 1980, private respondent Torres and
Edgardo Pabalan, real estate administrator of Torres,
filed an action against petitioner corporation, Virgilio
Dulay and Nepomuceno Redovan, a tenant of Dulay
Apartment Unit No. 8-A for the recovery of
possession, sum of money and damages with
preliminary injunction in Civil Case, No. 8198-P with
the then Court of First Instance of Rizal.
On July 21, 1980, petitioner corporation filed an
action against private respondents spouses Veloso
and Torres for the cancellation of the Certificate of
Sheriff's Sale and TCT No. 24799 in Civil Case No.
8278-P with the then Court of First Instance of Rizal.
On January 29, 1981, private respondents Pabalan
and Torres filed an action against spouses Florentino
and Elvira Manalastas, a tenant of Dulay Apartment
Unit No. 7-B, with petitioner corporation as
intervenor for ejectment in Civil Case No. 38-81 with
the Metropolitan Trial Court of Pasay City which
rendered a decision on April 25, 1985, dispositive
portion of which reads, as follows:
Wherefore, judgment is hereby rendered in favor of
the plaintiff (herein private respondents) and against
the defendants:
1. Ordering the defendants and all persons claiming
possession under them to vacate the premises.
2. Ordering the defendants to pay the rents in the
sum of P500.000 a month from May, 1979 until they
shall have vacated the premises with interest at the
legal rate;
3. Ordering the defendants to pay attorney's fees in
the sum of P2,000.00 and P1,000.00 as other
expenses of litigation and for them to pay the costs
of the suit.15
Thereafter or on May 17, 1985, petitioner
corporation and Virgilio Dulay filed an action against
the presiding judge of the Metropolitan Trial Court of
Pasay City, private respondents Pabalan and Torres
for the annulment of said decision with the Regional
Trial Court of Pasay in Civil Case No. 2880-P.
Thereafter, the three (3) cases were jointly tried and
the trial court rendered a decision in favor of private
respondents.
Not satisfied with said decision, petitioners appealed
to the Court of Appeals which rendered a decision on
October 23, 1989, the dispositive portion of which
reads, as follows:
PREMISES CONSIDERED, the decision being appealed
should be as it is hereby AFFIRMED in full. 16
On November 8, 1989, petitioners filed a Motion for
Reconsideration which was denied on January 26,
1990.
Hence, this petition.
During the pendency of this petition, private
respondent Torres died on April 3, 1991 as shown in
his death certificate 17 and named Torres-Pabalan
Realty & Development Corporation as his heir in his
holographic will 18 dated October 31, 1986.
Petitioners contend that the respondent court had
acted with grave abuse of discretion when it applied
the doctrine of piercing the veil of corporate entity in
the instant case considering that the sale of the
subject property between private respondents
spouses Veloso and Manuel Dulay has no binding
effect on petitioner corporation as Board Resolution
No. 18 which authorized the sale of the subject
property was resolved without the approval of all the
members of the board of directors and said Board
Resolution was prepared by a person not designated
by the corporation to be its secretary.
We do not agree.
Section 101 of the Corporation Code of the
Philippines provides:
Sec. 101. When board meeting is unnecessary or
improperly held. Unless the by-laws provide
otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors, or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiese of all the
stockholders, or
4. All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing.
If a directors' meeting is held without call or notice,
an action taken therein within the corporate powers
is deemed ratified by a director who failed to attend,
unless he promptly files his written objection with
the secretary of the corporation after having
knowledge thereof.
In the instant case, petitioner corporation is classified
as a close corporation and consequently a board
resolution authorizing the sale or mortgage of the
subject property is not necessary to bind the
corporation for the action of its president. At any
rate, corporate action taken at a board meeting
without proper call or notice in a close corporation is
deemed ratified by the absent director unless the
latter promptly files his written objection with the
secretary of the corporation after having knowledge
of the meeting which, in his case, petitioner Virgilio
Dulay failed to do.
It is relevant to note that although a corporation is an
entity which has a personality distinct and separate
from its individual stockholders or members, 19 the
veil of corporate fiction may be pierced when it is
used to defeat public convenience justify wrong,
protect fraud or defend crime. 20 The privilege of
being treated as an entity distinct and separate from
its stockholder or members is therefore confined to
its legitimate uses and is subject to certain limitations
to prevent the commission of fraud or other illegal or
unfair act. When the corporation is used merely as
an alter ego or business conduit of a person, the law
will regard the corporation as the act of that
person. 21 The Supreme Court had repeatedly
disregarded the separate personality of the
corporation where the corporate entity was used to
annul a valid contract executed by one of its
members.
Petitioners' claim that the sale of the subject
property by its president, Manuel Dulay, to private
respondents spouses Veloso is null and void as the
alleged Board Resolution No. 18 was passed without
the knowledge and consent of the other members of
the board of directors cannot be sustained. As
correctly pointed out by the respondent Court of
Appeals:
Appellant Virgilio E. Dulay's protestations of
complete innocence to the effect that he never
participated nor was even aware of any meeting or
resolution authorizing the mortgage or sale of the
subject premises (see par. 8, affidavit of Virgilio E.
Dulay, dated May 31, 1984, p. 14, Exh. "21") is
difficult to believe. On the contrary, he is very much
privy to the transactions involved. To begin with, he
is a incorporator and one of the board of directors
designated at the time of the organization of Manuel
R. Dulay Enterprise, Inc. In ordinary parlance, the said
entity is loosely referred to as a "family corporation".
The nomenclature, if imprecise, however, fairly
reflects the cohesiveness of a group and the
parochial instincts of the individual members of such
an aggrupation of which Manuel R. Dulay Enterprises,
Inc. is typical: four-fifths of its incorporators being
close relatives namely, three (3) children and their
father whose name identifies their corporation
(Articles of Incorporation of Manuel R. Dulay
Enterprises, Inc. Exh. "31-A"). 22
Besides, the fact that petitioner Virgilio Dulay on
June 24, 1975 executed an affidavit 23 that he was a
signatory witness to the execution of the post-dated
Deed of Absolute Sale of the subject property in
favor of private respondent Torres indicates that he
was aware of the transaction executed between his
father and private respondents and had, therefore,
adequate knowledge about the sale of the subject
property to private respondents.
Consequently, petitioner corporation is liable for the
act of Manuel Dulay and the sale of the subject
property to private respondents by Manuel Dulay is
valid and binding. As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises,
Inc. and the spouses Maria Theresa V. Veloso and
Castrense C. Veloso, was a corporate act of the
former and not a personal transaction of Manuel R.
Dulay. This is so because Manuel R. Dulay was not
only president and treasurer but also the general
manager of the corporation. The corporation was a
closed family corporation and the only non-relative
in the board of directors was Atty. Plaridel C. Jose
who appeared on paper as the secretary. There is no
denying the fact, however, that Maria Socorro R.
Dulay at times acted as secretary. . . ., the Court can
not lose sight of the fact that the Manuel R. Dulay
Enterprises, Inc. is a closed family corporation where
the incorporators and directors belong to one single
family. It cannot be concealed that Manuel R. Dulay
as president, treasurer and general manager almost
had absolute control over the business and affairs of
the corporation. 24
Moreover, the appellate courts will not disturb the
findings of the trial judge unless he has plainly
overlooked certain facts of substance and value that,
if considered, might affect the result of the
case, 25 which is not present in the instant case.
Petitioners' contention that private respondent
Torres never acquired ownership over the subject
property since the latter was never in actual
possession of the subject property nor was the
property ever delivered to him is also without merit.
Paragraph 1, Article 1498 of the New Civil Code
provides:
When the sale is made through a public instrument,
the execution thereof shall be equivalent to the
delivery of the thing which is the object of the
contract, if from the deed the contrary do not appear
or cannot clearly be inferred.
Under the aforementioned article, the mere
execution of the deed of sale in a public document is
equivalent to the delivery of the property. Likewise,
this Court had held that:
It is settled that the buyer in a foreclosure sale
becomes the absolute owner of the property
purchased if it is not redeemed during the period of
one year after the registration of the sale. As such,
he is entitled to the possession of the said property
and can demand it at any time following the
consolidation of ownership in his name and the
issuance to him of a new transfer certificate of title.
The buyer can in fact demand possession of the land
even during the redemption period except that he
has to post a bond in accordance with Section 7 of
Act No. 3133 as amended. No such bond is required
after the redemption period if the property is not
redeemed. Possession of the land then becomes an
absolute right of the purchaser as confirmed
owner. 26
Therefore, prior physical delivery or possession is not
legally required since the execution of the Deed of
Sale in deemed equivalent to delivery.
Finally, we hold that the respondent appellate court
did not err in denying petitioner's motion for
reconsideration despite the fact that private
respondents failed to submit their comment to said
motion as required by the respondent appellate
court from resolving petitioners' motion for
reconsideration without the comment of the private
respondent which was required merely to aid the
court in the disposition of the motion. The courts are
as much interested as the parties in the early
disposition of cases before them. To require
otherwise would unnecessarily clog the courts'
dockets.
WHEREFORE, the petition is DENIED and the decision
appealed from is hereby AFFIRMED.
SO ORDERED.
NATIONAL DEVELOPMENT COMPANY AND NEW
AGRIX, INC., Petitioners, vs. PHILIPPINE VETERANS
BANK, THE EX-OFFICIO SHERIFF and GODOFREDO
QUILING, in his capacity as Deputy Sheriff of Calamba,
Laguna, Respondents.
DECISION
CRUZ, J.:
This case involves the constitutionality of a
presidential decree which, like all other issuances of
President Marcos during his regime, was at that time
regarded as sacrosanct. It is only now, in a freer
atmosphere, that his acts are being tested by the
touchstone of the fundamental law that even then
was supposed to limit presidential action.: rd
The particular enactment in question is Pres. Decree
No. 1717, which ordered the rehabilitation of the
Agrix Group of Companies to be administered mainly
by the National Development Company. The law
outlined the procedure for filing claims against the
Agrix companies and created a Claims Committee to
process these claims. Especially relevant to this case,
and noted at the outset, is Sec. 4(1) thereof
providing that "all mortgages and other liens
presently attaching to any of the assets of the
dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had
executed in favor of private respondent Philippine
Veterans Bank a real estate mortgage dated July 7,
1978, over three (3) parcels of land situated in Los
Baños, Laguna. During the existence of the mortgage,
AGRIX went bankrupt. It was for the expressed
purpose of salvaging this and the other Agrix
companies that the aforementioned decree was
issued by President Marcos.
Pursuant thereto, the private respondent filed a Pres. Decree No. 1717 by filing a claim with the
claim with the AGRIX Claims Committee for the AGRIX Claims Committee. Failing to get results, it
payment of its loan credit. In the meantime, the New sought to foreclose the real estate mortgage
Agrix, Inc. and the National Development Company, executed by AGRIX in its favor, which had been
petitioners herein, invoking Sec. 4 (1) of the decree, extinguished by the decree. It was only when the
filed a petition with the Regional Trial Court of petitioners challenged the foreclosure on the basis of
Calamba, Laguna, for the cancellation of the Sec. 4 (1) of the decree, that the private respondent
mortgage lien in favor of the private respondent. For attacked the validity of the provision. At that stage,
its part, the private respondent took steps to however, consistent with Mendoza, the private
extrajudicially foreclose the mortgage, prompting the respondent was already estopped from questioning
petitioners to file a second case with the same court the constitutionality of the decree.
to stop the foreclosure. The two cases were
The Court does not agree that the principle of
consolidated.
estoppel is applicable.
After the submission by the parties of their
It is not denied that the private respondent did file a
respective pleadings, the trial court rendered the
claim with the AGRIX Claims Committee pursuant to
impugned decision. Judge Francisco Ma. Guerrero
this decree. It must be noted, however, that this was
annulled not only the challenged provision, viz., Sec.
done in 1980, when President Marcos was the
4 (1), but the entire Pres. Decree No. 1717 on the
absolute ruler of this country and his decrees were
grounds that: (1) the presidential exercise of
the absolute law. Any judicial challenge to them
legislative power was a violation of the principle of
would have been futile, not to say foolhardy. The
separation of powers; (2) the law impaired the
private respondent, no less than the rest of the
obligation of contracts; and (3) the decree violated
nation, was aware of that reality and knew it had no
the equal protection clause. The motion for
choice under the circumstances but to conform.: nad
reconsideration of this decision having been denied,
the present petition was filed.: rd It is true that there were a few venturesome souls
who dared to question the dictator's decisions
The petition was originally assigned to the Third
before the courts of justice then. The record will
Division of this Court but because of the
show, however, that not a single act or issuance of
constitutional questions involved it was transferred
President Marcos was ever declared unconstitutional,
to the Court en banc. On August 30, 1988, the Court
not even by the highest court, as long as he was in
granted the petitioner's prayer for a temporary
power. To rule now that the private respondent is
restraining order and instructed the respondents to
estopped for having abided with the decree instead
cease and desist from conducting a public auction
of boldly assailing it is to close our eyes to a cynical
sale of the lands in question. After the Solicitor
fact of life during that repressive time.
General and the private respondent had filed their
comments and the petitioners their reply, the Court This case must be distinguished from Mendoza,
gave due course to the petition and ordered the where the petitioners, after filing their claims with
parties to file simultaneous memoranda. Upon the AGRIX Claims Committee, received in settlement
compliance by the parties, the case was deemed thereof shares of stock valued at P40,000.00 without
submitted. protest or reservation. The herein private
respondent has not been paid a single centavo on its
The petitioners contend that the private respondent
claim, which was kept pending for more than seven
is now estopped from contesting the validity of the
years for alleged lack of supporting papers.
decree. In support of this contention, it cites the
Significantly, the validity of that claim was not
recent case of Mendoza v. Agrix Marketing, Inc., 1
questioned by the petitioner when it sought to
where the constitutionality of Pres. Decree No. 1717
restrain the extrajudicial foreclosure of the mortgage
was also raised but not resolved. The Court, after
by the private respondent. The petitioner limited
noting that the petitioners had already filed their
itself to the argument that the private respondent
claims with the AGRIX Claims Committee created by
was estopped from questioning the decree because
the decree, had simply dismissed the petition on the
of its earlier compliance with its provisions.
ground of estoppel.
Independently of these observations, there is the
The petitioners stress that in the case at bar the
consideration that an affront to the Constitution
private respondent also invoked the provisions of
cannot be allowed to continue existing simply
because of procedural inhibitions that exalt form
over substance.
The Court is especially disturbed by Section 4(1) of
the decree, quoted above, extinguishing all
mortgages and other liens attaching to the assets of
AGRIX. It also notes, with equal concern, the
restriction in Subsection (ii) thereof that all
"unsecured obligations shall not bear interest" and in
Subsection (iii) that "all accrued interests, penalties
or charges as of date hereof pertaining to the
obligations, whether secured or unsecured, shall not
be recognized."
These provisions must be read with the Bill of Rights,
where it is clearly provided in Section 1 that "no
person shall be deprived of life, liberty or property
without due course of law nor shall any person be
denied the equal protection of the law" and in
Section 10 that "no law impairing the obligation of
contracts shall be passed."
In defending the decree, the petitioners argue that
property rights, like all rights, are subject to
regulation under the police power for the promotion
of the common welfare. The contention is that this
inherent power of the state may be exercised at any
time for this purpose so long as the taking of the
property right, even if based on contract, is done
with due process of law.
This argument is an over-simplification of the
problem before us. The police power is not a
panacea for all constitutional maladies. Neither does
its mere invocation conjure an instant and automatic
justification for every act of the government
depriving a person of his life, liberty or property.
A legislative act based on the police power requires
the concurrence of a lawful subject and a lawful
method. In more familiar words, a) the interests of
the public generally, as distinguished from those of a
particular class, should justify the interference of the
state; and b) the means employed are reasonably
necessary for the accomplishment of the purpose
and not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court
finds first of all that the interests of the public are
not sufficiently involved to warrant the interference
of the government with the private contracts of
AGRIX. The decree speaks vaguely of the "public,
particularly the small investors," who would be
prejudiced if the corporation were not to be assisted.
However, the record does not state how many there
are of such investors, and who they are, and why
they are being preferred to the private respondent
and other creditors of AGRIX with vested property
rights.:-cralaw
The public interest supposedly involved is not
identified or explained. It has not been shown that by
the creation of the New Agrix, Inc. and the extinction
of the property rights of the creditors of AGRIX, the
interests of the public as a whole, as distinguished
from those of a particular class, would be promoted
or protected. The indispensable link to the welfare of
the greater number has not been established. On the
contrary, it would appear that the decree was issued
only to favor a special group of investors who, for
reasons not given, have been preferred to the
legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the
Court still finds that the means employed to
rehabilitate AGRIX fall far short of the requirement
that they shall not be unduly oppressive. The
oppressiveness is patent on the face of the decree.
The right to property in all mortgages, liens, interests,
penalties and charges owing to the creditors of
AGRIX is arbitrarily destroyed. No consideration is
paid for the extinction of the mortgage rights. The
accrued interests and other charges are simply
rejected by the decree. The right to property is
dissolved by legislative fiat without regard to the
private interest violated and, worse, in favor of
another private interest.
A mortgage lien is a property right derived from
contract and so comes under the protection of the
Bill of Rights. So do interests on loans, as well as
penalties and charges, which are also vested rights
once they accrue. Private property cannot simply be
taken by law from one person and given to another
without compensation and any known public
purpose. This is plain arbitrariness and is not
permitted under the Constitution.
And not only is there arbitrary taking, there is
discrimination as well. In extinguishing the mortgage
and other liens, the decree lumps the secured
creditors with the unsecured creditors and places
them on the same level in the prosecution of their
respective claims. In this respect, all of them are
considered unsecured creditors. The only concession
given to the secured creditors is that their loans are
allowed to earn interest from the date of the decree,
but that still does not justify the cancellation of the
interests earned before that date. Such interests,
whether due to the secured or the unsecured
creditors, are all extinguished by the decree. Even
assuming such cancellation to be valid, we still
cannot see why all kinds of creditors, regardless of
security, are treated alike.
Under the equal protection clause, all persons or
things similarly situated must be treated alike, both
in the privileges conferred and the obligations
imposed. Conversely, all persons or things differently
situated should be treated differently. In the case at
bar, persons differently situated are similarly treated,
in disregard of the principle that there should be
equality only among equals.- nad
One may also well wonder why AGRIX was singled
out for government help, among other corporations
where the stockholders or investors were also
swindled. It is not clear why other companies entitled
to similar concern were not similarly treated. And
surely, the stockholders of the private respondent,
whose mortgage lien had been cancelled and
legitimate claims to accrued interests rejected, were
no less deserving of protection, which they did not
get. The decree operated, to use the words of a
celebrated case, 3 "with an evil eye and an uneven
hand."
On top of all this, New Agrix, Inc. was created by
special decree notwithstanding the provision of
Article XIV, Section 4 of the 1973 Constitution, then
in force, that:
SEC. 4. The Batasang Pambansa shall not, except by
general law, provide for the formation, organization,
or regulation of private corporations, unless such
corporations are owned or controlled by the
Government or any subdivision or instrumentality
thereof. 4
The new corporation is neither owned nor controlled
by the government. The National Development
Corporation was merely required to extend a loan of
not more than P10,000,000.00 to New Agrix, Inc.
Pending payment thereof, NDC would undertake the
management of the corporation, but with the
obligation of making periodic reports to the Agrix
board of directors. After payment of the loan, the
said board can then appoint its own management.
The stocks of the new corporation are to be issued to
the old investors and stockholders of AGRIX upon
proof of their claims against the abolished
corporation. They shall then be the owners of the
new corporation. New Agrix, Inc. is entirely private
and so should have been organized under the
Corporation Law in accordance with the above-cited
constitutional provision.
The Court also feels that the decree impairs the
obligation of the contract between AGRIX and the
private respondent without justification. While it is
true that the police power is superior to the
impairment clause, the principle will apply only
where the contract is so related to the public welfare
that it will be considered congenitally susceptible to
change by the legislature in the interest of the
greater number. 5 Most present-day contracts are of
that nature. But as already observed, the contracts of
loan and mortgage executed by AGRIX are purely
private transactions and have not been shown to be
affected with public interest. There was therefore no
warrant to amend their provisions and deprive the
private respondent of its vested property rights.
It is worth noting that only recently in the case of the
Development Bank of the Philippines v. NLRC, 6 we
sustained the preference in payment of a mortgage
creditor as against the argument that the claims of
laborers should take precedence over all other claims,
including those of the government. In arriving at this
ruling, the Court recognized the mortgage lien as a
property right protected by the due process and
contract clauses notwithstanding the argument that
the amendment in Section 110 of the Labor Code
was a proper exercise of the police power.: nad
The Court reaffirms and applies that ruling in the
case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is
an invalid exercise of the police power, not being in
conformity with the traditional requirements of a
lawful subject and a lawful method. The extinction of
the mortgage and other liens and of the interest and
other charges pertaining to the legitimate creditors
of AGRIX constitutes taking without due process of
law, and this is compounded by the reduction of the
secured creditors to the category of unsecured
creditors in violation of the equal protection clause.
Moreover, the new corporation, being neither
owned nor controlled by the Government, should
have been created only by general and not special
law. And insofar as the decree also interferes with
purely private agreements without any
demonstrated connection with the public interest,
there is likewise an impairment of the obligation of
the contract.
With the above pronouncements, we feel there is no
more need to rule on the authority of President
Marcos to promulgate Pres. Decree No. 1717 under
Amendment No. 6 of the 1973 Constitution. Even if
he had such authority, the decree must fall just the
same because of its violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree
No. 1717 is declared UNCONSTITUTIONAL. The
temporary restraining order dated August 30, 1988,
is LIFTED. Costs against the petitioners.- nad
SO ORDERED.
PIONEER INSURANCE & SURETY
CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY
& HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S.
LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND
SURETY CORPORATION, BORDER MACHINERY and
HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO
MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety
Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S.
Lim.
Renato J. Robles for BORMAHECO, Inc. and
Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is
the decision of the Court of Appeals in CA-G.R. CV No.
66195 which modified the decision of the then Court
of First Instance of Manila in Civil Case No. 66135.
The plaintiffs complaint (petitioner in G.R. No. 84197)
against all defendants (respondents in G.R. No.
84197) was dismissed but in all other respects the
trial court's decision was affirmed.
The dispositive portion of the trial court's decision
reads as follows:
WHEREFORE, judgment is rendered against
defendant Jacob S. Lim requiring Lim to pay plaintiff
the amount of P311,056.02, with interest at the rate
of 12% per annum compounded monthly; plus 15%
of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus
P70,000.00 moral and exemplary damages.
It is found in the records that the cross party
plaintiffs incurred additional miscellaneous expenses
aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further
required to pay cross party plaintiff, Bormaheco, the
Cervanteses one-half and Maglana the other half, the
amount of Pl84,878.74 with interest from the filing of
the cross-complaints until the amount is fully paid;
plus moral and exemplary damages in the amount of
P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to
Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's
fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of
plaintiff Pioneer against defendants Bormaheco, the
Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the
amount of P20,000.00 as attorney's fees and the
amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay
Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.
No moral or exemplary damages is awarded against
plaintiff for this action was filed in good faith. The
fact that the properties of the Bormaheco and the
Cervanteses were attached and that they were
required to file a counterbond in order to dissolve
the attachment, is not an act of bad faith. When a
man tries to protect his rights, he should not be
saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for
in the Rules of Court, and it was the court that
ordered it, in the exercise of its discretion.
No damage is decided against Malayan Insurance
Company, Inc., the third-party defendant, for it only
secured the attachment prayed for by the plaintiff
Pioneer. If an insurance company would be liable for
damages in performing an act which is clearly within
its power and which is the reason for its being, then
nobody would engage in the insurance business. No
further claim or counter-claim for or against anybody
is declared by this Court. (Rollo - G.R. No. 24197, pp.
15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157)
was engaged in the airline business as
owner-operator of Southern Air Lines (SAL) a single
proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic
Airlines (JDA) and Lim entered into and executed a
sales contract (Exhibit A) for the sale and purchase of
two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila
on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety
Corporation (Pioneer, petitioner in G.R. No. 84197)
as surety executed and issued its Surety Bond No.
6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts
and spare parts.
It appears that Border Machinery and Heavy
Equipment Company, Inc. (Bormaheco), Francisco
and Modesto Cervantes (Cervanteses) and
Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were
supposed to be their contributions to a new
corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer,
one signed by Maglana and the other jointly signed
by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the
indemnitors principally agree and bind themselves
jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages,
losses, costs, damages, taxes, penalties, charges and
expenses of whatever kind and nature which Pioneer
may incur in consequence of having become surety
upon the bond/note and to pay, reimburse and make
good to Pioneer, its successors and assigns, all sums
and amounts of money which it or its representatives
should or may pay or cause to be paid or become
liable to pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the
name and style of SAL executed in favor of Pioneer as
deed of chattel mortgage as security for the latter's
suretyship in favor of the former. It was stipulated
therein that Lim transfer and convey to the surety
the two aircrafts. The deed (Exhibit D) was duly
registered with the Office of the Register of Deeds of
the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage
Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.
Lim defaulted on his subsequent installment
payments prompting JDA to request payments from
the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial
foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana,
however, filed a third party claim alleging that they
are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial
foreclosure with an application for a writ of
preliminary attachment against Lim and respondents,
the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the
Cervanteses filed cross-claims against Lim alleging
that they were not privies to the contracts signed by
Lim and, by way of counterclaim, sought for damages
for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the
purchase of the aircrafts in question.
After trial on the merits, a decision was rendered
holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the
trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other
respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation
avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY
ERRED WHEN IT DISMISSED THE APPEAL OF
PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND IN
FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS
DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No.
84197, p. 10)
The petitioner questions the following findings of the
appellate court:
We find no merit in plaintiffs appeal. It is undisputed
that plaintiff Pioneer had reinsured its risk of liability
under the surety bond in favor of JDA and
subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants'
alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the
recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant
action as it does not stand to be benefited or injured
by the judgment.
Plaintiff Pioneer's contention that it is representing
the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly
devoid of merit. Plaintiff did not even present any
evidence that it is the attorney-in-fact of the
reinsurance company, authorized to institute an
action for and in behalf of the latter. To qualify a
person to be a real party in interest in whose name
an action must be prosecuted, he must appear to be
the present real owner of the right sought to be
enforced (Moran, Vol. I, Comments on the Rules of
Court, 1979 ed., p. 155). It has been held that the
real party in interest is the party who would be
benefited or injured by the judgment or the party
entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in
interest is meant a present substantial interest as
distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest
(Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield
Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v.
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P.
2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer
cannot be considered as the real party in interest as
it has already been paid by the reinsurer the sum of
P295,000.00 — the bulk of defendants' alleged
obligation to Pioneer.
In addition to the said proceeds of the reinsurance
received by plaintiff Pioneer from its reinsurer, the
former was able to foreclose extra-judicially one of
the subject airplanes and its spare engine, realizing
the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00,
to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been
overpaid in the amount of P33,383.72 considering
that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover
from defendants the amount in excess of
P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the
reinsurance company of the amount plaintiff has
paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the
rule that no person should unjustly enrich himself at
the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where
respondent court based its finding that petitioner
was paid by its reinsurer in the aforesaid amount, as
this matter has never been raised by any of the
parties herein both in their answers in the court
below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically
that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the
reinsurance is strictly between the petitioner and the
re-insurer pursuant to section 91 of the Insurance
Code; (3) pursuant to the indemnity agreements, the
petitioner is entitled to recover from respondents
Bormaheco and Maglana; and (4) the principle of
unjust enrichment is not applicable considering that
whatever amount he would recover from the
co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the
issue on the reinsurance money was never raised by
the parties.
A cursory reading of the trial court's lengthy decision
shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants
with respect to so much of its obligations to JDA as
has been paid with reinsurance money?
2. If the answer to the preceding question is in the
negative, has Pioneer still any claim against
defendants, considering the amount it has realized
from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the
following findings:
It appearing that Pioneer reinsured its risk of liability
under the surety bond it had executed in favor of JDA,
collected the proceeds of such reinsurance in the
sum of P295,000, and paid with the said amount the
bulk of its alleged liability to JDA under the said
surety bond, it is plain that on this score it no longer
has any right to collect to the extent of the said
amount.
On the question of why it is Pioneer, instead of the
reinsurance (sic), that is suing defendants for the
amount paid to it by the reinsurers, notwithstanding
that the cause of action pertains to the latter,
Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue
alone the case.. . . . Pioneer Insurance & Surety
Corporation is representing the reinsurers to recover
the amount.' In other words, insofar as the amount
paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest
indication in the complaint that Pioneer is suing as
attorney-in- fact of the reinsurers for any amount.
Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is
well-settled that an action brought by an
attorney-in-fact in his own name instead of that of
the principal will not prosper, and this is so even
where the name of the principal is disclosed in the
complaint.
Section 2 of Rule 3 of the Old Rules of Court provides
that 'Every action must be prosecuted in the name of
the real party in interest.' This provision is mandatory.
The real party in interest is the party who would be
benefitted or injured by the judgment or is the party
entitled to the avails of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest, that
there is no law permitting an action to be brought by
an attorney-in-fact. Arroyo v. Granada and Gentero,
18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo,
19 Phil. Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23 SCRA 706,
710-714.
The total amount paid by Pioneer to JDA is
P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured
portion of what it paid to JDA is the difference
between the two amounts, or P3,666.28. This is the
amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid
and effective. But since the amount realized from the
sale of the mortgaged chattels are P35,000.00 for
one of the airplanes and P2,050.00 for a spare engine,
or a total of P37,050.00, Pioneer is still overpaid by
P33,383.72. Therefore, Pioneer has no more claim
against defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the
reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue
that cropped up was the effect of payment made by
the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly
between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section
98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires
the same rights by subrogation as are acquired in
similar cases where the original insurer pays a loss
(Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La.,
46 F 2nd 925).
The rules of practice in actions on original insurance
policies are in general applicable to actions or
contracts of reinsurance. (Delaware, Ins. Co. v.
Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7
Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new
Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured,
and he has received indemnity from the insurance
company for the injury or loss arising out of the
wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by
the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the
loss or injury.
Interpreting the aforesaid provision, we ruled in the
case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101
Phil. 1031 [1957]) which we subsequently applied
in Manila Mahogany Manufacturing Corporation v.
Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner
receives the indemnity from the insurer, it is
provided in said article that the insurer is deemed
subrogated to the rights of the insured against the
wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved
party is the one entitled to recover the
deficiency. Evidently, under this legal provision, the
real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured.
(Emphasis supplied).
It is clear from the records that Pioneer sued in its
own name and not as an attorney-in-fact of the
reinsurer.
Accordingly, the appellate court did not commit a
reversible error in dismissing the petitioner's
complaint as against the respondents for the reason
that the petitioner was not the real party in interest
in the complaint and, therefore, has no cause of
action against the respondents.
Nevertheless, the petitioner argues that the appeal
as regards the counter indemnitors should not have
been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the
counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent
"Maglanas defense and evidence are certainly
incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings
on the matter replete with evidence to substantiate
its finding that the counter-indemnitors are not liable
to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity
agreement ceased to be valid and effective after the
execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and
Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts
and the spare parts involved, agreed to issue the
bond provided that the same would be mortgaged to
it, but this was not possible because the planes were
still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to
the Philippines, they would be mortgaged to Pioneer
Insurance to cover the bond, and this indemnity
agreement would be cancelled.
The following is averred under oath by Pioneer in the
original complaint:
The various conflicting claims over the mortgaged
properties have impaired and rendered insufficient
the security under the chattel mortgage and there is
thus no other sufficient security for the claim sought
to be enforced by this action.
This is judicial admission and aside from the chattel
mortgage there is no other security for the claim
sought to be enforced by this action, which
necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this
action was instituted. Sec 2, Rule 129, Revised Rules
of Court.
Prescinding from the foregoing, Pioneer, having
foreclosed the chattel mortgage on the planes and
spare parts, no longer has any further action against
the defendants as indemnitors to recover any unpaid
balance of the price. The indemnity agreement was
ipso jure extinguished upon the foreclosure of the
chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of
Pioneer should they make payments to the latter.
Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's
election of the remedy of foreclosure precludes any
further action to recover any unpaid balance of the
price.
SAL or Lim, having failed to pay the second to the
eight and last installments to JDA and Pioneer as
surety having made of the payments to JDA, the
alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code,
known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the
chattel mortgage both by extrajudicial foreclosure
and the instant suit. Such being the case, as provided
by the aforementioned provisions, Pioneer shall have
no further action against the purchaser to recover
any unpaid balance and any agreement to the
contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA
791, 795-6.
The operation of the foregoing provision cannot be
escaped from through the contention that Pioneer is
not the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having
subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground
that these defendants and defendant Maglana are
not the vendee but indemnitors. Pascual, et al. v.
Universal Motors Corporation, G.R. No. L- 27862,
Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim,
thru the change of their maturity dates discharged
these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the
obligations of Lim, or SAL extinguish the original
obligations thru novations thus discharging the
indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments, the
first of which shall be due and payable 25 August
1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding
three months and the last of which shall be due and
payable 26th May 1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as
follows:
The principal hereof shall be paid in eight equal
successive three month interval installments the first
of which shall be due and payable 4 September 1965,
the remainder of which ... shall be due and payable
on the 4th day ... of each succeeding months and the
last of which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported
promissory notes bearing maturity dates different
from that fixed in the aforesaid memorandum; the
due date of the first installment appears as October
15, 1965, and those of the rest of the installments,
the 15th of each succeeding three months, that of
the last installment being July 15, 1967.
These restructuring of the obligations with regard to
their maturity dates, effected twice, were done
without the knowledge, much less, would have it
believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant
Maglana knew of and consented to the modification
of the obligations. But if that were so, there would
have been the corresponding documents in the form
of a written notice to as well as written conformity of
these defendants, and there are no such document.
The consequence of this was the extinguishment of
the obligations and of the surety bond secured by
the indemnity agreement which was thereby also
extinguished. Applicable by analogy are the rulings of
the Supreme Court in the case of Kabankalan Sugar
Co. v. Pacheco, 55 Phil. 553, 563, and the case of
Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532,
538.
Art. 2079. An extension granted to the debtor by the
creditor without the consent of the guarantor
extinguishes the guaranty The mere failure on the
part of the creditor to demand payment after the
debt has become due does not of itself constitute
any extension time referred to herein, (New Civil
Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp.
562-563, M.F. Stevenson & Co., Ltd., v. Climacom et
al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already
prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action
to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of an
express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days
from default of Lim or SAL on every installment,
released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact
reimbursement from these defendants thru the
indemnity.
Art. 1318. Payment by a solidary debtor shall not
entitle him to reimbursement from his co-debtors if
such payment is made after the obligation has
prescribed or became illegal.
These defendants are entitled to recover damages
and attorney's fees from Pioneer and its surety by
reason of the filing of the instant case against them
and the attachment and garnishment of their
properties. The instant action is clearly unfounded
insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp. 363-369,
Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these
findings.
Hence, it is our conclusion that the petition in G.R.
No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among
co-investors whose agreement was to do business
through the corporate vehicle but who failed to
incorporate the entity in which they had chosen to
invest? How are the losses to be treated in situations
where their contributions to the intended
'corporation' were invested not through the
corporate form? This Petition presents these
fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA').
(Rollo, p. 6).
These questions are premised on the petitioner's
theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana
and petitioner Lim to incorporate, a de
facto partnership among them was created, and that
as a consequence of such relationship all must share
in the losses and/or gains of the venture in
proportion to their contribution. The petitioner,
therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by
the respondents to the petitioner as their
contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay
his co-defendants' cross-claims in the total amount
of P184,878.74 as correctly found by the trial court,
with interest from the filing of the cross-complaints
until the amount is fully paid. Defendant Lim should
pay one-half of the said amount to Bormaheco and
the Cervanteses and the other one-half to defendant
Maglana. It is established in the records that
defendant Lim had duly received the amount of
Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the
ownership of the subject airplanes and spare parts
(Exhibit 58). In addition, the cross-party plaintiffs
incurred additional expenses, hence, the total sum of
P 184,878.74.
We first state the principles.
While it has been held that as between themselves
the rights of the stockholders in a defectively
incorporated association should be governed by the
supposed charter and the laws of the state relating
thereto and not by the rules governing partners
(Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446,
94 Am. S.R. 584), it is ordinarily held that persons
who attempt, but fail, to form a corporation and who
carry on business under the corporate name occupy
the position of partners inter se (Lynch v. Perryman,
119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus,
where persons associate themselves together under
articles to purchase property to carry on a business,
and their organization is so defective as to come
short of creating a corporation within the statute,
they become in legal effect partners inter se, and
their rights as members of the company to the
property acquired by the company will be recognized
(Smith v. Schoodoc Pond Packing Co., 84 A. 268,109
Me. 555; Whipple v. Parker, 29 Mich. 369). So, where
certain persons associated themselves as a
corporation for the development of land for
irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a
third the difference in the proportionate value of the
land conveyed by him, and no stock was ever issued
in the corporation, it was treated as a trustee for the
associates in an action between them for an
accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds
distributed among them in proportion to the value of
the property contributed by each (Shorb v. Beaudry,
56 Cal. 446). However, such a relation does not
necessarily exist, for ordinarily persons cannot be
made to assume the relation of partners, as between
themselves, when their purpose is that no partnership
shall exist (London Assur. Corp. v. Drennen, Minn., 6
S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it
should be implied only when necessary to do justice
between the parties; thus, one who takes no part
except to subscribe for stock in a proposed
corporation which is never legally formed does not
become a partner with other subscribers who engage
in business under the name of the pretended
corporation, so as to be liable as such in an action for
settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders
and other stockholders, who were also directors, will
not be implied in the absence of an agreement, so as
to make the former liable to contribute for payment
of debts illegally contracted by the latter (Heald v.
Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the
petitioner was declared non-suited for his failure to
appear during the pretrial despite notification. In his
answer, the petitioner denied having received any
amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the
appellate court, however, found through Exhibit 58,
that the petitioner received the amount of
P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts.
The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the
Cervanteses.
It is therefore clear that the petitioner never had the
intention to form a corporation with the respondents
despite his representations to them. This gives
credence to the cross-claims of the respondents to
the effect that they were induced and lured by the
petitioner to make contributions to a proposed
corporation which was never formed because the
petitioner reneged on their agreement. Maglana
alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed
to Francisco Cervantes and Maglana to expand his
airline business. Lim was to procure two DC-3's from
Japan and secure the necessary certificates of public
convenience and necessity as well as the required
permits for the operation thereof. Maglana
sometime in May 1965, gave Cervantes his share of
P75,000.00 for delivery to Lim which Cervantes did
and Lim acknowledged receipt thereof. Cervantes,
likewise, delivered his share of the undertaking. Lim
in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in
accordance with their agreement and proceeded to
acquire the planes on his own account. Since then up
to the filing of this answer, Lim has refused, failed
and still refuses to set up the corporation or return
the money of Maglana. (Record on Appeal, pp.
337-338).
while respondents Bormaheco and the Cervanteses
alleged in their answer, counterclaim, cross-claim
and third party complaint:
Sometime in April 1965, defendant Lim lured and
induced the answering defendants to purchase two
airplanes and spare parts from Japan which the latter
considered as their lawful contribution and
participation in the proposed corporation to be
known as SAL. Arrangements and negotiations were
undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff,
signed and executed the alleged chattel mortgage
and surety bond agreement in his personal capacity
as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery
and misrepresentation of the other, Jacob Lim, when
the herein plaintiff chattel mortgage (sic) allegedly
executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to
defendant Lim, to surrender the possession of the
two planes and their accessories and or return the
amount advanced by the former amounting to an
aggregate sum of P 178,997.14 as evidenced by a
statement of accounts, the latter ignored, omitted
and refused to comply with them. (Record on Appeal,
pp. 341-342).
Applying therefore the principles of law earlier cited
to the facts of the case, necessarily, no de facto
partnership was created among the parties which
would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation.
The record shows that the petitioner was acting on
his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes
and spare parts.
WHEREFORE, the instant petitions are DISMISSED.
The questioned decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
FORMATION AND ORGANIZATION OF OFFICERS
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC.
and PHILIPS INDUSTRIAL DEVELOPMENT,
INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE
COMMISSION and STANDARD PHILIPS
CORPORATION, respondents.
Emeterio V. Soliven & Associates for petitioners.
Narciso A. Manantan for private respondent.
MELENCIO-HERRERA, J.:
Petitioners challenge the Decision of the Court of
Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067,
upholding the Order of the Securities and Exchange
Commission, dated 2 January 1990, in SEC-AC No.
202, dismissing petitioners' prayer for the
cancellation or removal of the word "PHILIPS" from
private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign
corporation organized under the laws of the
Netherlands, although not engaged in business
here, is the registered owner of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM under
Certificates of Registration Nos. R-1641 and R-1674,
respectively issued by the Philippine Patents Office
(presently known as the Bureau of Patents,
Trademarks and Technology Transfer). Petitioners
Philips Electrical Lamps, Inc. (Philips Electrical, for
brevity) and Philips Industrial Developments, Inc.
(Philips Industrial, for short), authorized users of the
trademarks PHILIPS and PHILIPS SHIELD EMBLEM,
were incorporated on 29 August 1956 and 25 May
1956, respectively. All petitioner corporations belong
to the PHILIPS Group of Companies.
Respondent Standard Philips Corporation (Standard
Philips), on the other hand, was issued a Certificate
of Registration by respondent Commission on 19
May 1982.
On 24 September 1984, Petitioners filed a letter
complaint with the Securities & Exchange
Commission (SEC) asking for the cancellation of the
word "PHILIPS" from Private Respondent's corporate
name in view of the prior registration with the
Bureau of Patents of the trademark "PHILIPS" and
the logo "PHILIPS SHIELD EMBLEM" in the name of
Petitioner, PEBV, and the previous registration of
Petitioners Philips Electrical and Philips Industrial
with the SEC.
As a result of Private Respondent's refusal to amend
its Articles of Incorporation, Petitioners filed with the
SEC, on 6 February 1985, a Petition (SEC Case No.
2743) praying for the issuance of a Writ of
Preliminary Injunction, alleging, among others, that
Private Respondent's use of the word PHILIPS
amounts to an infringement and clear violation of
Petitioners' exclusive right to use the same
considering that both parties engage in the same
business.
In its Answer, dated 7 March 1985, Private
Respondent countered that Petitioner PEBV has no
legal capacity to sue; that its use of its corporate
name is not at all similar to Petitioners' trademark
PHILIPS when considered in its entirety; and that its
products consisting of chain rollers, belts, bearings
and cutting saw are grossly different from
Petitioners' electrical products.
After conducting hearings with respect to the prayer
for Injunction; the SEC Hearing Officer, on 27
September 1985, ruled against the issuance of such
Writ.
On 30 January 1987, the same Hearing Officer
dismissed the Petition for lack of merit. In so ruling,
the latter declared that inasmuch as the SEC found
no sufficient ground for the granting of injunctive
relief on the basis of the testimonial and
documentary evidence presented, it cannot order
the removal or cancellation of the word "PHILIPS"
from Private Respondent's corporate name on the
basis of the same evidence adopted in toto during
trial on the merits. Besides, Section 18 of the
Corporation Code (infra) is applicable only when the
corporate names in question are identical. Here,
there is no confusing similarity between Petitioners'
and Private Respondent's corporate names as those
of the Petitioners contain at least two words
different from that of the Respondent. Petitioners'
Motion for Reconsideration was likewise denied on
17 June 1987.
On appeal, the SEC en banc affirmed the dismissal
declaring that the corporate names of Petitioners
and Private Respondent hardly breed confusion
inasmuch as each contains at least two different
words and, therefore, rules out any possibility of
confusing one for the other.
On 30 January 1990, Petitioners sought an extension
of time to file a Petition for Review
on Certiorari before this Court, which Petition was
later referred to the Court of Appeals in a Resolution
dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990,
the Court of
Appeals1 swept aside Petitioners' claim that following
the ruling in Converse Rubber Corporation v.
Universal Converse Rubber Products, Inc., et al, (G. R.
No. L-27906, January 8, 1987, 147 SCRA 154), the
word PHILIPS cannot be used as part of Private
Respondent's corporate name as the same
constitutes a dominant part of Petitioners' corporate
names. In so holding, the Appellate Court observed
that the Converse case is not four-square with the
present case inasmuch as the contending parties
in Converse are engaged in a similar business, that is,
the manufacture of rubber shoes. Upholding the SEC,
the Appellate Court concluded that "private
respondents' products consisting of chain rollers,
belts, bearings and cutting saw are unrelated and
non-competing with petitioners'
products i.e. electrical lamps such that consumers
would not in any probability mistake one as the
source or origin of the product of the other."
The Appellate Court denied Petitioners' Motion for
Reconsideration on 20 November 1990, hence, this
Petition which was given due course on 22 April 1991,
after which the parties were required to submit their
memoranda, the latest of which was received on 2
July 1991. In December 1991, the SEC was also
required to elevate its records for the perusal of this
Court, the same not having been apparently before
respondent Court of Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v.
Reyes, 51 Phil. 115 (1927), the Court declared that a
corporation's right to use its corporate and trade
name is a property right, a right in rem, which it may
assert and protect against the world in the same
manner as it may protect its tangible property, real
or personal, against trespass or conversion. It is
regarded, to a certain extent, as a property right and
one which cannot be impaired or defeated by
subsequent appropriation by another corporation in
the same field (Red Line Transportation Co. vs. Rural
Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the
very existence of a corporation (American Steel
Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46
S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42;
First National Bank vs. Huntington Distilling Co. 40 W
Va 530, 23 SE 792). Its name is one of its attributes,
an element of its existence, and essential to its
identity (6 Fletcher [Perm Ed], pp. 3-4). The general
rule as to corporations is that each corporation must
have a name by which it is to sue and be sued and do
all legal acts. The name of a corporation in this
respect designates the corporation in the same
manner as the name of an individual designates the
person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356,
26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird.
10 NH 123); and the right to use its corporate name
is as much a part of the corporate franchise as any
other privilege granted (Federal Secur. Co. vs.
Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR
934; Paulino vs. Portuguese Beneficial Association,
18 RI 165, 26 A 36).
A corporation acquires its name by choice and need
not select a name identical with or similar to one
already appropriated by a senior corporation while
an individual's name is thrust upon him
(See Standard Oil Co. of New Mexico, Inc. v. Standard
Oil Co. of California, 56 F 2d 973, 977). A corporation
can no more use a corporate name in violation of the
rights of others than an individual can use his name
legally acquired so as to mislead the public and injure
another (Armington vs. Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18,
expressly provides that:
No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name
is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name
already protected by law or is patently deceptive,
confusing or contrary to existing law. Where a
change in a corporate name is approved, the
commission shall issue an amended certificate of
incorporation under the amended name. (Emphasis
supplied)
The statutory prohibition cannot be any clearer. To
come within its scope, two requisites must be proven,
namely:
(1) that the complainant corporation acquired a prior
right over the use of such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other
name already protected by law; or
(c) patently deceptive, confusing or contrary to
existing law.
The right to the exclusive use of a corporate name
with freedom from infringement by similarity is
determined by priority of adoption (1 Thompson, p.
80 citing Munn v. Americana Co., 82 N. Eq. 63, 88 Atl.
30; San Francisco Oyster House v. Mihich, 75 Wash.
274, 134 Pac. 921). In this regard, there is no doubt
with respect to Petitioners' prior adoption of' the
name ''PHILIPS" as part of its corporate name.
Petitioners Philips Electrical and Philips Industrial
were incorporated on 29 August 1956 and 25 May
1956, respectively, while Respondent Standard
Philips was issued a Certificate of Registration on 12
April 1982, twenty-six (26) years later (Rollo, p. 16).
Petitioner PEBV has also used the trademark
"PHILIPS" on electrical lamps of all types and their
accessories since 30 September 1922, as evidenced
by Certificate of Registration No. 1651.
The second requisite no less exists in this case. In
determining the existence of confusing similarity in
corporate names, the test is whether the similarity is
such as to mislead a person, using ordinary care and
discrimination. In so doing, the Court must look to
the record as well as the names themselves (Ohio
Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298).
While the corporate names of Petitioners and Private
Respondent are not identical, a reading of
Petitioner's corporate names, to wit: PHILIPS EXPORT
B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., inevitably leads
one to conclude that "PHILIPS" is, indeed, the
dominant word in that all the companies affiliated or
associated with the principal corporation, PEBV, are
known in the Philippines and abroad as the PHILIPS
Group of Companies.
Respondents maintain, however, that Petitioners did
not present an iota of proof of actual confusion or
deception of the public much less a single purchaser
of their product who has been deceived or confused
or showed any likelihood of confusion. It is settled,
however, that proof of actual confusion need not be
shown. It suffices that confusion is probably or likely
to occur (6 Fletcher [Perm Ed], pp. 107-108,
enumerating a long line of cases).
It may be that Private Respondent's products also
consist of chain rollers, belts, bearing and the like,
while petitioners deal principally with electrical
products. It is significant to note, however, that even
the Director of Patents had denied Private
Respondent's application for registration of the
trademarks "Standard Philips & Device" for chain,
rollers, belts, bearings and cutting saw. That office
held that PEBV, "had shipped to its subsidiaries in the
Philippines equipment, machines and their parts
which fall under international class where "chains,
rollers, belts, bearings and cutting saw," the goods in
connection with which Respondent is seeking to
register 'STANDARD PHILIPS' . . . also belong" ( Inter
Partes Case No. 2010, June 17, 1988, SEC Rollo).
Furthermore, the records show that among Private
Respondent's primary purposes in its Articles of
Incorporation (Annex D, Petition p. 37, Rollo) are the
following:
To buy, sell, barter, trade, manufacture, import,
export, or otherwise acquire, dispose of, and deal in
and deal with any kind of goods, wares, and
merchandise such as but not limited to plastics,
carbon products, office stationery and supplies,
hardware parts, electrical wiring devices, electrical
component parts, and/or complement of industrial,
agricultural or commercial machineries, constructive
supplies, electrical supplies and other merchandise
which are or may become articles of commerce
except food, drugs and cosmetics and to carry on
such business as manufacturer, distributor, dealer,
indentor, factor, manufacturer's representative
capacity for domestic or foreign companies.
(emphasis ours)
For its part, Philips Electrical also includes, among its
primary purposes, the following:
To develop manufacture and deal in electrical
products, including electronic, mechanical and other
similar products . . . (p. 30, Record of SEC Case No.
2743)
Given Private Respondent's aforesaid underlined
primary purpose, nothing could prevent it from
dealing in the same line of business of electrical
devices, products or supplies which fall under its
primary purposes. Besides, there is showing that
Private Respondent not only manufactured and sold
ballasts for fluorescent lamps with their corporate
name printed thereon but also advertised the same
as, among others, Standard Philips (TSN, before the
SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp.
16-19, July 25, 1985). As aptly pointed out by
Petitioners, [p]rivate respondent's choice of
"PHILIPS" as part of its corporate name [STANDARD
PHILIPS CORPORATION] . . . tends to show said
respondent's intention to ride on the popularity and
established goodwill of said petitioner's business
throughout the world" (Rollo, p. 137). The
subsequent appropriator of the name or one
confusingly similar thereto usually seeks an unfair
advantage, a free ride of another's goodwill
(American Gold Star Mothers, Inc. v. National Gold
Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d
488).
In allowing Private Respondent the continued use of
its corporate name, the SEC maintains that the
corporate names of Petitioners PHILIPS ELECTRICAL
LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT,
INC. contain at least two words different from that of
the corporate name of respondent STANDARD
PHILIPS CORPORATION, which words will readily
identify Private Respondent from Petitioners and
vice-versa.
True, under the Guidelines in the Approval of
Corporate and Partnership Names formulated by the
SEC, the proposed name "should not be similar to
one already used by another corporation or
partnership. If the proposed name contains a word
already used as part of the firm name or style of a
registered company; the proposed name must
contain two other words different from the company
already registered" (Emphasis ours). It is then
pointed out that Petitioners Philips Electrical and
Philips Industrial have two words different from that
of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a
trademark or trade name which was registered as far
back as 1922. Petitioners, therefore, have the
exclusive right to its use which must be free from any
infringement by similarity. A corporation has an
exclusive right to the use of its name, which may be
protected by injunction upon a principle similar to
that upon which persons are protected in the use of
trademarks and tradenames (18 C.J.S. 574). Such
principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that
name and perhaps carried on its business thereunder,
that another should attempt to use the same name,
or the same name with a slight variation in such a
way as to induce persons to deal with it in the belief
that they are dealing with the corporation which has
given a reputation to the name (6 Fletcher [Perm Ed],
pp. 39-40, citing Borden Ice Cream Co. v. Borden's
Condensed Milk Co., 210 F 510). Notably, too, Private
Respondent's name actually contains only a single
word, that is, "STANDARD", different from that of
Petitioners inasmuch as the inclusion of the term
"Corporation" or "Corp." merely serves the Purpose
of distinguishing the corporation from partnerships
and other business organizations.
The fact that there are other companies engaged in
other lines of business using the word "PHILIPS" as
part of their corporate names is no defense and does
not warrant the use by Private Respondent of such
word which constitutes an essential feature of
Petitioners' corporate name previously adopted and
registered and-having acquired the status of a
well-known mark in the Philippines and
internationally as well (Bureau of Patents Decision
No. 88-35 [TM], June 17, 1988, SEC Records).
In support of its application for the registration of its
Articles of Incorporation with the SEC, Private
Respondent had submitted an undertaking
"manifesting its willingness to change its corporate
name in the event another person, firm or entity has
acquired a prior right to the use of the said firm
name or one deceptively or confusingly similar to it."
Private respondent must now be held to its
undertaking.
As a general rule, parties organizing a corporation
must choose a name at their peril; and the use of a
name similar to one adopted by another corporation,
whether a business or a nonbusiness or non-profit
organization if misleading and likely to injure it in the
exercise in its corporate functions, regardless of
intent, may be prevented by the corporation having
the prior right, by a suit for injunction against the
new corporation to prevent the use of the name
(American Gold Star Mothers, Inc. v. National Gold
Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27
ALR 2d 948).
WHEREFORE, the Decision of the Court of Appeals
dated 31 July 1990, and its Resolution dated 20
November 1990, are SET ASIDE and a new one
entered ENJOINING private respondent from using
"PHILIPS" as a feature of its corporate name, and
ORDERING the Securities and Exchange Commission
to amend private respondent's Articles of
Incorporation by deleting the word PHILIPS from the
corporate name of private respondent.
No costs.
SO ORDERED.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs.
COURT OF APPEALS, LYCEUM OF APARRI, LYCEUM OF
CABAGAN, LYCEUM OF CAMALANIUGAN, INC.,
LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC.,
BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES,
LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF
EASTERN MINDANAO, INC. and WESTERN
PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and
Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato,
Tarriela & Tan Law Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES;
REGISTRATION OF PROPOSED NAME WHICH IS
IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF
ANY EXISTING CORPORATION, PROHIBITED;
CONFUSION AND DECEPTION EFFECTIVELY
PRECLUDED BY THE APPENDING OF GEOGRAPHIC
NAMES TO THE WORD "LYCEUM". — The Articles of
Incorporation of a corporation must, among other
things, set out the name of the corporation. Section
18 of the Corporation Code establishes a restrictive
rule insofar as corporate names are concerned:
"Section 18. Corporate name. — No corporate name
may be allowed by the Securities an Exchange
Commission if the proposed name is identical or
deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law or is patently deceptive, confusing
or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall
issue an amended certificate of incorporation under
the amended name." The policy underlying the
prohibition in Section 18 against the registration of a
corporate name which is "identical or deceptively or
confusingly similar" to that of any existing
corporation or which is "patently deceptive" or
"patently confusing" or "contrary to existing laws," is
the avoidance of fraud upon the public which would
have occasion to deal with the entity concerned, the
evasion of legal obligations and duties, and the
reduction of difficulties of administration and
supervision over corporations. We do not consider
that the corporate names of private respondent
institutions are "identical with, or deceptively or
confusingly similar" to that of the petitioner
institution. True enough, the corporate names of
private respondent entities all carry the word
"Lyceum" but confusion and deception are
effectively precluded by the appending of geographic
names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken
by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan"
would be confused with the Lyceum of the
Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE
OF WORD "LYCEUM," NOT ATTENDED WITH
EXCLUSIVITY. — It is claimed, however, by petitioner
that the word "Lyceum" has acquired a secondary
meaning in relation to petitioner with the result that
word, although originally a generic, has become
appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The
doctrine of secondary meaning originated in the field
of trademark law. Its application has, however, been
extended to corporate names sine the right to use a
corporate name to the exclusion of others is based
upon the same principle which underlies the right to
use a particular trademark or tradename. In
Philippine Nut Industry, Inc. v. Standard Brands, Inc.,
the doctrine of secondary meaning was elaborated in
the following terms: " . . . a word or phrase originally
incapable of exclusive appropriation with reference
to an article on the market, because geographically
or otherwise descriptive, might nevertheless have
been used so long and so exclusively by one
producer with reference to his article that, in that
trade and to that branch of the purchasing public,
the word or phrase has come to mean that the
article was his product." The question which arises,
therefore, is whether or not the use by petitioner of
"Lyceum" in its corporate name has been for such
length of time and with such exclusivity as to have
become associated or identified with the petitioner
institution in the mind of the general public (or at
least that portion of the general public which has to
do with schools). The Court of Appeals recognized
this issue and answered it in the negative: "Under
the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with
reference to an article in the market, because
geographical or otherwise descriptive might
nevertheless have been used so long and so
exclusively by one producer with reference to this
article that, in that trade and to that group of the
purchasing public, the word or phrase has come to
mean that the article was his produce (Ana Ang vs.
Toribio Teodoro, 74 Phil. 56). This circumstance has
been referred to as the distinctiveness into which the
name or phrase has evolved through the substantial
and exclusive use of the same for a considerable
period of time. . . . No evidence was ever presented
in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has
indeed acquired secondary meaning in favor of the
appellant. If there was any of this kind, the same
tend to prove only that the appellant had been using
the disputed word for a long period of time. . . . In
other words, while the appellant may have proved
that it had been using the word 'Lyceum' for a long
period of time, this fact alone did not amount to
mean that the said word had acquired secondary
meaning in its favor because the appellant failed to
prove that it had been using the same word all by
itself to the exclusion of others. More so, there was
no evidence presented to prove that confusion will
surely arise if the same word were to be used by
other educational institutions. Consequently, the
allegations of the appellant in its first two assigned
errors must necessarily fail." We agree with the
Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that
petitioner's use of the word "Lyceum" has not been
attended with the exclusivity essential for
applicability of the doctrine of secondary meaning.
Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western
Pangasinan Lyceum and a little later with other
private respondent institutions which registered with
the SEC using "Lyceum" as part of their corporation
names. There may well be other schools using
Lyceum or Liceo in their names, but not registered
with the SEC because they have not adopted the
corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY
TO DETERMINE WHETHER THEY ARE CONFUSINGLY
OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE
ENTITY'S NAME. — petitioner institution is not
entitled to a legally enforceable exclusive right to use
the word "Lyceum" in its corporate name and that
other institutions may use "Lyceum" as part of their
corporate names. To determine whether a given
corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate
name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when
the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably
regarded as "identical" or "confusingly or deceptively
similar" with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly
registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the
SEC on 21 September 1950, it used the corporate
name Lyceum of the Philippines, Inc. and has used
that name ever since.
On 24 February 1984, petitioner instituted
proceedings before the SEC to compel the private
respondents, which are also educational institutions,
to delete the word "Lyceum" from their corporate
names and permanently to enjoin them from using
"Lyceum" as part of their respective names.
Some of the private respondents actively
participated in the proceedings before the SEC.
These are the following, the dates of their original
SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in
default for failure to file an answer despite service of
summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had
included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as
concerned the Lyceum of Malacanay and the Lyceum
of Marbel, for failure to serve summons upon these
two (2) entities. The case against the Liceum of
Araullo was dismissed when that school motu
proprio change its corporate name to "Pamantasan
ng Araullo."
The background of the case at bar needs some
recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No.
1241) against the Lyceum of Baguio, Inc. to require it
to change its corporate name and to adopt another
name not "similar [to] or identical" with that of
petitioner. In an Order dated 20 April 1977, Associate
Commissioner Julio Sulit held that the corporate
name of petitioner and that of the Lyceum of Baguio,
Inc. were substantially identical because of the
presence of a "dominant" word, i.e., "Lyceum," the
name of the geographical location of the campus
being the only word which distinguished one from
the other corporate name. The SEC also noted that
petitioner had registered as a corporation ahead of
the Lyceum of Baguio, Inc. in point of time, 1 and
ordered the latter to change its name to another
name "not similar or identical [with]" the names of
previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the
SEC before the Supreme Court in a case docketed as
G.R. No. L-46595. In a Minute Resolution dated 14
September 1977, the Court denied the Petition for
Review for lack of merit. Entry of judgment in that
case was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No.
L-46595, petitioner then wrote all the educational
institutions it could find using the word "Lyceum" as
part of their corporate name, and advised them to
discontinue such use of "Lyceum." When, with the
passage of time, it became clear that this recourse
had failed, petitioner instituted before the SEC
SEC-Case No. 2579 to enforce what petitioner claims
as its proprietary right to the word "Lyceum." The
SEC hearing officer rendered a decision sustaining
petitioner's claim to an exclusive right to use the
word "Lyceum." The hearing officer relied upon the
SEC ruling in the Lyceum of Baguio, Inc. case
(SEC-Case No. 1241) and held that the word
"Lyceum" was capable of appropriation and that
petitioner had acquired an enforceable exclusive
right to the use of that word.
On appeal, however, by private respondents to the
SEC En Banc, the decision of the hearing officer was
reversed and set aside. The SEC En Banc did not
consider the word "Lyceum" to have become so
identified with petitioner as to render use thereof by
other institutions as productive of confusion about
the identity of the schools concerned in the mind of
the general public. Unlike its hearing officer, the SEC
En Banc held that the attaching of geographical
names to the word "Lyceum" served sufficiently to
distinguish the schools from one another, especially
in view of the fact that the campuses of petitioner
and those of the private respondents were physically
quite remote from each other. 3
Petitioner then went on appeal to the Court of
Appeals. In its Decision dated 28 June 1991, however,
the Court of Appeals affirmed the questioned Orders
of the SEC En Banc. 4 Petitioner filed a motion for
reconsideration, without success.
Before this Court, petitioner asserts that the Court of
Appeals committed the following errors:
1. The Court of Appeals erred in holding that the
Resolution of the Supreme Court in G.R. No. L-46595
did not constitute stare decisis as to apply to this
case and in not holding that said Resolution bound
subsequent determinations on the right to exclusive
use of the word Lyceum.
2. The Court of Appeals erred in holding that
respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the
word Lyceum has not acquired a secondary meaning
in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum
as a generic word cannot be appropriated by the
petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors,
though not necessarily seriatim. We begin by noting
that the Resolution of the Court in G.R. No. L-46595
does not, of course, constitute res adjudicata in
respect of the case at bar, since there is no identity
of parties. Neither is stare decisis pertinent, if only
because the SEC En Banc itself has re-examined
Associate Commissioner Sulit's ruling in the Lyceum
of Baguio case. The Minute Resolution of the Court in
G.R. No. L-46595 was not a reasoned adoption of the
Sulit ruling.
The Articles of Incorporation of a corporation must,
among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate
names are concerned:
"SECTION 18. Corporate name. — No corporate
name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or
deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law or is patently deceptive, confusing
or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall
issue an amended certificate of incorporation under
the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18
against the registration of a corporate name which is
"identical or deceptively or confusingly similar" to
that of any existing corporation or which is "patently
deceptive" or "patently confusing" or "contrary to
existing laws," is the avoidance of fraud upon the
public which would have occasion to deal with the
entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of
administration and supervision over corporations. 7
We do not consider that the corporate names of
private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate
names of private respondent entities all carry the
word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic
names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken
by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan"
would be confused with the Lyceum of the
Philippines.
Etymologically, the word "Lyceum" is the Latin word
for the Greek lykeion which in turn referred to a
locality on the river Ilissius in ancient Athens
"comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by
Pisistratus, Pericles and Lycurgus frequented by the
youth for exercise and by the philosopher Aristotle
and his followers for teaching." 8 In time, the word
"Lyceum" became associated with schools and other
institutions providing public lectures and concerts
and public discussions. Thus today, the word
"Lyceum" generally refers to a school or an
institution of learning. While the Latin word "lyceum"
has been incorporated into the English language, the
word is also found in Spanish (liceo) and in French
(lycee). As the Court of Appeals noted in its Decision,
Roman Catholic schools frequently use the term; e.g.,
"Liceo de Manila," "Liceo de Baleno" (in Baleno,
Masbate), "Liceo de Masbate," "Liceo de Albay." 9
"Lyceum" is in fact as generic in character as the
word "university." In the name of the petitioner,
"Lyceum" appears to be a substitute for "university;"
in other places, however, "Lyceum," or "Liceo" or
"Lycee" frequently denotes a secondary school or a
college. It may be (though this is a question of fact
which we need not resolve) that the use of the word
"Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable
number of educational institutions have adopted
"Lyceum" or "Liceo" as part of their corporate names.
Since "Lyceum" or "Liceo" denotes a school or
institution of learning, it is not unnatural to use this
word to designate an entity which is organized and
operating as an educational institution.
It is claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in
relation to petitioner with the result that that word,
although originally a generic, has become
appropriable by petitioner to the exclusion of other
institutions like private respondents herein.
The doctrine of secondary meaning originated in the
field of trademark law. Its application has, however,
been extended to corporate names sine the right to
use a corporate name to the exclusion of others is
based upon the same principle which underlies the
right to use a particular trademark or tradename. 10
In Philippine Nut Industry, Inc. v. Standard Brands,
Inc., 11 the doctrine of secondary meaning was
elaborated in the following terms:
" . . . a word or phrase originally incapable of
exclusive appropriation with reference to an article
on the market, because geographically or otherwise
descriptive, might nevertheless have been used so
long and so exclusively by one producer with
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase
has come to mean that the article was his product."
12
The question which arises, therefore, is whether or
not the use by petitioner of "Lyceum" in its corporate
name has been for such length of time and with such
exclusivity as to have become associated or
identified with the petitioner institution in the mind
of the general public (or at least that portion of the
general public which has to do with schools). The
Court of Appeals recognized this issue and answered
it in the negative:
"Under the doctrine of secondary meaning, a word
or phrase originally incapable of exclusive
appropriation with reference to an article in the
market, because geographical or otherwise
descriptive might nevertheless have been used so
long and so exclusively by one producer with
reference to this article that, in that trade and to that
group of the purchasing public, the word or phrase
has come to mean that the article was his produce
(Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the
distinctiveness into which the name or phrase has
evolved through the substantial and exclusive use of
the same for a considerable period of time.
Consequently, the same doctrine or principle cannot
be made to apply where the evidence did not prove
that the business (of the plaintiff) has continued for
so long a time that it has become of consequence
and acquired a good will of considerable value such
that its articles and produce have acquired a
well-known reputation, and confusion will result by
the use of the disputed name (by the defendant)
(Ang Si Heng vs. Wellington Department Store, Inc.,
92 Phil. 448).
With the foregoing as a yardstick, [we] believe the
appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the
hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there
was any of this kind, the same tend to prove only
that the appellant had been using the disputed word
for a long period of time. Nevertheless, its (appellant)
exclusive use of the word (Lyceum) was never
established or proven as in fact the evidence tend to
convey that the cross-claimant was already using the
word 'Lyceum' seventeen (17) years prior to the date
the appellant started using the same word in its
corporate name. Furthermore, educational
institutions of the Roman Catholic Church had been
using the same or similar word like 'Liceo de Manila,'
'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de
Masbate,' 'Liceo de Albay' long before appellant
started using the word 'Lyceum'. The appellant also
failed to prove that the word 'Lyceum' has become
so identified with its educational institution that
confusion will surely arise in the minds of the public
if the same word were to be used by other
educational institutions.
In other words, while the appellant may have proved
that it had been using the word 'Lyceum' for a long
period of time, this fact alone did not amount to
mean that the said word had acquired secondary
meaning in its favor because the appellant failed to
prove that it had been using the same word all by
itself to the exclusion of others. More so, there was
no evidence presented to prove that confusion will
surely arise if the same word were to be used by
other educational institutions. Consequently, the
allegations of the appellant in its first two assigned
errors must necessarily fail." 13 (Underscoring partly
in the original and partly supplied)
We agree with the Court of Appeals. The number
alone of the private respondents in the case at bar
suggests strongly that petitioner's use of the word
"Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of
secondary meaning. It may be noted also that at
least one of the private respondents, i.e., the
Western Pangasinan Lyceum, Inc., used the term
"Lyceum" seventeen (17) years before the petitioner
registered its own corporate name with the SEC and
began using the word "Lyceum." It follows that if any
institution had acquired an exclusive right to the
word "Lyceum," that institution would have been the
Western Pangasinan Lyceum, Inc. rather than the
petitioner institution.
In this connection, petitioner argues that because
the Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance
with the provisions of R.A. No. 62, which records had
been destroyed during World War II, Western
Pangasinan Lyceum should be deemed to have lost
all rights it may have acquired by virtue of its past
registration. It might be noted that the Western
Pangasinan Lyceum, Inc. registered with the SEC
soon after petitioner had filed its own registration on
21 September 1950. Whether or not Western
Pangasinan Lyceum, Inc. must be deemed to have
lost its rights under its original 1933 registration,
appears to us to be quite secondary in importance;
we refer to this earlier registration simply to
underscore the fact that petitioner's use of the word
"Lyceum" was neither the first use of that term in the
Philippines nor an exclusive use thereof. Petitioner's
use of the word "Lyceum" was not exclusive but was
in truth shared with the Western Pangasinan Lyceum
and a little later with other private respondent
institutions which registered with the SEC using
"Lyceum" as part of their corporation names. There
may well be other schools using Lyceum or Liceo in
their names, but not registered with the SEC because
they have not adopted the corporate form of
organization.
We conclude and so hold that petitioner institution is
not entitled to a legally enforceable exclusive right to
use the word "Lyceum" in its corporate name and
that other institutions may use "Lyceum" as part of
their corporate names. To determine whether a
given corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate
name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when
the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably
regarded as "identical" or "confusingly or deceptively
similar" with each other.
WHEREFORE, the petitioner having failed to show
any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review
is DENIED for lack of merit, and the Decision of the
Court of Appeals dated 28 June 1991 is hereby
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR.
and ROSALINA F. JAVIER, Petitioners, v. HON. COURT
OF APPEALS, PAIC SAVINGS & MORTGAGE BANK, INC.,
SHERIFFS GRACE BELVIS, SOFRONIO VILLARIN, PIO
MARTINEZ and NICANOR BLANCO, Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is an appeal by certiorari under Rule 45 of
the Rules of Court which seeks to set aside the
decision1 of the Court of Appeals dated 31 January
1997 which affirmed in toto the decision of Branch
62 of the Regional Trial Court (RTC) of Makati City,
dismissing the complaint for Annulment of Mortgage
and Foreclosure with Preliminary Injunction,
Prohibition and Damages filed by petitioners, and its
Resolution2 dated 20 June 1997 denying petitioners'
motion for reconsideration.
A complaint3 for Annulment of Mortgage and
Foreclosure with Preliminary Injunction, Prohibition
and Damages was filed by petitioners P.C. Javier &
Sons, Inc. and spouses Pablo C. Javier, Sr. and
Rosalina F. Javier against PAIC Savings & Mortgage
Bank, Inc., Grace S. Belvis, Acting Ex Officio Regional
Sheriff of Pasig, Metro Manila and Sofronio M.
Villarin, Deputy Sheriff-in-Charge, before Branch 62
of the RTC of Makati City, on 07 May 1984. The case
was docketed as Civil Case No. 7184.
On 10 May 1984, a Supplemental Complaint4 was
filed to include additional defendants, namely: Pio
Martinez, Acting Ex Officio Regional Sheriff of
Antipolo, Rizal, and Nicanor D. Blanco, Deputy
Sheriff-in-Charge.
The facts that gave rise to the aforesaid complaint, as
found by Branch 62 of the RTC of Makati City, and
adopted by the respondent court, are as follows:
In February, 1981, Plaintiff P.C. Javier and Sons
Services, Inc., Plaintiff Corporation, for short, applied
with First Summa Savings and Mortgage Bank, later
on renamed as PAIC Savings and Mortgage Bank,
Defendant Bank, for short, for a loan accommodation
under the Industrial Guarantee Loan Fund (IGLF)
for P1.5 Million. On March 21, 1981, Plaintiff
Corporation through Plaintiff Pablo C. Javier, Plaintiff
Javier for short, was advised that its loan application
was approved and that the same shall be forwarded
to the Central Bank (CB) for processing and release
(Exhibit A also Exhibit 8).
The CB released the loan to Defendant Bank in two (2)
tranches of P750,000 each. The first tranche was
released to the Plaintiff Corporation on May 18, 1981
in the amount of P750,000.00 and the second
tranche was released to Plaintiff Corporation on
November 21, 1981 in the amount of P750,000.00.
From the second tranche release, the amount
of P250,000.00 was deducted and deposited in the
name of Plaintiff Corporation under a time deposit.
Plaintiffs claim that the loan releases were delayed;
that the amount of P250,000.00 was deducted from
the IGLF loan of P1.5 Million and placed under time
deposit; that Plaintiffs were never allowed to
withdraw the proceeds of the time deposit because
Defendant Bank intended this time deposit as
automatic payments on the accrued principal and
interest due on the loan. Defendant Bank, however,
claims that only the final proceeds of the loan in the
amount of P750,000.00 was delayed the same having
been released to Plaintiff Corporation only on
November 20, 1981, but this was because of the
shortfall in the collateral cover of Plaintiff's loan; that
this second tranche of the loan was precisely
released after a firm commitment was made by
Plaintiff Corporation to cover the collateral deficiency
through the opening of a time deposit using a
portion of the loan proceeds in the amount
of P250,000.00 for the purpose; that in compliance
with their commitment to submit additional security
and open time deposit, Plaintiff Javier in fact opened
a time deposit for P250,000.00 and on February 15,
1983, executed a chattel mortgage over some
machineries in favor of Defendant Bank; that
thereafter, Plaintiff Corporation defaulted in the
payment of its IGLF loan with Defendant Bank hence
Defendant Bank sent a demand letter dated
November 22, 1983, reminding Plaintiff Javier to
make payments because their accounts have been
long overdue; that on May 2, 1984, Defendant Bank
sent another demand letter to Plaintiff spouses
informing them that since they have defaulted in
paying their obligation, their mortgage will now be
foreclosed; that when Plaintiffs still failed to pay,
Defendant Bank initiated extrajudicial foreclosure of
the real estate mortgage executed by Plaintiff
spouses and accordingly the auction sale of the
property covered by TCT No. 473216 was scheduled
by the Ex Officio Sheriff on May 9, 1984.5
The instant complaint was filed to forestall the
extrajudicial foreclosure sale of a piece of land
covered by Transfer Certificate of Title (TCT) No.
4732166 mortgaged by petitioner corporation in
favor of First Summa Savings and Mortgage Bank
which bank was later renamed as PAIC Savings and
Mortgage Bank, Inc.7 It likewise asked for the
nullification of the Real Estate Mortgages it entered
into with First Summa Savings and Mortgage Bank.
The supplemental complaint added several
defendants who scheduled for public auction other
real estate properties contained in the same real
estate mortgages and covered by TCTs No. N-5510,
No. 426872, No. 506346 and Original Certificate of
Title No. 10146.8
Several extrajudicial foreclosures of the mortgaged
properties were scheduled but were temporarily
restrained by the RTC notwithstanding the denial9 of
petitioners' prayer for a writ of preliminary injunction.
In an Order10 dated 10 December 1990, the RTC
ordered respondents-sheriffs to maintain the status
quo and to desist from further proceeding with the
extrajudicial foreclosure of the mortgaged
properties.
Among the issues raised by petitioners at the RTC are
whether or not First Summa Savings and Mortgage
Bank and PAIC Savings and Mortgage Bank, Inc. are
one and the same entity, and whether or not their
obligation is already due and demandable at the time
respondent bank commenced to extrajudicially
foreclose petitioners' properties in April 1984.
The RTC declared that First Summa Savings and
Mortgage Bank and PAIC Savings and Mortgage Bank,
Inc. are one and the same entity and that petitioner
corporation is liable to respondent bank for the
unpaid balance of its Industrial Guarantee Loan Fund
(IGLF) loans. The RTC further ruled that respondent
bank was justified in extrajudicially foreclosing the
real estate mortgages executed by petitioner
corporation in its favor because the loans were
already due and demandable when it commenced
foreclosure proceedings in April 1984.
In its decision dated 06 July 1993, the RTC disposed
of the case as follows:
Premises considered, judgment is hereby rendered
dismissing the Complaint against Defendant Bank
and ordering Plaintiffs to pay Defendant Bank jointly
and severally, the following:
1. The principal amount of
P700,453.45 under P.N. No. 713
plus all the accrued interests,
liquidated damages and other fees
due thereon from March 18, 1983
until fully paid as provided in said
PN;
2. The principal amount of
P749,879.38 under P.N. No. 841
plus all the accrued interests,
liquidated damages and other fees
due thereon from September 1,
1982 until fully paid as provided in
such PN;
3. The amount of P40,000.00 as
actual damages;
4. The amount of P30,000.00 as
exemplary damages;
5. The amount of P50,000.00 as
attorney's fees; plus
6. Cost of suit.11
Petitioners filed a Motion for
Reconsideration12 which was opposed13 by
respondent bank. The motion was denied in an Order
dated 11 May 1994.
Petitioners appealed the decision to the Court of
Appeals. The latter affirmed in toto the decision of
the lower court. It also denied petitioners' motion for FILING THIS CASE AGAINST THE
reconsideration. RESPONDENT BANK.

Hence, this appeal by certiorari. On the first assigned error, petitioners argue that
they are legally justified to withhold their amortized
Petitioners assigned the following as errors: payments to the respondent bank until such time
they would have been properly notified of the
A. PUBLIC RESPONDENT COURT change in the corporate name of First Summa
GRAVELY ERRED WHEN IT Savings and Mortgage Bank. They claim that they
SUSTAINED THE DISMISSAL OF have never received any formal notice of the alleged
PETITIONERS' COMPLAINT AND IN change of corporate name of First Summa Savings
AFFIRMING THE RIGHT OF THE and Mortgage Bank to PAIC Savings & Mortgage Bank,
RESPONDENT BANK TO COLLECT Inc. They further claim that the only and first time
THE IGLF LOANS IN LIEU OF FIRST they received formal evidence of a change in the
SUMMA SAVINGS AND MORTGAGE corporate name of First Summa Savings and
BANK WHICH ORIGINALLY Mortgage Bank surfaced when respondent bank
GRANTED SAID LOANS. presented its witness, Michael Caguioa, on 03 April
1990, where he presented the Securities and
COROLLARY TO THE ABOVE Exchange Commission (SEC) Certificate of Filing of
ARGUMENT, THE PUBLIC the Amended Articles of Incorporation of First
RESPONDENT COURT ALSO Summa Savings and Mortgage Bank,14 the Central
GRAVELY ERRED WHEN IT RULED Bank (CB) Certificate of Authority15 to change the
THAT THE PETITIONERS CANNOT name of First Summa Savings and Mortgage Bank to
WITHHOLD THEIR PAYMENT TO PAIC Savings and Mortgage Bank, Inc., and the CB
THE RESPONDENT BANK Circular Letter16 dated 27 June 1983.
NOTWITHSTANDING THE
ADMITTED INABILITY OF THE Their argument does not hold water. Their defense
RESPONDENT BANK TO FURNISH that they should first be formally notified of the
THE PETITIONERS THE SAID change of corporate name of First Summa Savings
REQUESTED DOCUMENTS. and Mortgage Bank to PAIC Savings and Mortgage
Bank, Inc., before they will continue paying their loan
b. PUBLIC RESPONDENT COURT obligations to respondent bank presupposes that
GRAVELY ERRED WHEN IT there exists a requirement under a law or regulation
SUSTAINED THE COLLECTION OF ordering a bank that changes its corporate name to
THE ENTIRE PROCEEDS OF THE formally notify all its debtors. After going over the
IGLF LOANS OF P1,500,000.00 Corporation Code and Banking Laws, as well as the
DESPITE THE FACT THAT THE regulations and circulars of both the SEC and the
P250,000.00 OF THIS LOAN WAS Bangko Sentral ng Pilipinas (BSP), we find that there
WITHHELD BY THE FIRST SUMMA is no such requirement. This being the case, this
SAVINGS AND MORTGAGE BANK Court cannot impose on a bank that changes its
TO BECOME PART OF THE corporate name to notify a debtor of such change
COLLATERALS TO THE SAID absent any law, circular or regulation requiring it.
P1,500,000.00 LOAN. Such act would be judicial legislation. The formal
notification is, therefore, discretionary on the bank.
c. PUBLIC RESPONDENT COURT Unless there is a law, regulation or circular from the
GRAVELY ERRED WHEN IT SEC or BSP requiring the formal notification of all
SUSTAINED THE DAMAGES debtors of banks of any change in corporate name,
AWARDED TO THE RESPONDENT such notification remains to be a mere internal policy
BANK DESPITE THE ABSENCE OF that banks may or may not adopt.
MALICE OR BAD FAITH ON THE
PART OF THE PETITIONERS IN In the case at bar, though there was no evidence
showing that petitioners were furnished copies of
official documents showing the First Summa Savings
and Mortgage Bank's change of corporate name to
PAIC Savings and Mortgage Bank, Inc., evidence
abound that they had notice or knowledge thereof.
Several documents establish this fact. First,
letter17 dated 16 July 1983 signed by Raymundo V.
Blanco, Accountant of petitioner corporation,
addressed to PAIC Savings and Mortgage Bank, Inc.
Part of said letter reads: "In connection with your
inquiry as to the utilization of funds we obtained
from the former First Summa Savings and Mortgage
Bank, . . ." Second, Board Resolution18 of petitioner
corporation signed by Pablo C. Javier, Sr. on 24
August 1983 authorizing him to execute a Chattel
Mortgage over certain machinery in favor of PAIC
Savings and Mortgage Bank, Inc. Third, Secretary's
Certificate19 signed by Fortunato E. Gabriel,
Corporate Secretary of petitioner corporation, on 01
September 1983, certifying that a board resolution
was passed authorizing Mr. Pablo C. Javier, Sr. to
execute a chattel mortgage on the corporation's
equipment that will serve as collateral to cover the
IGLF loan with PAIC Savings and Mortgage Bank, Inc.
Fourth, undated letter20 signed by Pablo C. Javier, Sr.
and addressed to PAIC Savings and Mortgage Bank,
Inc., authorizing Mr. Victor F. Javier, General
Manager of petitioner corporation, to secure from
PAIC Savings and Mortgage Bank, Inc. certain
documents for his signature.
From the foregoing documents, it cannot be denied
that petitioner corporation was aware of First
Summa Savings and Mortgage Bank's change of
corporate name to PAIC Savings and Mortgage Bank,
Inc. Knowing fully well of such change, petitioner
corporation has no valid reason not to pay because
the IGLF loans were applied with and obtained from
First Summa Savings and Mortgage Bank. First
Summa Savings and Mortgage Bank and PAIC Savings
and Mortgage Bank, Inc., are one and the same bank
to which petitioner corporation is indebted. A change
in the corporate name does not make a new
corporation, whether effected by a special act or
under a general law. It has no effect on the identity
of the corporation, or on its property, rights, or
liabilities.21 The corporation, upon such change in its
name, is in no sense a new corporation, nor the
successor of the original corporation. It is the same
corporation with a different name, and its character
is in no respect changed.22
Anent the second assigned error, this Court rules
that respondent court did not err when it sustained
the collection of the entire proceeds of the IGLF
loans amounting to P1,500,000.00 despite the
withholding of P250,000.00 to become part of the
collaterals to the said P1,500,000.00 IGLF loan.
Petitioners contend that the collaterals they
submitted were more than sufficient to cover the
P1,500,000.00 IGLF loan. Such contention is
untenable. Petitioner corporation was required to
place P250,000.00 in a time deposit with respondent
bank for the simple reason that the collateral it put
up was insufficient to cover the IGLF loans it has
received. It admitted the shortfall of its collateral
when it authorized petitioner Pablo C. Javier,
Sr., via a board resolution,23 to execute a chattel
mortgage over certain machinery in favor of PAIC
Savings and Mortgage Bank, Inc. which was certified
by its corporate secretary.24 If the collateral it put up
was sufficient, why then did it execute another
chattel mortgage?chanroblesvirtualawlibrary
In his order dated 07 September 1984, Hon. Rafael T.
Mendoza found that the loanable value of the lands,
buildings, machinery and equipment amounted only
to P934,000.00. The order reads in part:
The terms and conditions of the IGLF loan extended
to plaintiff corporation are governed by the loan and
security documents evidencing said loan. Although
the loan agreement was approved by the defendant
bank, the same has to be processed and be finally
approved by the Central Bank of the Philippines, in
pursuance to the IGLF program, of which the
defendant bank is an accredited participant. The
defendant had to await Central Bank's advise (sic)
regarding the final approval of the loan before the
release of the proceeds thereof. The proceeds of the
loan was released to the plaintiff on 6 April and
November 20, 1981, and the final proceeds was
released only on November 20, 1981, on account of
short fall in the collateral covered by the lands and
buildings as well as the machineries and equipment
then subject of the existing mortgages in favor of the
defendant bank, having only a loanable value of
P934,000.00, and only after a firm commitment
made by plaintiff corporation to the defendant bank
to correct the collateral deficiency thru the execution
of a chattel mortgage on additional machineries,
equipment and tools and thru the opening of a time
deposit with PAIC Bank using a portion of the loan
proceeds in the amount of P250,000.00 to answer
for its obligation to the defendant bank under the
IGLF loan was the final proceeds of the loan released
in favor of the plaintiffs. The delay in the release of
the final proceeds of the IGLF loan was due to the
aforestated collateral deficiency.25
As declared by the respondent court, the finding in
said order was not disputed in the appeal before it. It
said that what was contained in petitioners' brief was
that "their loans were 'overcollateralized,' and fail to
specify why or in what manner it was so."26 Having
failed to raise this issue before the respondent court,
petitioners thus cannot raise this issue before this
Court. Moreover, since the issue of whether or not
the collateral put up by petitioners is sufficient is
factual, the same is not proper for this Court's
consideration. The basic rule is that factual questions
are beyond the province of the Supreme Court in a
Petition for Review .27
Petitioners maintain that to collect the P250,000.00
from them would be a clear case of unjust
enrichment because they have not availed or used
said amount for the same was unlawfully withheld
from them.
We do not agree. The fundamental doctrine of unjust
enrichment is the transfer of value without just cause
or consideration. The elements of this doctrine are:
enrichment on the part of the defendant;
impoverishment on the part of the plaintiff; and lack
of cause. The main objective is to prevent one to
enrich himself at the expense of another.28 It is
commonly accepted that this doctrine simply means
that a person shall not be allowed to profit or enrich
himself inequitably at another's expense.29 In the
instant case, there is no unjust enrichment to speak
of. The amount of P225,905.79 was applied as
payment for petitioner corporation's loan which was
Date
taken from the P250,000.00, together with its
(Per PN Schedule)
accrued interest, that was placed in time deposit
with First Summa Savings and Mortgage Bank. The
use of said amount as payment was approved by
petitioner Pablo C. Javier, Sr. on 17 March 1983.30 As
further found by the RTC in its decision,July
the6,balance
1981
of the time deposit was withdrawn by petitioners.31
October 6, 1981
Petitioner corporation faults respondent bank, then
known as First Summa Savings and Mortgage Bank,
January 6, 1982
for requiring it to put up as additional collateral the
amount of P250,000.00 inasmuch as the CB never
required it to do so. It added that respondent bank
took advantage of its urgent and immediate need at
the time for the proceeds of the IGLF loans that it
had no choice but to comply with respondent bank's
requirement to put in time deposits the said amount
as additional collateral.
We agree with respondent court that the questioning
of the propriety of the placing of the P250,000.00 in
time deposits32 with respondent bank as additional
collateral was belatedly made. As above-discussed,
the requirement to give additional collateral was
warranted because the collateral petitioner
corporation put up failed to cover its IGLF loans. If
petitioner corporation was really bent on questioning
the reasonableness of putting up the
aforementioned amount as additional collateral, it
should have done immediately after it made the time
deposits on 26 November 1981. This, it did not do. It
questioned the placing of the time deposits only on
08 February 198433 or long after defendant bank had
already demanded full payment of the loans, then
amounting to P2,045,401.79 as of 22 November
1983. It is too late in the day for petitioner
corporation to question the placing of the
P250,000.00 in time deposits after it failed to pay its
loan obligations as scheduled, making them due and
demandable, and after a demand for full payment
has been made. We will not allow petitioner
corporation to have one's cake and eat it too.
As regards the payments made by petitioner
corporation, respondent court has this to say:
The trial court held, based on plaintiffs' own exhibits,
that plaintiff[s] made the following payments:
On Promissory Note No. 713:
Actual Date of
Amount
Payment
August 3, 1981 P 28,125.00
October 28, 1981 28,836.13
January 22, 1982 29,227.38
 225,905.79 As to the third assigned error, petitioners argue that
March 17, 1983 there being no malice or bad faith on their part when
they filed the instant case, no damages should have
been awarded to respondent bank.
TOTAL P 312,094.30
We cannot sustain such argument. The presence of
malice or bad faith is very evident in the case before
And on Promissory Note No. 841: us. By the documents it executed, petitioner
corporation was well aware that First Summa Savings
Date Actual Date of and Mortgage Bank changed its corporate name to
Amount PAIC Savings and Mortgage Bank, Inc. Despite
Per PN Schedule) Payment
knowledge that First Summa Savings and Mortgage
Bank and PAIC Savings and Mortgage Bank, Inc., are
one and the same entity, it pretended otherwise. It
used this purported ignorance as an excuse to
February 20, 1982 April 13, 1982 P 28,569.30
renege on its obligation to pay its loans after they
became due and after demands for payment were
May 20, 1982 July 7, 1982 29,254.31made, claiming that it never obtained the loans from
respondent bank.
36,795.44
August 20, 1982 August 31, 1982 No good faith was shown by petitioner corporation.
If it were in good faith in complying with its loan
obligations since it believed that respondent bank
TOTAL P 94,619.05
had no right to the payment, it should have made a
valid consignation in court. This, it did not do. If
petitioner corporation were at a loss as to who
Plaintiff-appellant[s] does not dispute the finding, should receive the payment, it could have easily
which is obvious from the foregoing summary, that taken steps and inquired from the SEC, CB of the
plaintiff[s] stopped payments on March 17, 1983 on Philippines or from the bank itself from which it
Promissory Note No. 713, and on August 31, 1982 on received the loans and to where it made previous
Promissory Note No. 841. payments. Further, the fact that it was respondent
bank that was demanding payment for loans already
By simply looking at the amortization schedule due and demandable and not First Summa Savings
attached to the two promissory notes, it is clear that and Mortgage Bank is sufficient to make petitioner
plaintiff[s] already defaulted on its loan obligations corporation wonder why this is so. It never took any
when the defendant Bank gave notice of the initiative to clear the matter. Instead, it paid no
foreclosure proceedings on April 28, 1984. On attention to the valid demands of respondent bank.
amortization payments alone, plaintiff[s] should have
paid a total of P459,339 as of April 6, 1984 on The awarding of actual and compensatory damages,
Promissory [Note] No. 713, and a total of as well as attorney's fees, is justified under the
P328,173.00 as of February 20, 1984 on Promissory circumstances. We quote with approval the reasons
Note [No.] 841. No extended computation is given by the RTC for the grant of the same:
necessary to demonstrate that, even without
imputing the liquidated damages equivalent to 2% a Considering that Defendant Bank had been
month on the delayed payments (see second prevented at least four (4) times from foreclosing the
paragraph of the promissory notes), the plaintiffs mortgages (i.e., Temporary Restraining Orders of
were grossly deficient in amortization payments, and May 9 and 19 and October 22, 1984 and status quo
already in default when the foreclosure proceedings order of December 10, 1990 enjoining the
were commenced. Further, we note that under the extrajudicial foreclosure sales of May 9 and 16 and
terms of the promissory note, "failure to pay an October 23, 1984 and December 20, 1990,
installment when due shall entitle the bank or its respectively), it is proper that Defendant Bank be
assign to declare all the obligations as immediately reimbursed its actual expenses. The amount of
due and payable" (second paragraph).34
P40,000.00 is reasonable reimbursement for the
publication and other expenses incurred in the four
(4) extrajudicial foreclosures which were enjoined by
the Court. Considering the wanton and reckless filing
of this clearly unfounded and baseless legal action
and the fact that Defendant Bank had to defend itself
against such suit, attorney's fees in the amount of
P50,000.00 should be paid by the Plaintiffs to the
Defendant Bank. Defendant Bank failed to adduce
indubitable proof on the moral and exemplary
damages that it seeks. Nevertheless, since such proof
is not absolutely necessary and primarily as an
example for the public good to deter others from
filing a similar clearly unfounded legal action,
Defendant Bank should be entitled to an award of
exemplary damages.35
This Court finds that petitioners failed to comply with
what is incumbent upon them - to pay their loans
when they became due. The lame excuse they
belatedly advanced for their non-payment cannot
and should not prevent respondent bank from
exercising its right to foreclose the real estate
mortgages executed in its favor.
WHEREFORE, premises considered, the Court of
Appeals decision dated 31 January 1997 and its
resolution dated 20 June 1997 are hereby
AFFIRMED in toto. Costs against petitioners.
SO ORDERED.
PHILIPPINE FIRST INSURANCE COMPANY,
INC., plaintiff-appellant,
vs.
MARIA CARMEN HARTIGAN, CGH, and O.
ENGKEE, defendants-appellees.
Bausa, Ampil & Suarez for plaintiff-appellant.
Nicasio E. Martin for defendants-appellees.
BARREDO, J.:
Appeal from the decision dated 6 October 1962 of
the Court of First Instance of Manila — dismissing
the action in its Civil Case No. 48925 — brought by
the herein plaintiff-appellant Philippine First
Insurance Co., Inc. to the Court of Appeals which
could, upon finding that the said appeal raises purely
questions of law, declared itself without jurisdiction
to entertain the same and, in its resolution dated 15
July 1966, certified the records thereof to this Court
for proper determination.
The antecedent facts are set forth in the pertinent
portions of the resolution of the Court of Appeals
referred to as follows:
According to the complaint, plaintiff was originally
organized as an insurance corporation under the
name of 'The Yek Tong Lin Fire and Marine Insurance
Co., Ltd.' The articles of incorporation originally
presented before the Security and Exchange
Commissioner and acknowledged before Notary
Public Mr. E. D. Ignacio on June 1, 1953 state that the
name of the corporation was 'The Yek Tong Lin Fire
and Marine Insurance Co., Ltd.' On May 26, 1961 the
articles of incorporation were amended pursuant to
a certificate of the Board of Directors dated March 8,
1961 changing the name of the corporation to
'Philippine First Insurance Co., Inc.'.
The complaint alleges that the plaintiff Philippine
First Insurance Co., Inc., doing business under the
name of 'The Yek Tong Lin Fire and Marine Insurance
Co., Lt.' signed as co-maker together with defendant
Maria Carmen Hartigan, CGH, a promissory note for
P5,000.00 in favor of the China Banking Corporation
payable within 30 days after the date of the
promissory note with the usual banking interest; that
the plaintiff agreed to act as such co-maker of the
promissory note upon the application of the
defendant Maria Carmen Hartigan, CGH, who
together with Antonio F. Chua and Chang Ka Fu,
signed an indemnity agreement in favor of the
plaintiff, undertaking jointly and severally, to pay the
plaintiff damages, losses or expenses of whatever
kind or nature, including attorney's fees and legal
costs, which the plaintiff may sustain as a result of
the execution by the plaintiff and co-maker of Maria
Carmen Hartigan, CGH, of the promissory note
above-referred to; that as a result of the execution of
the promissory note by the plaintiff and Maria
Carmen Hartigan, CGH, the China Banking
Corporation delivered to the defendant Maria
Carmen Hartigan, CGH, the sum of P5,000.00 which
said defendant failed to pay in full, such that on
August 31, 1961 the same was. renewed and as of
November 27, 1961 there was due on account of the
promissory note the sum of P4,559.50 including
interest. The complaint ends with a prayer for
judgment against the defendants, jointly and
severally, for the sum of P4,559.50 with interest at
the rate of 12% per annum from November 23, 1961
plus P911.90 by way of attorney's fees and costs.
Although O. Engkee was made as party defendant in
the caption of the complaint, his name is not
mentioned in the body of said complaint. However,
his name Appears in the Annex A attached to the
complaint which is the counter indemnity agreement
supposed to have been signed according to the
complaint by Maria Carmen Hartigan, CGH, Antonio F.
Chua and Chang Ka Fu.
In their answer the defendants deny the allegation
that the plaintiff formerly conducted business under
the name and style of 'The Yek Tong Lin Fire and
Marine Insurance Co., Ltd.' They admit the execution
of the indemnity agreement but they claim that they
signed said agreement in favor of the Yek Tong Lin
Fire and Marine Insurance Co., Ltd.' and not in favor
of the plaintiff. They likewise admit that they failed to
pay the promissory note when it fell due but they
allege that since their obligation with the China
Banking Corporation based on the promissory note
still subsists, the surety who co-signed the
promissory note is not entitled to collect the value
thereof from the defendants otherwise they will be
liable for double amount of their obligation, there
being no allegation that the surety has paid the
obligation to the creditor.
By way of special defense, defendants claim that
there is no privity of contract between the plaintiff
and the defendants and consequently, the plaintiff
has no cause of action against them, considering that
the complaint does not allege that the plaintiff and
the 'Yek Tong Lin Fire and Marine Insurance Co., Ltd.'
are one and the same or that the plaintiff has
acquired the rights of the latter. The parties after the
admission of Exhibit A which is the amended articles
of incorporation and Exhibit 1 which is a demand
letter dated August 16, 1962 signed by the manager
of the loans and discount department of the China
Banking Corporation showing that the promissory
note up to said date in the sum of P4,500.00 was still
unpaid, submitted the case for decision based on the
pleadings.
Under date of 6 October 1962, the Court of First
Instance of Manila rendered the decision appealed. It
dismissed the action with costs against the plaintiff
Philippine First Insurance Co., Inc., reasoning as
follows:
... With these undisputed facts in mind, the parties
correctly concluded that the issues for resolution by
this Court are as follows:
(a) Whether or not the plaintiff is the real party in
interest that may validly sue on the indemnity
agreement signed by the defendants and the Yek
Tong Lin Fire & Marine Insurance Co., Ltd. (Annex A
to plaintiff's complaint ); and
(b) Whether or not a suit for indemnity or
reimbursement may under said indemnity
agreement prosper without plaintiff having yet paid
the amount due under said promissory note.
In the first place, the change of name of the Yek Tong
Lin Fire & Marine Insurance Co., Ltd. to the
Philippines First Insurance Co., Inc. is of dubious
validity. Such change of name in effect dissolved the
original corporation by a process of dissolution not
authorized by our corporation law (see Secs. 62 and
67, inclusive, of our Corporation Law). Moreover,
said change of name, amounting to a dissolution of
the Yek Tong Lin Fire & Marine Insurance Co., Ltd.,
does not appear to have been effected with the
written note or assent of stockholders representing
at least two-thirds of the subscribed capital stock of
the corporation, a voting proportion required not
only for the dissolution of a corporation but also for
any amendment of its articles of incorporation (Secs.
18 and 62, Corporation Law). Furthermore, such
change of corporate name appears to be against
public policy and may be effected only by express
authority of law (Red Line Transportation Co. v. Rural
Transit Co., Ltd., 60 Phil. 549, 555; Cincinnati
Cooperage Co., Ltd. vs. Vate, 26 SW 538, 539; Pilsen
Brewing Co. vs. Wallace, 125 NE 714), but there is
nothing in our corporation law authorizing the
change of corporate name in this jurisdiction.
In the second place, assuming that the change of
name of the Yek Tong Lin Fire & Marine Insurance Co.
Ltd., to Philippines pine First Insurance Co., Inc., as
accomplished on March 8, 1961, is valid, that would
mean that the original corporation, the Yek Tong Lin
Fire & Marine Insurance Co., Ltd., became dissolved
and of no further existence since March 8, 1961, so
that on May 15, 1961, the date the indemnity
agreement, Annex A, was executed, said original
corporation bad no more power to enter into any
agreement with the defendants, and the agreement
entered into by it was ineffective for lack of capacity
of said dissolved corporation to enter into said
agreement. At any rate, even if we hold that said
change of name is valid, the fact remains that there
is no evidence showing that the new entity, the
Philippine First Insurance Co., Inc. has with the
consent of the original parties, assumed the
obligations or was assigned the rights of action in the
original corporation, the Yek Tong Lin Fire & Marine
Insurance Co., Ltd. In other words, there is no
evidence of conventional subrogation of the Plaintiffs
in the rights of the Yek Tong Lin Fire & Marine
Insurance Co., Ltd. under said indemnity agreement
(Arts. 1300, 1301, New Civil Code). without such
subrogation assignment of rights, the herein plaintiff
has no cause of action against the defendants, and is,
therefore, not the right party in interest as plaintiff.
Last, but not least, assuming that the said change of
name was legal and operated to dissolve the original
corporation, the dissolved corporation, must
pursuant to Sec. 77 of our corporation law, be
deemed as continuing as a body corporate for three
(3) years from March 8, 1961 for the purpose of
prosecuting and defending suits. It is, therefore, the
Yek Tong Lin Fire & Marine Insurance Co., Ltd. that is
the proper party to sue the defendants under said
indemnity agreement up to March 8, 1964.
Having arrived at the foregoing conclusions, this
Court need not squarely pass upon issue (b)
formulated above.
WHEREFORE, plaintiff's action is hereby dismissed,
with costs against the plaintiff.
In due time, the Philippine First Insurance Company,
Inc. moved for reconsideration of the decision
aforesaid, but said motion was denied on December
3, 1962 in an order worded thus:
The motion for reconsideration, dated November 8,
1962, raises no new issue that we failed to consider
in rendering our decision of October 6, 1962.
However, it gives us an opportunity to amplify our
decision as regards the question of change of name
of a corporation in this jurisdiction.
We find nothing in our Corporation Law authorizing a
change of name of a corporation organized pursuant
to its provisions. Sec. 18 of the Corporation Law
authorizes, in our opinion, amendment to the
Articles of Incorporation of a corporation only as to
matters other than its corporate name. Once a
corporation is organized in this jurisdiction by the
execution and registration of its Articles of
Incorporation, it shall continue to exist under its
corporate name for the lifetime of its corporate
existence fixed in its Articles of Incorporation, unless
sooner legally dissolved (Sec. 11, Corp. Law).
Significantly, change of name is not one of the
methods of dissolution of corporations expressly
authorized by our Corporation Law. Also significant is
the fact that the power to change its corporate name
is not one of the general powers conferred on
corporations in this jurisdiction (Sec. 13, Corp. Law).
The enumeration of corporate powers made in our
Corporation Law implies the exclusion of all others
(Thomas v. West Jersey R. Co., 101 U.S. 71, 25 L. ed.
950). It is obvious, in this connection, that change of
name is not one of the powers necessary to the
exercise of the powers conferred on corporations by
said Sec. 13 (see Sec. 14, Corp. Law).
To rule that Sec. 18 of our Corporation Law
authorizes the change of name of a corporation by
amendment of its Articles of Incorporation is to
indulge in judicial legislation. We have examined the
cases cited in Volume 13 of American Jurisprudence
in support of the proposition that the general power
to alter or amend the charter of a corporation
necessarily includes the power to alter the name of a
corporation, and find no justification for said
conclusion arrived at by the editors of American
Jurisprudence. On the contrary, the annotations in
favor of plaintiff's view appear to have been based
on decisions in cases where the statute itself
expressly authorizes change of corporate name by
amendment of its Articles of Incorporation. The
correct rule in harmony with the provisions of our
Corporation Law is well expressed in an English case
as follows:
After a company has been completely register
without defect or omission, so as to be incorporated
by the name set forth in the deed of settlement, such
incorporated company has not the power to change
its name ... Although the King by his prerogative
might incorporate by a new name, and the newly
named corporation might retain former rights, and
sometimes its former name also, ... it never appears
to be such an act as the corporation could do by
itself, but required the same power as created the
corporation. (Reg. v. Registrar of Joint Stock Cos 10
Q.B. 839, 59 E.C.L. 839).
The contrary view appears to represent the minority
doctrine, judging from the annotations on decided
cases on the matter.
The movant invokes as persuasive precedent the
action of the Securities Commissioner in tacitly
approving the Amended, Articles of Incorporation on
May 26, 1961. We regret that we cannot in good
conscience lend approval to this action of the
Securities and Exchange Commissioner. We find no
justification, legal, moral, or practical, for adhering to
the view taken by the Securities and Exchange
Commissioner that the name of a corporation in the
Philippines may be changed by mere amendment of
its Articles of Incorporation as to its corporate name.
A change of corporate name would serve no useful
purpose, but on the contrary would most probably
cause confusion. Only a dubious purpose could
inspire a change of a corporate. name which, unlike a
natural person's name, was chosen by the
incorporators themselves; and our Courts should not
lend their assistance to the accomplishment of
dubious purposes.
WHEREFORE, we hereby deny plaintiff's motion for
reconsideration, dated November 8, 1962, for lack of
merit.
In this appeal appellant contends that —
I for example, to state the number and names of and
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS
JURISDICTION, THERE IS NOTHING IN OUR
CORPORATION LAW AUTHORIZING THE CHANGE OF
CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A
CHANGE OF CORPORATE NAME APPEARS TO BE
AGAINST PUBLIC POLICY;
III
THE TRIAL COURT ERRED IN HOLDING THAT A
CHANGE OF CORPORATE NAME HAS THE LEGAL
EFFECT OF DISSOLVING THE ORIGINAL
CORPORATION:
IV
THE TRIAL COURT ERRED IN HOLDING THAT THE
CHANGE OF NAME OF THE YEK TONG LIN FIRE &
MARINE INSURANCE CO., LTD. IS OF DUBIOUS
VALIDITY;
V
THE TRIAL COURT ERRED IN HOLDING THAT THE
APPELLANT HEREIN IS NOT THE RIGHT PARTY
INTEREST TO SUE DEFENDANTS-APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE
COMPLAINT.
Appellant's Position is correct; all the above
assignments of error are well taken. The whole case,
however, revolves around only one question. May a
Philippine corporation change its name and still
retain its original personality and individuality as
such?
The answer is not difficult to find. True, under
Section 6 of the Corporation Law, the first thing
required to be stated in the Articles of Incorporation
of any corn corporation is its name, but it is only one
among many matters equally if not more important,
that must be stated therein. Thus, it is also required,
residences of the incorporators and the residence or
location of the principal office of the corporation, its
term of existence, the amount of its capital stock and
the number of shares into which it is divided, etc.,
etc.
On the other hand, Section 18 explicitly permits the
articles of incorporation to be amended thus:
Sec. 18. — Any corporation may for legitimate
corporate purpose or purposes, amend its articles of
incorporation by a majority vote of its board of
directors or trustees and the vote or written assent
of two-thirds of its members, if it be a nonstock
corporation or, if it be a stock corporation, by the
vote or written assent of the stockholders
representing at least two-thirds of the subscribed
capital stock of the corporation Provided, however,
That if such amendment to the articles of
incorporation should consist in extending the
corporate existence or in any change in the rights of
holders of shares of any class, or would authorize
shares with preferences in any respect superior to
those of outstanding shares of any class, or would
restrict the rights of any stockholder, then any
stockholder who did not vote for such corporate
action may, within forty days after the date upon
which such action was authorized, object thereto in
writing and demand Payment for his shares. If, after
such a demand by a stockholder, the corporation and
the stockholder cannot agree upon the value of his
share or shares at the time such corporate action
was authorized, such values all be ascertained by
three disinterested persons, one of whom shall be
named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the appraisers shall be final, and if
their award is not paid by the corporation within
thirty days after it is made, it may be recovered in an
action by the stockholder against the corporation.
Upon payment by the corporation to the stockholder
of the agreed or awarded price of his share or shares,
the stockholder shall forthwith transfer and assign
the share or shares held by him as directed by the
corporation: Provided, however, That their own
shares of stock purchased or otherwise acquired by
banks, trust companies, and insurance companies,
should be disposed of within six months after
acquiring title thereto.
Unless and until such amendment to the articles of
incorporation shall have been abandoned or the
action rescinded, the stockholder making such
demand in writing shall cease to be a stockholder
and shall have no rights with respect to such shares,
except the right to receive payment therefor as
aforesaid.
A stockholder shall not be entitled to payment for his
shares under the provisions of this section unless the
value of the corporate assets which would remain
after such payment would be at least equal to the
aggregate amount of its debts and liabilities and the
aggregate par value and/or issued value of the
remaining subscribed capital stock.
A copy of the articles of incorporation as amended,
duly certified to be correct by the president and the
secretary of the corporation and a majority of the
board of directors or trustees, shall be filed with the
Securities and Exchange Commissioner, who shall
attach the same to the original articles of
incorporation, on file in his office. From the time of
filing such copy of the amended articles of
incorporation, the corporation shall have the same
powers and it and the members and stockholders
thereof shall thereafter be subject to the same
liabilities as if such amendment had been embraced
in the original articles of incorporation: Provided,
however, That should the amendment consist in
extending the corporate life, the extension shall not
exceed 50 years in any one instance. Provided,
further, That the original articles and amended
articles together shall contain all provisions required
by law to be set out in the articles of
incorporation: And provided, further, That nothing in
this section shall be construed to authorize any
corporation to increase or diminish its capital stock
or so as to effect any rights or actions which accrued
to others between the time of filing the original
articles of incorporation and the filing of the
amended articles.
The Securities and, Exchange Commissioner shall be
entitled to collect and receive the sum of ten pesos
for filing said copy of the amended articles of
incorporation. Provided, however, That when the
amendment consists in extending the term of
corporate existence, the Securities and Exchange
Commissioner shall be entitled to collect and receive
for the filing of its amended articles of incorporation
the same fees collectible under existing law for the
filing of articles of incorporation. The Securities &
Exchange Commissioner shall not hereafter file any
amendment to the articles of incorporation of any
bank, banking institution, or building and loan
association unless accompanied by a certificate of
the Monetary Board (of the Central Bank) to the
effect that such amendment is in accordance with
law. (As further amended by Act No. 3610, Sec. 2 and
Sec. 9. R.A. No. 337 and R.A. No. 3531.)
It can be gleaned at once that this section does not
only authorize corporations to amend their charter;
it also lays down the procedure for such amendment;
and, what is more relevant to the present discussion,
it contains provisos restricting the power to amend
when it comes to the term of their existence and the
increase or decrease of the capital stock. There is no
prohibition therein against the change of name. The
inference is clear that such a change is allowed, for if
the legislature had intended to enjoin corporations
from changing names, it would have expressly stated
so in this section or in any other provision of the law.
No doubt, "(the) name (of a corporation) is peculiarly
important as necessary to the very existence of a
corporation. The general rule as to corporations is
that each corporation shall have a name by which it
is to sue and be sued and do all legal acts. The name
of a corporation in this respect designates the
corporation in the same manner as the name of an
individual designates the person."1 Since an
individual has the right to change his name under
certain conditions, there is no compelling reason why
a corporation may not enjoy the same right. There is
nothing sacrosanct in a name when it comes to
artificial beings. The sentimental considerations
which individuals attach to their names are not
present in corporations and partnerships. Of course,
as in the case of an individual, such change may not
be made exclusively. by the corporation's own act. It
has to follow the procedure prescribed by law for the
purpose; and this is what is important and
indispensably prescribed — strict adherence to such
procedure.
Local well known corporation law commentators are
unanimous in the view that a corporation may
change its name by merely amending its charter in
the manner prescribed by law.2 American authorities
which have persuasive force here in this regard
because our corporation law is of American origin,
the same being a sort of codification of American
corporate law,3 are of the same opinion.
A general power to alter or amend the charter of a
corporation necessarily includes the power to alter
the name of the corporation. Ft. Pitt Bldg., etc., Assoc.
v. Model Plan Bldg., etc., Assoc., 159 Pa. St. 308, 28
Atl. 215; In re Fidelity Mut. Aid Assoc., 12 W.N.C. (Pa.)
271; Excelsior Oil Co., 3 Pa. Co. Ct. 184; Wetherill
Steel Casting Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec.
7, relating to an increase of the capital stock of a
corporation, it is provided that 'such agreement may
be amended in any other particular, excepting as
provided in the following section', which relates to a
decrease of the capital stock This section has been
held to authorize a change in the name of a
corporation. Armington v. Palmer, 21 R.I. 109, 42 Atl.
308, 43, L.R.A. 95, 79 Am. St. Rep. 786. (Vol. 19,
American and English Annotated Cases, p. 1239.)
Fletcher, a standard authority on American an
corporation law also says:
Statutes are to be found in the various jurisdictions
dealing with the matter of change in corporate
names. Such statutes have been subjected to judicial
construction and have, in the main, been upheld as
constitutional. In direct terms or by necessary
implication, they authorize corporations new
names and prescribe the mode of procedure for that
purpose. The same steps must be taken under some
statutes to effect a change in a corporate name, as
when any other amendment of the corporate charter
is sought .... When the general law thus deals with
the subject, a corporation can change its name only
in the manner provided. (6 Fletcher, Cyclopedia of
the Law of Private Corporations, 1968 Revised
Volume, pp. 212-213.) (Emphasis supplied)
The learned trial judge held that the above-quoted
proposition are not supported by the weight of
authority because they are based on decisions in
cases where the statutes expressly authorize change
of corporate name by amendment of the articles of
incorporation. We have carefully examined these
authorities and We are satisfied of their relevance.
Even Lord Denman who has been quoted by His
Honor from In Reg. v. Registrar of Joint Stock Cos. 10,
Q.B., 59 E.C.L. maintains merely that the change of
its name never appears to be such an act as the
corporation could do for itself, but required ;the
same Power as created a corporation." What seems
to have been overlooked, therefore, is that the
procedure prescribes by Section 18 of our
Corporation Law for the amendment of corporate
charters is practically identical with that for the
incorporation itself of a corporation.
In the appealed order of dismissal, the trial court,
made the observation that, according to this Court
in Red Line Transportation Co. v. Rural Transit Co.,
Ltd., 60 Phil, 549, 555, change of name of a
corporation is against public policy. We must clarify
that such is not the import of Our said decision. What
this Court held in that case is simply that:
We know of no law that empowers the Public Service
Commission or any court in this jurisdiction to
authorize one corporation to assume the name of
another corporation as a trade name. Both the Rural
Transit Company, Ltd., and the Bachrach Motor Co.,
Inc., are Philippine corporations and the very law of
their creation and continued existence requires each
to adopt and certify a distinctive name. The
incorporators 'constitute a body politic and
corporate under the name stated in the certificate.'
(Section 11, Act No. 1459, as amended.) A
corporation has the power 'of succession by its
corporate name.' (Section 13, ibid.) The name of a
corporation is therefore essential to its existence. It
cannot change its name except in the manner
provided by the statute. By that name alone is it
authorized to transact business. The law gives a
corporation no express or implied authority to
assume another name that is unappropriated; still
less that of another corporation, which is expressly
set apart for it and protected by the law. If any
corporation could assume at pleasure as an
unregistered trade name the name of another
corporation, this practice would result in confusion
and open the door to frauds and evasions and
difficulties of administration and supervision. The
policy of the law as expressed our corporation
statute and the Code of Commerce is clearly against
such a practice. (Cf. Scarsdale Pub. Co. — Colonial
Press vs. Carter, 116 New York Supplement, 731;
Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205
Illinois [Appellate Courts], 428, 434.)
In other words, what We have held to be contrary to
public policy is the use by one corporation of the
name of another corporation as its trade name. We
are certain no one will disagree that such an act can
only "result in confusion and open the door to frauds
and evasions and difficulties of administration and
supervision." Surely, the Red Line case was not one
of change of name.
Neither can We share the posture of His Honor that
the change of name of a corporation results in its
dissolution. There is unanimity of authorities to the
contrary.
An authorized change in the name of a corporation
has no more effect upon its identity as a corporation
than a change of name of a natural person has upon
his identity. It does not affect the rights of the
corporation or lessen or add to its obligations. After a
corporation has effected a change in its name it
should sue and be sued in its new name .... (13 Am.
Jur. 276-277, citing cases.)
A mere change in the name of a corporation, either
by the legislature or by the corporators or
stockholders under legislative authority, does not,
generally speaking, affect the identity of the
corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or
incurred by it. Indeed, it has been said that a change
of name by a corporation has no more effect upon
the identity of the corporation than a change of
name by a natural person has upon the identity of
such person. The corporation, upon such change in
its name, is in no sense a new corporation, nor the
successor of the original one, but remains and
continues to be the original corporation. It is the
same corporation with a different name, and its
character is in no respect changed. ... (6 Fletcher,
Cyclopedia of the Law of Private Corporations,
224-225, citing cases.)
The change in the name of a corporation has no
more effect upon its identity as a corporation than a
change of name of a natural person has upon his
identity. It does not affect the rights of the
corporation, or lessen or add to its obligations.
England. — Doe v. Norton, 11 M. & W. 913, 7 Jur.
751, 12 L. J. Exch. 418.
United States. — Metropolitan Nat. Bank v.
Claggett, 141 U.S. 520, 12 S. Ct. 60, 35 U.S. (L. ed.)
841.
Alabama. — Lomb v. Pioneer Sav., etc., Co., 106 Ala.
591, 17 So. 670; North Birmingham Lumber Co. v.
Sims, 157 Ala. 595, 48 So. 84.
Connecticut. — Trinity Church v. Hall, 22 Com. 125.
Illinois. — Mt. Palatine Academy v. Kleinschnitz 28 III,
133; St. Louis etc. R. Co. v. Miller, 43 Ill. 199; Reading
v. Wedder, 66 III. 80.
Indiana. — Rosenthal v. Madison etc., Plank Road Co.,
10 Ind. 358.
Kentucky. — Cahill v. Bigger, 8 B. Mon. 211; Wilhite v.
Convent of Good Shepherd, 177 Ky. 251, 78 S. W.
138.
Maryland. — Phinney v. Sheppard & Enoch Pratt
Hospital, 88 Md. 633, 42 Atl. 58, writ of error
dismissed, 177 U.S. 170, 20 S. Ct. 573, 44 U.S. (L. ed.)
720.
Missouri. — Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. — Carlon v. City Sav. Bank, 82 Neb. 582,
188 N. W. 334. New York First Soc of M.E. Church v.
Brownell, 5 Hun 464.
Pennsylvania. — Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. — South Carolina Mut Ins. Co. v.
Price 67 S.C. 207, 45 S.E. 173.
Virginia. — Wilson v. Chesapeake etc., R. Co., 21
Gratt 654; Wright-Caesar Tobacco Co. v. Hoen, 105
Va. 327, 54 S.E. 309.
Washington. — King v. Ilwaco R. etc., Co., 1 Wash.
127. 23 Pac. 924.
Wisconsin. — Racine Country Bank v. Ayers, 12 Wis.
512.
The fact that the corporation by its old name makes a
format transfer of its property to the corporation by
its new name does not of itself show that the change
in name has affected a change in the identity of the
corporation. Palfrey v. Association for Relief, etc., 110
La. 452, 34 So. 600. The fact that a corporation
organized as a state bank afterwards becomes a
national bank by complying with the provisions of the
National Banking Act, and changes its name
accordingly, has no effect on its right to sue upon
obligations or liabilities incurred to it by its former
name. Michigan Ins. Bank v. Eldred 143 U.S. 293, 12 S.
Ct. 450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has
been held not to be affected by the fact that the
church afterwards took a different name. Cahill v.
Bigger, 8 B. Mon (ky) 211.
A change in the name of a corporation is not a
divestiture of title or such a change as requires a
regular transfer of title to property, whether real or
personal, from the corporation under one name to
the same corporation under another
name. McCloskey v. Doherty, 97 Ky. 300, 30 S. W. 649.
(19 American and English Annotated Cases
1242-1243.)
As was very aptly said in Pacific Bank v. De Ro 37 Cal.
538, "The changing of the name of a corporation is
no more the creation of a corporation than the
changing of the name of a natural person is the
begetting of a natural person. The act, in both cases,
would seem to be what the language which we use
to designate it imports — a change of name, and not
a change of being.
Having arrived at the above conclusion, We have
agree with appellant's pose that the lower court also
erred in holding that it is not the right party in
interest to sue defendants-appellees.4 As correctly
pointed out by appellant, the approval by the
stockholders of the amendment of its articles of
incorporation changing the name "The Yek Tong Lin
Fire & Marine Insurance Co., Ltd." to "Philippine First
Insurance Co., Inc." on March 8, 1961, did not
automatically change the name of said corporation
on that date. To be effective, Section 18 of the
Corporation Law, earlier quoted, requires that "a
copy of the articles of incorporation as amended,
duly certified to be correct by the president and the
secretary of the corporation and a majority of the
board of directors or trustees, shall be filed with the
Securities & Exchange Commissioner", and it is only
from the time of such filing, that "the corporation
shall have the same powers and it and the members
and stockholders thereof shall thereafter be subject
to the same liabilities as if such amendment had
been embraced in the original articles of
incorporation." It goes without saying then that
appellant rightly acted in its old name when on May
15, 1961, it entered into the indemnity agreement,
Annex A, with the defendant-appellees; for only after
the filing of the amended articles of incorporation
with the Securities & Exchange Commission on May
26, 1961, did appellant legally acquire its new name;
and it was perfectly right for it to file the present
case In that new name on December 6, 1961. Such is,
but the logical effect of the change of name of the
corporation upon its actions.
Actions brought by a corporation after it has changed
its name should be brought under the new name
although for the enforcement of rights existing at the
time the change was made. Lomb v. Pioneer Sav., etc.,
Co., 106 Ala. 591, 17 So. 670: Newlan v. Lombard
University, 62 III. 195; Thomas v. Visitor of Frederick
County School, 7 Gill & J (Md.) 388; Delaware, etc., R.
Co. v. Trick, 23 N. J. L. 321; Northumberland Country
Bank v. Eyer, 60 Pa. St. 436; Wilson v. Chesapeake
etc., R. Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not
affect its right to bring an action on a note given to
the corporation under its former name. Cumberland
College v. Ish, 22. Cal. 641; Northwestern College v.
Schwagler, 37 Ia. 577. (19 American and English
Annotated Cases 1243.)
In consequence, We hold that the lower court erred
in dismissing appellant's complaint. We take this
opportunity, however, to express the Court's feeling
that it is apparent that appellee's position is more
technical than otherwise. Nowhere in the record is it
seriously pretended that the indebtedness sued
upon has already been paid. If appellees entertained
any fear that they might again be made liable to Yek
Tong Lin Fire & Marine Insurance Co. Ltd., or to
someone else in its behalf, a cursory examination of
the records of the Securities & Exchange Commission
would have sufficed to clear up the fact that Yek
Tong Lin had just changed its name but it had not
ceased to be their creditor. Everyone should realize
that when the time of the courts is utilized for cases
which do not involve substantial questions and the
claim of one of the parties, therein is based on pure
technicality that can at most delay only the ultimate
outcome necessarily adverse to such party because it
has no real cause on the merits, grave injustice is
committed to numberless litigants whose
meritorious cases cannot be given all the needed
time by the courts. We address this appeal once
more to all members of the bar, in particular, since it
is their bounden duty to the profession and to our
country and people at large to help ease as fast as
possible the clogged dockets of the courts. Let us not
wait until the people resort to other means to secure
speedy, just and inexpensive determination of their
cases.
WHEREFORE, judgment of the lower court is
reversed, and this case is remanded to the trial court
for further proceedings consistent herewith With
costs against appellees.
ZUELLIG FREIGHT AND CARGO
SYSTEMS, Petitioner, v. NATIONAL LABOR RELATIONS
COMMISSION AND RONALDO V. SAN
MIGUEL, Respondents.
DECISION
BERSAMIN, J.:
The mere change in the corporate name is not
considered under the law as the creation of a new
corporation; hence, the renamed corporation
remains liable for the illegal dismissal of its employee
separated under that guise.
The Case
Petitioner employer appeals the decision
promulgated on November 6, 2002,1 whereby the
Court of Appeals (CA) dismissed its petition
for certiorari and upheld the adverse decision of the
National Labor Relations Commission (NLRC) finding
respondent Ronaldo V. San Miguel to have been
illegally dismissed.
Antecedents
San Miguel brought a complaint for unfair labor
practice, illegal dismissal, non-payment of salaries
and moral damages against petitioner, formerly
known as Zeta Brokerage Corporation (Zeta).2 He
alleged that he had been a checker/customs
representative of Zeta since December 16, 1985; that
in January 1994, he and other employees of Zeta
were informed that Zeta would cease operations,
and that all affected employees, including him, would
be separated; that by letter dated February 28, 1994,
Zeta informed him of his termination effective March
31, 1994; that he reluctantly accepted his separation
pay subject to the standing offer to be hired to his
former position by petitioner; and that on April 15,
1994, he was summarily terminated, without any
valid cause and due process.
San Miguel contended that the amendments of the
articles of incorporation of Zeta were for the purpose
of changing the corporate name, broadening the
primary functions, and increasing the capital stock;
and that such amendments could not mean that Zeta
had been thereby dissolved.3
On its part, petitioner countered that San Miguel’s
termination from Zeta had been for a cause
authorized by the Labor Code; that its
non-acceptance of him had not been by any means
irregular or discriminatory; that its
predecessor-in-interest had complied with the
requirements for termination due to the cessation of
business operations; that it had no obligation to
employ San Miguel in the exercise of its valid
management prerogative; that all employees had
been given sufficient time to make their decision
whether to accept its offer of employment or not,
but he had not responded to its offer within the time
set; that because of his failure to meet the deadline,
the offer had expired; that he had nonetheless been
hired on a temporary basis; and that when it decided
to hire another employee instead of San Miguel, such
decision was not arbitrary because of seniority
considerations.4
Decision of the Labor Arbiter
On November 15, 1999, Labor Arbiter Francisco A.
Robles rendered a decision holding that San Miguel
had been illegally dismissed,5 to
wit:cralavvonlinelawlibrary
Contrary to respondents’ claim
that Zeta ceased operations and
closed its business, we believe that
there was merely a change of
business name and primary
purpose and upgrading of stocks of
the corporation. Zuellig and Zeta
are therefore legally the same
person and entity and this was
admitted by Zuellig’s counsel in its
letter to the VAT Department of
the Bureau of Internal Revenue on
08 June 1994 (Reply, Annex “A”).
As such, the termination of
complainant’s services allegedly
due to cessation of business
operations of Zeta is deemed illegal.
Notwithstanding his receipt of
separation benefits from
respondents, complainant is not
estopped from questioning the
legality of his dismissal.6
xxx x
WHEREFORE, in view of the
foregoing, complainant is found to
have been illegally dismissed.
Respondent Zuellig Freight and
Cargo Systems, Inc. is hereby
ordered to pay complainant his
backwages from April 1, 1994 up to
November 15, 1999, in the amount
of THREE HUNDRED TWENTY FOUR
THOUSAND SIX HUNDRED FIFTEEN
PESOS (P324,615.00).
The same respondent is ordered to
pay the complainant Ronaldo San
Miguel attorney’s fees equivalent
to ten percent (10%) of the total
award.
All other claims are dismissed.
SO ORDERED.7
Decision of the NLRC
Petitioner appealed, but the NLRC issued a resolution
on April 4, 2001,8 affirming the decision of the Labor
Arbiter.
The NLRC later on denied petitioner’s motion for
reconsideration via its resolution dated June 15,
2001.9
Decision of the CA
Petitioner then filed a petition for certiorari in the CA,
imputing to the NLRC grave abuse of discretion
amounting to lack or excess of jurisdiction, as
follows:cralavvonlinelawlibrary
1. In failing to consider the
circumstances attendant
to the cessation of
business of
Zeta;chanroblesvirtualawli
brary
2. In failing to consider that
San Miguel failed to meet
the deadline Zeta fixed for
its employees to accept
 the offer of petitioner for
re-employment;chanroble
svirtualawlibrary
3. In failing to consider that
San Miguel’s employment
with petitioner from April
1 to 15, 1994 could in no
way be interpreted as a
continuation of
employment with
Zeta;chanroblesvirtualawli
brary
4. In admitting in evidence
the letter dated January
21, 1994 of petitioner’s
counsel to the Bureau of
Internal Revenue; and
5. In awarding attorney’s
fees to San Miguel based
on Article 2208 of the Civil
Code and Article 111 of
the Labor Code.
On November 6, 2002, the CA promulgated its
assailed decision dismissing the petition
for certiorari,10viz:cralavvonlinelawlibrary
A careful perusal of the records
shows that the closure of business
operation was not validly
made. Consider the Certificate of
Filing of the Amended Articles of
Incorporation which clearly shows
that petitioner Zuellig is actually
the former Zeta as per amendment
dated January 21, 1994. The same
observation can be deduced with
respect to the Certificate of Filing
of Amended By-Laws dated May 10,
1994. As aptly pointed out by
private respondent San Miguel, the
amendment of the articles of
incorporation merely changed its
corporate name, broadened its
primary purpose and increased its
authorized capital stocks. The
requirements contemplated in
Article 283 were not satisfied in
this case. Good faith was not
established by mere registration
with the Securities and Exchange
Commission (SEC) of the Amended
Articles of Incorporation and
By-Laws. The factual milleu of the
case, considered in its totality,
shows that there was no closure to
speak of. The termination of
services allegedly due to cessation
of business operations of Zeta was
illegal. Notwithstanding private
respondent San Miguel’s receipt of
separation benefits from petitioner
Zuellig, the former is not estopped
from questioning the legality of his
dismissal.
Petitioner Zuellig’s allegation that
the five employees who refused to
receive the termination letters
were verbally informed that they
had until 6:00 p.m. of March 1,
1994 to receive the termination
letters and sign the employment
contracts, otherwise the former
would be constrained to withdraw
its offer of employment and seek
for replacements in order to
ensure the smooth operations of
the new company from its opening
date, is of no moment in view of
the foregoing circumstances. There
being no valid closure of business
operations, the dismissal of private
respondent San Miguel on alleged
authorized cause of cessation of
business pursuant to Article 283 of
the Labor Code, was utterly illegal.
Despite verbal notice that the
employees had until 6:00 p.m. of
March 1, 1994 to receive the
termination letters and sign the
employment contracts, the
dismissal was still illegal for the
said condition is null and void. In
point of facts and law, private
respondent San Miguel remained
an employee of petitioner Zuellig.
If at all, the alleged closure of
business operations merely
operates to suspend employment
relation since it is not permanent in
character.
Where there is no showing of a
clear, valid, and legal cause for the
termination of employment, the
law considers the matter a case of
illegal dismissal and the burden is
on the employer to prove that the
termination was for a valid or
authorized cause.
Findings of facts of the NLRC,
particularly when both the NLRC
and Labor Arbiter are in agreement,
are deemed binding and conclusive
upon the Supreme Court.
As regards the second and last
argument advanced by petitioner
Zuellig that private respondent San
Miguel is not entitled to attorney’s
fees, this Court finds no reason to
disturb the ruling of the public
respondent NLRC. Petitioner
Zuellig maintains that the factual
backdraft (sic) of this petition does
not call for the application of
Article 2208 of the Civil Code and
Article 111 of the Labor Code as
private respondent’s wages were
not withheld. On the other hand,
public respondent NLRC argues
that paragraphs 2 and 3, Article
2208 of the Civil Code and
paragraph (a), Article 111 of the
Labor Code justify the award of
attorney’s fees. NLRC was saying
to the effect that by petitioner
Zuellig’s act of illegally dismissing
private respondent San Miguel, the
latter was compelled to litigate and
thus incurred expenses to protect
his interest. In the same passion,
private respondent San Miguel
contends that petitioner Zuellig
acted in gross and evident bad
faith in refusing to satisfy his
plainly valid, just and demandable
claim.
After careful and judicious
evaluation of the arguments
advanced to support the propriety
or impropriety of the award of
attorney’s fees to private
respondent San Miguel, this Court
finds the resolutions of public
respondent NLRC supported by
laws and jurisprudence. It does
not need much imagination to see
that by reason of petitioner
Zuellig’s feigned closure of
business operations, private
respondent San Miguel incurred
expenses to protect his rights and
interests. Therefore, the award of
attorney’s fees is in order.
WHEREFORE, in view of the
foregoing, the resolutions dated
April 4, 2001 and June 15, 2001 of
the National Labor Relations
Commission affirming the
November 15, 1999 decision of the
Labor Arbiter in NLRC NCR
05-03639-94 (CA No. 022861-00)
are hereby AFFIRMED and the
instant petition for certiorari is
hereby DENIED and
ordered DISMISSED.
SO ORDERED.
Hence, petitioner appeals.
Issues
Petitioner asserts that the CA erred in holding that
the NLRC did not act with grave abuse of discretion in
ruling that the closure of the business operation of
Zeta had not been bona fide, thereby resulting in the
illegal dismissal of San Miguel; and in holding that the
NLRC did not act with grave abuse of discretion in
ordering it to pay San Miguel attorney’s fees.11
In his comment,12 San Miguel counters that the CA
correctly found no grave abuse of discretion on the
part of the NLRC because the ample evidence on
record showed that he had been illegally terminated;
that such finding accorded with applicable laws and
jurisprudence; and that he was entitled to back
wages and attorney’s fees.
In its reply,13 petitioner reiterates that the cessation
of Zeta’s business, which resulted in the severance of
San Miguel from his employment, was valid; that the
CA erred in upholding the NLRC’s finding that San
Miguel had been illegally terminated; that his
acknowledgment of the validity of his separation
from Zeta by signing a quitclaim and waiver estopped
him from claiming that it had subsequently employed
him; and that the award of attorney’s fees had no
basis in fact and in law.
Ruling
The petition for review on certiorari is denied for its
lack of merit.
First of all, the outcome reached by the CA that the
NLRC did not commit any grave abuse of discretion
was borne out by the records of the case. We cannot
undo such finding without petitioner making a clear
demonstration to the Court now that the CA gravely
erred in passing upon the petition for certiorari of
petitioner.
Indeed, in a special civil action for certiorari brought
against a court or quasi-judicial body with jurisdiction
over a case, petitioner carries the burden of proving
that the court or quasi-judicial body committed not a
merely reversible error but a grave abuse of
discretion amounting to lack or excess of jurisdiction
in issuing the impugned order.14 Showing mere abuse
of discretion is not enough, for it is necessary to
demonstrate that the abuse of discretion was
grave. Grave abuse of discretion means either that
the judicial or quasi-judicial power was exercised in
an arbitrary or despotic manner by reason of passion
or personal hostility, or that the respondent judge,
tribunal or board evaded a positive duty, or virtually
refused to perform the duty enjoined or to act in
contemplation of law, such as when such judge,
tribunal or board exercising judicial or quasi-judicial
powers acted in a capricious or whimsical manner as
to be equivalent to lack of jurisdiction.15 Under the
circumstances, the CA committed no abuse of
discretion, least of all grave, because its justifications
were supported by the records and by the applicable
laws and jurisprudence.
Secondly, it is worthy to point out that the Labor
Arbiter, the NLRC, and the CA were united in
concluding that the cessation of business by Zeta was
not a bona fide closure to be regarded as a valid
ground for the termination of employment of San
Miguel within the ambit of Article 283 of the Labor
Code. The provision pertinently
reads:cralavvonlinelawlibrary
Article 283. Closure of
establishment and reduction of
personnel. — The employer may
also terminate the employment of
any employee due to the
installation of labor-saving devices,
redundancy, retrenchment to
prevent losses or the closing or
cessation of operation of the
establishment or undertaking
unless the closing is for the purpose
of circumventing the provisions of
this Title, by serving a written notice
on the workers and the Department
of Labor and Employment at least
one (1) month before the intended
date thereof. x x x.
The unanimous conclusions of the CA, the NLRC and
the Labor Arbiter, being in accord with law, were not
tainted with any abuse of discretion, least of all grave,
on the part of the NLRC. Verily, the amendments of
the articles of incorporation of Zeta to change the
corporate name to Zuellig Freight and Cargo Systems,
Inc. did not produce the dissolution of the former as
a corporation. For sure, the Corporation
Code defined and delineated the different modes of
dissolving a corporation, and amendment of the
articles of incorporation was not one of such modes.
The effect of the change of name was not a change
of the corporate being, for, as well stated
in Philippine First Insurance Co., Inc. v.
Hartigan:16 “The changing of the name of a
corporation is no more the creation of a corporation
than the changing of the name of a natural person is
begetting of a natural person. The act, in both cases,
would seem to be what the language which we use
to designate it imports – a change of name, and not a
change of being.”
The consequences, legal and otherwise, of the
change of name were similarly dealt with in P.C.
Javier & Sons, Inc. v. Court of Appeals,17 with the
Court holding thusly:cralavvonlinelawlibrary
From the foregoing documents, it
cannot be denied that petitioner
corporation was aware of First
Summa Savings and Mortgage
Bank’s change of corporate name
to PAIC Savings and Mortgage Bank,
Inc. Knowing fully well of such
 change, petitioner corporation has
no valid reason not to pay because
the IGLF loans were applied with
and obtained from First Summa
Savings and Mortgage Bank. First
Summa Savings and Mortgage
Bank and PAIC Savings and
Mortgage Bank, Inc., are one and
the same bank to which petitioner
corporation is indebted. A change
in the corporate name does not
make a new corporation, whether
effected by a special act or under a
general law. It has no effect on the
identity of the corporation, or on its
property, rights, or liabilities. The
corporation, upon such change in
its name, is in no sense a new
corporation, nor the successor of
the original corporation. It is the
same corporation with a different
name, and its character is in no
respect changed. (Bold
underscoring supplied for
emphasis)
In short, Zeta and petitioner remained one and the
same corporation. The change of name did not give
petitioner the license to terminate employees of Zeta
like San Miguel without just or authorized cause. The
situation was not similar to that of an enterprise
buying the business of another company where the
purchasing company had no obligation to rehire
terminated employees of the latter.18 Petitioner,
despite its new name, was the mere continuation of
Zeta’s corporate being, and still held the obligation to
honor all of Zeta’s obligations, one of which was to
respect San Miguel’s security of tenure. The dismissal
of San Miguel from employment on the pretext that
petitioner, being a different corporation, had no
obligation to accept him as its employee, was illegal
and ineffectual.
And, lastly, the CA rightfully upheld the NLRC’s
affirmance of the grant of attorney’s fees to San
Miguel. Thereby, the NLRC did not commit any grave
abuse of its discretion, considering that San Miguel
had been compelled to litigate and to incur expenses
to protect his rights and interest. In Producers Bank
of the Philippines v. Court of Appeals,19 the Court
ruled that attorney’s fees could be awarded to a
party whom an unjustified act of the other party
compelled to litigate or to incur expenses to protect
his interest. It was plain that petitioner’s refusal to
reinstate San Miguel with backwages and other
benefits to which he had been legally entitled was
unjustified, thereby entitling him to recover
attorney’s fees.
WHEREFORE, the Court AFFIRMS the decision of the
Court of Appeals promulgated on November 6, 2002;
and ORDERS petitioner to pay the costs of suit.
SO ORDERED.
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR,
and AMER MACAORAO BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN
MACAPUNUNG, HADJI HASAN MACARAMPAD,
FREDERICK V. DUJERTE MONDACO ONTAL,
MARONSONG ANDOY, MACALABA INDAR
LAO. respondents.
L. Amores and R. Gonzales for petitioners.
Jose W. Diokno for respondents.
CASTRO, J.:
The petitioner Amer Macaorao Balindong is the
mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and
the rest of the respondents are the councilors, of the
municipality of Balabagan of the same province.
Balabagan was formerly a part of the municipality of
Malabang, having been created on March 15, 1960,
by Executive Order 386 of the then President Carlos
P. Garcia, out of barrios and sitios 1 of the latter
municipality.
The petitioners brought this action for prohibition
to nullify Executive Order 386 and to restrain the
respondent municipal officials from performing the
functions of their respective office relying on the
ruling of this Court in Pelaez v. Auditor
General 2 and Municipality of San Joaquin v. Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief
Justice) Concepcion, ruled: (1) that section 23 of
Republic Act 2370 [Barrio Charter Act, approved
January 1, 1960], by vesting the power to
create barrios in the provincial board, is a "statutory
denial of the presidential authority to create a
new barrio [and] implies a negation of
the bigger power to create municipalities," and (2)
that section 68 of the Administrative Code, insofar as
it gives the President the power to create
municipalities, is unconstitutional (a) because it
constitutes an undue delegation of legislative power
and (b) because it offends against section 10 (1) of
article VII of the Constitution, which limits the
President's power over local governments to mere
supervision. As this Court summed up its discussion:
"In short, even if it did not entail an undue delegation
of legislative powers, as it certainly does, said section
68, as part of the Revised Administrative Code,
approved on March 10, 1917, must be deemed
repealed by the subsequent adoption of the
Constitution, in 1935, which is utterly incompatible
and inconsistent with said statutory enactment."
On the other hand, the respondents, while
admitting the facts alleged in the petition,
nevertheless argue that the rule announced
in Pelaez can have no application in this case because
unlike the municipalities involved in Pelaez, the
municipality of Balabagan is at least a de
facto corporation, having been organized under color
of a statute before this was declared unconstitutional,
its officers having been either elected or appointed,
and the municipality itself having discharged its
corporate functions for the past five years preceding
the institution of this action. It is contended that as
a de facto corporation, its existence cannot be
collaterally attacked, although it may be inquired into
directly in an action for quo warranto at the instance
of the State and not of an individual like the
petitioner Balindong.
It is indeed true that, generally, an inquiry into the
legal existence of a municipality is reserved to the
State in a proceeding for quo warranto or other
direct proceeding, and that only in a few exceptions
may a private person exercise this function of
government. 4 But the rule disallowing collateral
attacks applies only where the municipal corporation
is at least a de facto corporations. 5 For where it is
neither a corporation de jure nor de facto, but a
nullity, the rule is that its existence may be,
questioned collaterally or directly in any action or
proceeding by any one whose rights or interests ate
affected thereby, including the citizens of the
territory incorporated unless they are estopped by
their conduct from doing so. 6
And so the threshold question is whether the
municipality of Balabagan is a de facto corporation.
As earlier stated, the claim that it is rests on the fact
that it was organized before the promulgation of this
Court's decision in Pelaez. 7
Accordingly, we address ourselves to the question
whether a statute can lend color of validity to an
attempted organization of a municipality despite the
fact that such statute is subsequently declared
unconstitutional.lawphi1.ñet
This has been a litigiously prolific question, sharply
dividing courts in the United States. Thus, some hold
that a de facto corporation cannot exist where the
statute or charter creating it is unconstitutional
because there can be no de facto corporation where
there can be no de jure one, 8 while others hold
otherwise on the theory that a statute is binding until
it is condemned as unconstitutional. 9
An early article in the Yale Law Journal offers the
following analysis:
It appears that the true basis for denying to the
corporation a de facto status lay in the absence of
any legislative act to give vitality to its creation. An
examination of the cases holding, some of them
unreservedly, that a de facto office or municipal
corporation can exist under color of an
unconstitutional statute will reveal that in no
instance did the invalid act give life to the
corporation, but that either in other valid acts or in
the constitution itself the office or the corporation
was potentially created....
The principle that color of title under an
unconstitutional statute can exist only where there is
some other valid law under which the organization
may be effected, or at least an authority in
potentia by the state constitution, has its counterpart
in the negative propositions that there can be no
color of authority in an unconstitutional statute that
plainly so appears on its face or that attempts to
authorize the ousting of a de jure or de
facto municipal corporation upon the same territory;
in the one case the fact would imply the imputation
of bad faith, in the other the new organization must
be regarded as a mere usurper....
 As a result of this analysis of the cases the following
principles may be deduced which seem to reconcile
the apparently conflicting decisions:
I. The color of authority requisite to the organization
of a de facto municipal corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which
has either (a) been upheld for a time by the courts or
(b) not yet been declared void; provided that a
warrant for its creation can be found in some other
valid law or in the recognition of its potential
existence by the general laws or constitution of the
state.
II. There can be no de facto municipal corporation
unless either directly or potentially, such a de
jure corporation is authorized by some legislative fiat.
III. There can be no color of authority in an
unconstitutional statute alone, the invalidity of which
is apparent on its face.
IV. There can be no de facto corporation created to
take the place of an existing de jure corporation, as
such organization would clearly be a usurper.10
In the cases where a de facto municipal
corporation was recognized as such despite the fact
that the statute creating it was later invalidated, the
decisions could fairly be made to rest on the
consideration that there was some other valid law
giving corporate vitality to the organization. Hence,
in the case at bar, the mere fact that Balabagan was
organized at a time when the statute had not been
invalidated cannot conceivably make it a de
facto corporation, as, independently of the
Administrative Code provision in question, there is
no other valid statute to give color of authority to its
creation. Indeed, in Municipality of San Joaquin v.
Siva, 11 this Court granted a similar petition for
prohibition and nullified an executive order creating
the municipality of Lawigan in Iloilo on the basis of
the Pelaez ruling, despite the fact that the
municipality was created in 1961, before section 68
of the Administrative Code, under which the
President had acted, was invalidated. 'Of course the
issue of de facto municipal corporation did not arise
in that case.
In Norton v. Shelby Count, 12 Mr. Justice Field said:
"An unconstitutional act is not a law; it confers no
rights; it imposes no duties; it affords no
protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never
been passed." Accordingly, he held that bonds issued
by a board of commissioners created under an
invalid statute were unenforceable.
Executive Order 386 "created no office." This is not
to say, however, that the acts done by the
municipality of Balabagan in the exercise of its
corporate powers are a nullity because the executive
order "is, in legal contemplation, as inoperative as
though it had never been passed." For the existence
of Executive, Order 386 is "an operative fact which
cannot justly be ignored." As Chief Justice Hughes
explained in Chicot County Drainage District v. Baxter
State Bank: 13
The courts below have proceeded on the theory
that the Act of Congress, having been found to be
unconstitutional, was not a law; that it was
inoperative, conferring no rights and imposing no
duties, and hence affording no basis for the
challenged decree. Norton v. Shelby County, 118 U.S.
425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S.
559, 566. It is quite clear, however, that such broad
statements as to the effect of a determination of
unconstitutionality must be taken with qualifications.
The actual existence of a statute, prior to such a
determination, is an operative fact and may have
consequences which cannot justly be ignored. The
past cannot always be erased by a new judicial
declaration. The effect of the subsequent ruling as to
invalidity may have to be considered in various
aspects — with respect to particular relations,
individual and corporate, and particular conduct,
private and official. Questions of rights claimed to
have become vested, of status of prior
determinations deemed to have finality and acted
upon accordingly, of public policy in the light of the
nature both of the statute and of its previous
application, demand examination. These questions
are among the most difficult of those which have
engaged the attention of courts, state and federal,
and it is manifest from numerous decisions that an
all-inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.
There is then no basis for the respondents'
apprehension that the invalidation of the executive
order creating Balabagan would have the effect of
unsettling many an act done in reliance upon the
validity of the creation of that municipality. 14
ACCORDINGLY, the petition is granted, Executive
Order 386 is declared void, and the respondents are
hereby permanently restrained from performing the
duties and functions of their respective offices. No
pronouncement as to costs.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and
Capistrano, JJ., concur.
Teehankee and Barredo, JJ., took no part.
Separate Opinions
FERNANDO, J., concurring:
I concur fully with the well-written opinion of
Justice Castro. It breaks new ground; it strikes out
new paths. It is precisely because of its impact on the
power of judicial review of executive acts that I deem
a few additional words would not be amiss.
1. Insofar as the effect of a declaration of
unconstitionality is concerned, the latter and more
realistic trend reflected in Chicot County Drainage
District v. Baxter State Bank 1 had previously elicited
our approval. Thus: "'Rutter vs. Esteban (93 Phil. 68)
may be construed to mean that at the time of the
decision the Moratorium law could no longer be
validly applied because of the prevailing
circumstances. At any rate, although the general rule
is that an unconstitutional statute — 'confers no
right, creates no office, affords no protection and
justifies no acts performed under it.' ... there are
several instances wherein courts, out of equity, have
relaxed its operation ... or qualified its effects 'since
the actual existence of a statute prior to such
declaration is an operative fact, and may have
consequences which cannot justly be ignored' ... and
a realistic approach is eroding the general
doctrine ....'" 2 Also: "We have taken note, of the fact
that, on June 30, 1961, Section 25 of Reorganization
Plan No. 20-A had been declared unconstitutional by
this Court in the case of Corominas, et al. v. The
Labor Standards Commission, et al., .... It appears,
however, that the Plaintiff had filed his claim before
Regional Office No. 4 of the Department of Labor on
July 26, 1960, or about one year before said Section
25 had been declared unconstitutional. The
circumstance that Section 25 of Reorganization Plan
No. 20-A had been declared unconstitutional should
not be counted against the defendant in the present
case. In the case of Manila Motor Co., Inc. v.
Flores, ..., this Court upheld the right of a party under
the Moratorium Law which had accrued in his favor
before said law was declared unconstitutional by this
Court in the case of Rutter v. Esteban, 93 Phil. 68." 3
2. Nothing can be clearer therefore in the light of the
two above cases than that a previous declaration of
invalidity of legislative acts would not be bereft of
legal results. Would that view hold true of
nullification of executive acts? There might have
been doubts as to the correct answer before. There
is none now.
A judicial decision annulling a presidential exercise
of authority 4 is not without its effect either. That
much is evident from the holding now reached. The
act stricken down, whether proceeding from the
legislature or the Executive, could in the language of
the Chicot County case, be considered, prior to the
declaration of invalidity, as "an operative fact and
may have consequences which cannot justly be
ignored."
Thus the frontiers of the law have been extended, a
doctrine which to some may come into play when a
statute is voided is now considered equally
applicable to a Presidential act that has met a similar
fate. Such a result should not occasion surprise. That
is to be expected.
There would be an unjustified deviation from the
doctrine of separation of powers if a consequence
attached to the annulment of a statue is considered
as not operative where an executive order is involved.
The doctrine of co-equal or coordinate departments
would be meaningless if a discrimination of the
above sort were considered permissible. The
cognizance taken of the prior existence of an
enactment subsequently declared unconstitutional
applies as well as to a Presidential act thereafter
successfully assailed. There was a time when it too
did exist and, as such, a fact to be reckoned with,
though an infirm source of a legal right, if, as
subsequently held, considered violative of a
constitutional command.
3. Precisionists may cavil at the above view; they may
assert, and with some degree of plausibility, that the
holding in the Pelaez case goes no further than to
locate a statutory infirmity in the Presidential act
there challenged, creating municipal corporations
under what the then Executive considered a grant of
authority found in the Revised Administrative
Code. 5 Such a power having been found not to exist,
the decision, so it may be asserted, did not reach the
constitutional issue of non-delegation of legislative
power. Tersely put, there was no finding of nullity
based on a violation of the Constitution.
To such a claim, it suffices to answer that while the
challenged Administrative Code provision was in fact
held as not containing within itself the authority
conferred on the President to create municipal
corporations, the opinion by the then Justice, now
Chief Justice, Concepcion went further. As was
pointed out by him: "Although Congress may
delegate to another branch of the Government the
power to fill in the details in the execution,
enforcement or administration of a law, it is essential,
to forestall a violation of the principle of separation
of powers, that said law: (a) be complete in itself — it
must set forth therein the policy to be executed,
carried out or implemented by the delegate — and
(b) fix a standard — the limits of which are
sufficiently determinate or determinable — to which
the delegate must conform in the performance of his
functions. Indeed, without a statutory declaration of
policy, the delegate would, in effect, make or
formulate such policy, which is the essence of every
law; and without the aforementioned standard,
there would be no means to determine, with
reasonable certainty, whether the delegate has acted
within or beyond the scope of his authority. Hence,
he could thereby arrogate upon himself the power,
not only to make the law, but also — and this is
worse — to unmake it, by adopting measures
inconsistent with the end sought to be attained by
the Act of Congress, thus nullifying the principle of
separation of powers and the system of checks and
balances, and, consequently, undermining the very
foundation of our Republican system." 6
From which, it would follow, in the language of the
opinion: "Section 68 of the Revised Administrative
Code does not meet these well-settled requirements
for a valid delegation of the power to fix the details
in the enforcement of a law. It does not enunciate
any policy to be carried out or implemented by the
President. Neither does it give a standard sufficiently
precise to avoid the evil effects above referred to." 7
It is thus clear that while it might not be strictly
accurate to advance the view that there was a
finding of unconstitutionality of a challenged
statutory norm, there could be no objection to the
view that the holding was one of unconstitutional
application.
Nor is this all. If there be admission of the force of
the assertion that the Pelaez opinion went no further
than to locate in the challenged Executive orders
creating municipal corporations an act in excess of
statutory authority, then our decision in this case is
all the more noteworthy for the more hospitable
scope accorded the Chicot doctrine. For as originally
formulated, it would merely recognize that during its
existence, prior to its being declared violative of the
constitute, the statute must be deemed an operative
fact. Today we decide that such a doctrine extends to
a Presidential act held void not only on the ground of
unconstitutional infirmity but also because in excess
of the statutory power conferred. That to me is the
more significant aspect of this decision. To repeat, to
that point of view I yield full concurrence.
I do so because it appears to me a logical corollary
to the principle of separation of powers. Once we
accept the basic doctrine that each department as a
coordinate agency of government is entitled to the
respect of the other two, it would seem to follow
that at the very least, there is a presumption of the
validity of the act performed by it, unless
subsequently declared void in accordance with
legally accepted principles. The rule of law cannot be
satisfied with anything less.
Since under our Constitution, judicial review exists
precisely to test the validity of executive or legislative
acts in an appropriate legal proceeding, there is
always the possibility of their being declared
inoperative and void. Realism compels the
acceptance of the thought that there could be a
time-lag between the initiation of such Presidential
or congressional exercise of power and the final
declaration of nullity. In the meanwhile, it would be
productive of confusion, perhaps at times even of
chaos, if the parties affected were left free to
speculate as to its fate being one of doom, thus
leaving them free to disobey it in the meanwhile.
Since, however, the orderly processes of government
not to mention common sense, requires that the
presumption of validity be accorded an act of
Congress or an order of the President, it would be
less than fair, and it may be productive of injustice, if
no notice of its existence as a fact be paid to it, even
if thereafter, it is stricken down as contrary, in the
case of Presidential act, either to the Constitution or
a controlling statute.
The far-reaching import in the above sense of the
decision we now render calls, to my mind, for an
articulation of further reflection on its varied
implications. We have here an illustration to
paraphrase Dean Pound, of the law being stable and
yet far from standing still. That is as it ought to be;
that is how law grows. It is in that sense that the
judicial process is impressed with creativity,
admittedly within limits rather narrowly confined.
That in itself is to hold fast to the appropriate role of
the judiciary, far from insignificant as our decision
discloses. Hence, this separate concurring opinion,
which, I trust, will make manifest why my agreement
with what Justice Castro had so ably expressed in the
opinion of the Court is wholehearted and entire.
HARRILL v. DAVIS et al.
Doctrine:
Parties who actively engage in business for profit
under the name and pretense of a corporation which
they know neither exists nor has any color of
existence may not escape individual liability because
strangers are led by their pretense to con- tract with
their pretended entity as a corporation.
Color of legal organization as a corporation, such as a
charter or the filing of articles of incorporation under
some law, and user of the supposed corporate
franchise in good faith, are indispensable to the
existence of a de facto corporation which will exempt
from individual liability those who actively conduct it.
Neither the execution of articles which are not filed,
nor statements nor beliefs of the promoters that
they are a corporation, nor the treatment of
themselves by themselves and by those who deal
with them as a corporation, nor all these together,
will exempt those who actively conduct the business
under the assumed name of such a nonexistent
corporation from individual liability for the debts
they incur.
Facts:
The four defendants(Walter B. Mann, Frank Davis,
Robert S. Davis, and James G. Knight) agreed in April
or June, 1902, to take specified shares in a $10,000
enterprise for the purpose of building a cotton gin
and carrying on the business of buying, ginning, and
selling cotton, and to organize a corporation for this
purpose. They transacted a business with the plaintiff
consisting of the purchase of lumber, materials, and
labor for their buildings and of dealing in cotton with
it which amounted to several tens of thousands of
dollars, and they remained indebted to it over $5,000,
of which $4,700.
On September 3, 1902, three of the defendants met
and signed articles of incorporation as the "Coweta
Cotton & Milling Company" and a declaration of the
purpose of the incorporation, which the statutes
required to be verified by the signers and to be filed
with the clerk of the Court of Appeals and with the
clerk of the judicial district in which the
contemplated corporation was to do business. This
declaration was verified by Mann on November 10,
1902, and by Frank M. Davis on December 10, 1902,
and it was filed with the clerk of the Court of Appeals
on December 22, 1902, and was never filed
elsewhere. Frank M. Davis, as general manager of the
investment company, treated the milling company as
a corporation all the time during which this
indebtedness was contracted, and never charged any
of it to himself or his associates.
The Western Investment Company brought this
action for a balance due It upon an account for
lumber and materials sold, cotton handled, and
services rendered to Walter B. Mann, Frank Davis,
Robert S. Davis, and James G. Knight, as partners
doing business under the firm name the "Coweta
Cotton & Milling Company. The defendants denied
the partnership and their liability, and averred that
the indebtedness in question was that of the milling
company and that that company was a corporation.
Issue/s:
Was there ‘colorable’ compliance enough to give the
supposed corporation at least the status of a ‘de
facto’ corporation?
Held:
There was none.
The defendants cannot escape individual liability on
the ground that the Coweta Cotton & Milling
Company was a corporation de facto when that
portion of the plaintiff's claim was incurred, because
it then had no color of incorporation, and they knew
it and yet, actively used its name to incur the
obligation.
The general rule is that parties who associate
themselves together and actively engage in business
for profit under any name are liable as partners for
the debts they incur under that name. It is an
exception to this rule that such associates may
escape individual liability for such debts by a
compliance with incorporation laws or by a real
attempt to comply with them which gives the color
of a legal corporation, and by the user of the
franchise of such a corporation in the honest belief
that it is duly incorporated. When the fact appears,
as it does in the case at bar, by indisputable evidence
that parties associated and knowingly incurred
liabilities under a given name, the legal presumption
is that they are governed by the general rule, and the
burden is upon them to prove that they fall under
some exception to it.
For the exception to apply, under the general law of
Arkansas in force in the Indian Territory, the filing of
articles of incorporation with the clerk of the Court of
Appeals was a sine qua non of any color of a legal
corporation. Without that there was not, and there
could not be, an apparent corporation or the color of
a corporation, Agreements to form one, statements
that there was one, signed articles of association to
make one, acts as one, created no color of
incorporation, because there could be no
incorporation or color of it under the law until the
articles were filed.
The defendants never became a corporation de facto
prior to December 22, 1902, that they never became
a corporation de jure, that the indebtedness here in
question was not incurred under any promise or
assurance of the defendants as promoters that it
should become the obligation of a corporation to be
formed, that a large part of it was incurred in the
conduct of a general commercial business, and not to
prepare for the commencement of such a business
or for the organization of a corporation
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First
Instance of Leyte, FRED BROWN, EMMA BROWN,
HIPOLITA CAPUCIONG, in his capacity as receiver of
the Far Eastern Lumber and Commercial Co.,
Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in
civil case No. 381 of the Court of First Instance of
Leyte and to enjoin the respondent judge from
further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold
Hall and Bradley P. Hall, and the respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella, signed and acknowledged in Leyte,
the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to
engage in a general lumber business to carry on as
general contractors, operators and managers, etc.
Attached to the article was an affidavit of the
treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain
properties transferred to the corporation described
in a list appended thereto.
(2) Immediately after the execution of said articles of
incorporation, the corporation proceeded to do
business with the adoption of by-laws and the
election of its officers.
(3) On December 2, 1947, the said articles of
incorporation were filed in the office of the Securities
and Exchange Commissioner, for the issuance of the
corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles
of incorporation by the aforesaid governmental
office, the respondents Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella filed
before the Court of First Instance of Leyte the civil
case numbered 381, entitled "Fred Brown et al. vs.
Arnold C. Hall et al.", alleging among other things
that the Far Eastern Lumber and Commercial Co. was
an unregistered partnership; that they wished to
have it dissolved because of bitter dissension among
the members, mismanagement and fraud by the
managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall
and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently
of the cause of action.
(6) After hearing the parties, the Hon. Edmund S.
Piccio ordered the dissolution of the company; and at
the request of plaintiffs, appointed of the properties
thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein)
offered to file a counter-bond for the discharge of
the receiver, but the respondent judge refused to
accept the offer and to discharge the receiver.
Whereupon, the present special civil action was
instituted in this court. It is based upon two main
propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381
to decree the dissolution of the company, because it
being a de facto corporation, dissolution thereof may
only be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the
Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma
Brown had signed the article of incorporation but
only a partnership.
Discussion: The second proposition may at once be
dismissed. All the parties are informed that the
Securities and Exchange Commission has not, so far,
issued the corresponding certificate of incorporation.
All of them know, or sought to know, that the
personality of a corporation begins to exist only from
the moment such certificate is issued — not before
(sec. 11, Corporation Law). The complaining
associates have not represented to the others that
they were incorporated any more than the latter had
made similar representations to them. And as
nobody was led to believe anything to his prejudice
and damage, the principle of estoppel does not apply.
Obviously this is not an instance requiring the
enforcement of contracts with the
corporation through the rule of estoppel.
The first proposition above stated is premised on the
theory that, inasmuch as the Far Eastern Lumber and
Commercial Co., is a de facto corporation, section 19
of the Corporation Law applies, and therefore the
court had not jurisdiction to take cognizance of said
civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations
claiming in good faith to be a corporation under this
Act and its right to exercise corporate powers shall
not be inquired into collaterally in any private suit to
which the corporation may be a party, but such
inquiry may be had at the suit of the Insular
Government on information of the Attorney-General.
There are least two reasons why this section does
not govern the situation. Not having obtained the
certificate of incorporation, the Far Eastern Lumber
and Commercial Co. — even its stockholders — may
not probably claim "in good faith" to be a
corporation.
Under our statue it is to be noted (Corporation Law,
sec. 11) that it is the issuance of a certificate of
incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation
into being. The immunity if collateral attack is
granted to corporations "claiming in good faith to be
a corporation under this act." Such a claim is
compatible with the existence of errors and
irregularities; but not with a total or substantial
disregard of the law. Unless there has been an
evident attempt to comply with the law the claim to
be a corporation "under this act" could not be made
"in good faith." (Fisher on the Philippine Law of Stock
Corporations, p. 75. See also Humphreys vs. Drew, 59
Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a
party. This is a litigation between stockholders of the
alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de
jure corporation may be terminated in a private suit
for its dissolution between stockholders, without the
intervention of the state.
There might be room for argument on the right of
minority stockholders to sue for dissolution; 1 but that
question does not affect the court's jurisdiction, and
is a matter for decision by the judge, subject to
review on appeal. Whkch brings us to one principal
reason why this petition may not prosper, namely:
the petitioners have their remedy by appealing the
order of dissolution at the proper time.
There is a secondary issue in connection with the
appointment of a receiver. But it must be admitted
that receivership is proper in proceedings for
dissolution of a company or corporation, and it was
no error to reject the counter-bond, the court having
declared the dissolution. As to the amount of the
bond to be demanded of the receiver, much depends
upon the discretion of the trial court, which in this
instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed,
with costs. The preliminary injunction heretofore
issued will be dissolved.
ASIA BANKING CORPORATION, plaintiff-appellee,
vs.
STANDARD PRODUCTS, CO.,
INC., defendant-appellant.
Charles C. De Selms for appellant.
Gibbs & McDonough and Roman Ozaeta for appellee.
OSTRAND, J.:
This action is brought to recover the sum of
P24,736.47, the balance due on the following
promissory note:
P37,757.22
MANILA, P. I., Nov. 28, 1921.
MANILA, P. I., Nov. 28, 1921.
On demand, after date we promise to pay to the Asia
Banking Corporation, or order, the sum of
thirty-seven thousand seven hundred fifty-seven and
22/100 pesos at their office in Manila, for value
received, together with interest at the rate of ten per
cent per annum.
No. ________ Due __________
THE STANDARD PRODUCTS CO., INC.
By (Sgd.) GEORGE H. SEAVER
By President
The court below rendered judgment in favor of the
plaintiff for the sum demanded in the complaint,
with interest on the sum of P24,147.34 from
November 1, 1923, at the rate of 10 per cent per
annum, and the costs. From this judgment the
defendant appeals to this court.
At the trial of the case the plaintiff failed to prove
affirmatively the corporate existence of the parties
and the appellant insists that under these
circumstances the court erred in finding that the
parties were corporations with juridical personality
and assigns same as reversible error.
There is no merit whatever in the appellant's
contention. The general rule is that in the absence of
fraud a person who has contracted or otherwise
dealt with an association in such a way as to
recognize and in effect admit its legal existence as a
corporate body is thereby estopped to deny its
corporate existence in any action leading out of or
involving such contract or dealing, unless its
existence is attacked for cause which have arisen
since making the contract or other dealing relied on
as an estoppel and this applies to foreign as well as
to domestic corporations. (14 C. J., 227; Chinese
Chamber of Commerce vs. Pua Te Ching, 14 Phil.,
222.)
The defendant having recognized the corporate
existence of the plaintiff by making a promissory
note in its favor and making partial payments on the
same is therefore estopped to deny said plaintiff's
corporate existence. It is, of course, also estopped
from denying its own corporate existence. Under
these circumstances it was unnecessary for the
plaintiff to present other evidence of the corporate
existence of either of the parties. It may be noted
that there is no evidence showing circumstances
taking the case out of the rules stated.
The judgment appealed from is affirmed, with the
costs against the appellant. So ordered.
 Upon being advised by the attorney
that the corporation had been
formed under the laws of
Maryland,he paid for and received
a stock certificate evidencing
ownership of shares in the
corporation
2. Their business was conducted as if it were a
corporation, through corporate bank
accounts, with auditors maintaining
corporate books and records, and under a
lease entered into by the corporation for
the office from which it operated
3. However, due to the attorney’s oversight
which Carson was not aware, the certificate
of incorporation, which had been signed
and acknowledged prior to May 1, 1961,
was not filed until November 24, 1961.
 Between May 17 and November 8,
the Bureau purchased eight
typewriters from I.B.M.
4. I.B.M. Corporation brought this action
against Cranson for the balance due on
electric typewriters purchased by the
Bureau.

ISSUE
Whether an officer of a defectively incorporated
CRANSON v. I.B.M. CORP. | 234 Md. 477 (1964)
association may be subjected to personal liability –
| April 30, 1964 | Horney, J.
NO!
Summary: The Real Estate Service Bureau was
 Doctrine of de facto corporations applied in
defectively incorporated. Before the certificate of
cases with the following requisites:
incorporation was filed, the bureau purchased eight
o (1) the existence of law authorizing
typewriters from I.B.M. I.B.M. is running after the
incorporation:
Bureau’s president Cranson for the balance due on
o (2) an effort in good faith to
the typewriters. The Court ruled that Cranson may
incorporate under the existing law;
not be subjected to personal liability because I.B.M.
and
is estopped from denying the corporate existence of
o (3) actual user or exercise of
the Bureau.
corporate powers.
 Doctrine of estoppel to deny the corporate
FACTS
existence
1. Albion C. Cranson, Jr., was a partner in the
o Generally employed where the
business conducted by the Real Estate
person seeking to hold the officer
Service Bureau and was elected president.
personally liable has contracted or
 Cranson was asked to invest in a new
otherwise dealt with the
business corporation.
association in such a manner as to
 He met with other interested recognize and in effect admit its
individuals and an attorney and
existence as a corporate body
agreed to purchase stock and
become an officer and director
 It is generally held that where there had
been a failure to comply with a requirement
which the law declared to be a condition
precedent to the existence of the
corporation, the corporation was not a legal
entity and was therefore precluded from
suing or being sued as such
 In a line of cases, it was held that substantial
compliance with those formalities of the
corporation law, which are made a
condition precedent to corporate existence,
was not only necessary for the creation of a
corporation de jure, but was also a
prerequisite to the existence of a de facto
corporation or a corporation by estoppel.
 The law in Maryland pertaining to the de
facto and estoppel doctrines reveals that
the cases seem to fall into one or the other
of two categories
o Choosing to disregard the nature of
the dealings between the parties,
the Court refused to recognize
both doctrines where there had
been a failure to comply with a
condition precedent to corporate
existence
o whenever such noncompliance
concerned a condition subsequent
to incorporation, the Court often
applied the estoppel doctrine
 There is a wide difference between creating
a corporation by means of the de facto
doctrine and estopping a party, due to his
conduct in a particular case, from setting up
the claim of no incorporation
 Where there is a concurrence of the three
elements necessary for the application of
the de facto corporation doctrine, there
exists an entity which is a corporation de
jure against all persons but the state.
 On the other hand, the estoppel theory is
applied only to the facts of each particular
case and may be invoked even where there
is no corporation de facto.
o Even though one or more of the
requisites of a de facto corporation
are absent, we think that this
factor does not preclude the
application of the estoppel
doctrine
Whether the failure of the Bureau to file its
certificate of incorporation debarred all corporate
existence.
 I.B.M., having dealt with the Bureau as if it
were a corporation and relied on its credit
rather than that of Cranson, is estopped to
assert that the Bureau was not incorporated
at the time the typewriters were purchased.
 The doctrine in relation to estoppel is based
upon
o the ground that it would generally be
inequitable to permit the corporate
existence of an association to be
denied by persons who have
represented it to be a corporation,
or held it out as a corporation, or
by any persons who have
recognized it as a corporation by
dealing with it as such; and
o by the overwhelming weight of
authority, therefore, a person may
be estopped to deny the legal
incorporation of an association
which is not even a corporation de
facto
 In cases similar to the one at bar, involving a
failure to file articles of incorporation, the
courts of other jurisdictions have held that
where one has recognized the corporate
existence of an association, he is estopped
to assert the contrary with respect to a
claim arising out of such dealings.
 Since I.B.M. is estopped to deny the
corporate existence of the Bureau, we hold
that Cranson was not liable for the balance
due on account of the typewriters.
Judgement REVERSED
MANUELA T. VDA. DE SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge
of the Court of First Instance of Leyte, Branch II, and
SEGUNDINO REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda.
de Salvatierra seeking to nullify the order of the
Court of First Instance of Leyte in Civil Case No. 1912,
dated March 21, 1956, relieving Segundino Refuerzo
of liability for the contract entered into between the
former and the Philippine Fibers Producers Co., Inc.,
of which Refuerzo is the president. The facts of the
case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the
owner of a parcel of land located at Maghobas,
Poblacion, Burauen, Teyte. On March 7, 1954, said
landholder entered into a contract of lease with the
Philippine Fibers Producers Co., Inc., allegedly a
corporation "duly organized and existing under the
laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein,
represented in this instance by Mr. Segundino Q.
Refuerzo, the President". It was provided in said
contract, among other things, that the lifetime of the
lease would be for a period of 10 years; that the land
would be planted to kenaf, ramie or other crops
suitable to the soil; that the lessor would be entitled
to 30 per cent of the net income accruing from the
harvest of any, crop without being responsible for
the cost of production thereof; and that after every
harvest, the lessee was bound to declare at the
earliest possible time the income derived therefrom
and to deliver the corresponding share due the
lessor.
Apparently, the aforementioned obligations imposed
on the alleged corporation were not complied with
because on April 5, 1955, Alanuela T. Vda, de
Salvatierra filed with the Court of First Instance of
Leyte a complaint against the Philippine Fibers
Producers Co., Inc., and Segundino Q. Refuerzo, for
accounting, rescission and damages (Civil Case No.
1912). She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the leased
property which crop was, at the time of the
commencement of the action, already harvested,
processed and sold by defendants; that
notwithstanding that fact, defendants refused to
render an accounting of the income derived
therefrom and to deliver the lessor's share; that the
estimated gross income was P4,500, and the
deductible expenses amounted to P1,000; that as
defendants' refusal to undertake such task was in
violation of the terms of the covenant entered into
between the plaintiff and defendant corporation, a
rescission was but proper.
As defendants apparently failed to file their answer
to the complaint, of which they were allegedly
notified, the Court declared them in default and
proceeded to receive plaintiff's evidence. On June 8,
1955, the lower Court rendered judgment granting
plaintiff's prayer, and required defendants to render
a complete accounting of the harvest of the land
subject of the proceeding within 15 days from
receipt of the decision and to deliver 30 per cent of
the net income realized from the last harvest to
plaintiff, with legal interest from the date defendants
received payment for said crop. It was further
provide that upon defendants' failure to abide by the
said requirement, the gross income would be fixed at
P4,200 or a net income of P3,200 after deducting the
expenses for production, 30 per cent of which or
P960 was held to be due the plaintiff pursuant to the
aforementioned contract of lease, which was
declared rescinded.
No appeal therefrom having been perfected within
the reglementary period, the Court, upon motion of
plaintiff, issued a writ of execution, in virtue of which
the Provincial Sheriff of Leyte caused the attachment
of 3 parcels of land registered in the name of
Segundino Refuerzo. No property of the Philippine
Fibers Producers Co., Inc., was found available for
attachment. On January 31, 1956, defendant
Segundino Refuerzo filed a motion claiming that the
decision rendered in said Civil Case No. 1912 was null
and void with respect to him, there being no
allegation in the complaint pointing to his personal
liability and thus prayed that an order be issued
limiting such liability to defendant corporation. Over
plaintiff's opposition, the Court a quo granted the
same and ordered the Provincial Sheriff of Leyte to
release all properties belonging to the movant that
might have already been attached, after finding that
the evidence on record made no mention or referred
to any fact which might hold movant personally liable
therein. As plaintiff's petition for relief from said
order was denied, Manuela T. Vda. de Salvatierra
instituted the instant action asserting that the trial
Judge in issuing the order complained of, acted with
grave abuse of discretion and prayed that same be
declared a nullity.
From the foregoing narration of facts, it is clear that
the order sought to be nullified was issued by tile
respondent Judge upon motion of defendant
Refuerzo, obviously pursuant to Rule 38 of the Rules
of Court. Section 3 of said Rule, however, in
providing for the period within which such a motion
may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND
VERIFICATION. — A petition provided for in either of
the preceding sections of this rule must be verified,
filed within sixty days after the petitioner learns of
the judgment, order, or other proceeding to be set
aside, and not more than six months after such
judgment or order was entered, or such proceeding
was taken; and must be must be accompanied with
affidavit showing the fraud, accident, mistake, or
excusable negligence relied upon, and the facts
constituting the petitioner is good and substantial
cause of action or defense, as the case may be,
which he may prove if his petition be granted". (Rule
38)
The aforequoted provision treats of 2 periods, i.e., 60
days after petitioner learns of the judgment, and not
more than 6 months after the judgment or order was
rendered, both of which must be satisfied. As the
decision in the case at bar was under date of June 8,
1955, whereas the motion filed by respondent
Refuerzo was dated January 31, 1956, or after the
lapse of 7 months and 23 days, the filing of the
aforementioned motion was clearly made beyond
the prescriptive period provided for by the rules. The
remedy allowed by Rule 38 to a party adversely
affected by a decision or order is certainly an alert of
grace or benevolence intended to afford said litigant
a penultimate opportunity to protect his interest.
Considering the nature of such relief and the purpose
behind it, the periods fixed by said rule are
non-extendible and never interrupted; nor could it
be subjected to any condition or contingency
because it is of itself devised to meet a condition or
contingency (Palomares vs. Jimenez,* G.R. No. L-4513,
January 31, 1952). On this score alone, therefore, the
petition for a writ of certiorari filed herein may be
granted. However, taking note of the question
presented by the motion for relief involved herein,
We deem it wise to delve in and pass upon the merit
of the same.
Refuerzo, in praying for his exoneration from any
liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers
Producers Co., Inc., interposed the defense that the
complaint filed with the lower court contained no
allegation which would hold him liable personally, for
while it was stated therein that he was a signatory to
the lease contract, he did so in his capacity as
president of the corporation. And this allegation was
found by the Court a quo to be supported by the
records. Plaintiff on the other hand tried to refute
this averment by contending that her failure to
specify defendant's personal liability was due to the
fact that all the time she was under the impression
that the Philippine Fibers Producers Co., Inc.,
represented by Refuerzo was a duly registered
corporation as appearing in the contract, but a
subsequent inquiry from the Securities and Exchange
Commission yielded otherwise. While as a general
rule a person who has contracted or dealt with an
association in such a way as to recognize its existence
as a corporate body is estopped from denying the
same in an action arising out of such transaction or
dealing, (Asia Banking Corporation vs. Standard
Products Co., 46 Phil., 114; Compania Agricola de
Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.;
vs. Steamship Pompey, 49 Phil., 117), yet this
doctrine may not be held to be applicable where
fraud takes a part in the said transaction. In the
instant case, on plaintiff's charge that she was
unaware of the fact that the Philippine Fibers
Producers Co., Inc., had no juridical personality,
defendant Refuerzo gave no confirmation or denial
and the circumstances surrounding the execution of
the contract lead to the inescapable conclusion that
plaintiff Manuela T. Vda. de Salvatierra was really
made to believe that such corporation was duly
organized in accordance with law.
There can be no question that a corporation with
registered has a juridical personality separate and
distinct from its component members or
stockholders and officers such that a corporation
cannot be held liable for the personal indebtedness
of a stockholder even if he should be its president
(Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and
conversely, a stockholder or member cannot be held
personally liable for any financial obligation be, the
corporation in excess of his unpaid subscription. But
this rule is understood to refer merely to registered
corporations and cannot be made applicable to the
liability of members of an unincorporated association.
The reason behind this doctrine is obvious-since an
organization which before the law is non-existent has
no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a
corporation as provided by law; it cannot create
agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its
representatives or agents do so without authority
and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent
without authority or without a principal is himself
regarded as the principal, possessed of all the rights
and subject to all the liabilities of a principal, a
person acting or purporting to act on behalf of a
corporation which has no valid existence assumes
such privileges and obligations and comes personally
liable for contracts entered into or for other acts
performed as such, agent (Fay vs. Noble, 7 Cushing
[Mass.] 188. Cited in II Tolentino's Commercial Laws
of the Philippines, Fifth Ed., P. 689-690). Considering
that defendant Refuerzo, as president of the
unregistered corporation Philippine Fibers Producers
Co., Inc., was the moving spirit behind the
consummation of the lease agreement by acting as
its representative, his liability cannot be limited or
restricted that imposed upon corporate shareholders.
In acting on behalf of a corporation which he knew to
be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any,
arising out of such transaction.
Wherefore, the order of the lower Court of March 21,
1956, amending its previous decision on this matter
and ordering the Provincial Sheriff of Leyte to release
any and all properties of movant therein which might
have been attached in the execution of such
judgment, is hereby set aside and nullified as if it had
never been issued. With costs against respondent
Segundino Refuerzo. It is so ordered.
CHIANG KAI SHEK SCHOOL, petitioner,
vs.
COURT OF APPEALS and FAUSTINA FRANCO
OH, respondents.
CRUZ, J.:
An unpleasant surprise awaited Fausta F. Oh when
she reported for work at the Chiang Kai Shek School
in Sorsogon on the first week of July, 1968. She was
told she had no assignment for the next semester.
Oh was shocked. She had been teaching in the school
since 1932 for a continuous period of almost 33
years. And now, out of the blue, and for no apparent
or given reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social
security benefits, salary differentials, maternity
benefits and moral and exemplary damages. 1 The
original defendant was the Chiang Kai Shek School
but when it filed a motion to dismiss on the ground
that it could not be sued, the complaint was
amended. 2 Certain officials of the school were also
impleaded to make them solidarily liable with the
school.
The Court of First Instance of Sorsogon dismissed the
complaint. 3 On appeal, its decision was set aside by
the respondent court, which held the school suable
and liable while absolving the other
defendants. 4 The motion for reconsideration having
been denied, 5 the school then came to this Court in
this petition for review on certiorari.
The issues raised in the petition are:
1. Whether or not a school that has not been
incorporated may be sued by reason alone of its long
continued existence and recognition by the
government,
2. Whether or not a complaint filed against persons
associated under a common name will justify a
judgment against the association itself and not its
individual members.
3. Whether or not the collection of tuition fees and
book rentals will make a school profit-making and
not charitable.
4. Whether or not the Termination Pay Law then in
force was available to the private respondent who
was employed on a year-to-year basis.
5. Whether or not the awards made by the
respondent court were warranted.
We hold against the petitioner on the first question.
It is true that Rule 3, Section 1, of the Rules of Court
clearly provides that "only natural or juridical persons
may be parties in a civil action." It is also not denied
that the school has not been incorporated. However,
this omission should not prejudice the private
respondent in the assertion of her claims against the
school.
As a school, the petitioner was governed by Act No.
2706 as amended by C.A. No. 180, which provided as
follows:
Unless exempted for special reasons by the Secretary
of Public Instruction, any private school or college
recognized by the government shall be incorporated
under the provisions of Act No. 1459 known as the
Corporation Law, within 90 days after the date of
recognition, and shall file with the Secretary of Public
Instruction a copy of its incorporation papers and
by-laws.
Having been recognized by the government, it was
under obligation to incorporate under the
Corporation Law within 90 days from such
recognition. It appears that it had not done so at the
time the complaint was filed notwithstanding that it
had been in existence even earlier than 1932. The
petitioner cannot now invoke its own
non-compliance with the law to immunize it from the
private respondent's complaint.
There should also be no question that having
contracted with the private respondent every year
for thirty two years and thus represented itself as
possessed of juridical personality to do so, the
petitioner is now estopped from denying such
personality to defeat her claim against it. According
to Article 1431 of the Civil Code, "through estoppel
an admission or representation is rendered
conclusive upon the person making it and cannot be
denied or disproved as against the person relying on
it."
As the school itself may be sued in its own name,
there is no need to apply Rule 3, Section 15, under
which the persons joined in an association without
any juridical personality may be sued with such
association. Besides, it has been shown that the
individual members of the board of trustees are not
liable, having been appointed only after the private
respondent's dismissal. 6
It is clear now that a charitable institution is covered
by the labor laws 7 although the question was still
unsettled when this case arose in 1968. At any rate,
there was no law even then exempting such
institutions from the operation of the labor laws
(although they were exempted by the Constitution
from ad valorem taxes). Hence, even assuming that
the petitioner was a charitable institution as it claims,
the private respondent was nonetheless still entitled
to the protection of the Termination Pay Law, which
was then in force.
While it may be that the petitioner was engaged in
charitable works, it would not necessarily follow that
those in its employ were as generously motivated.
Obviously, most of them would not have the means
for such charity. The private respondent herself was
only a humble school teacher receiving a meager
salary of Pl80. 00 per month.
At that, it has not been established that the
petitioner is a charitable institution, considering
especially that it charges tuition fees and collects
book rentals from its students. 8 While this alone
may not indicate that it is profit-making, it does
weaken its claim that it is a non-profit entity.
The petitioner says the private respondent had not
been illegally dismissed because her teaching
contract was on a yearly basis and the school was not
required to rehire her in 1968. The argument is that
her services were terminable at the end of each year
at the discretion of the school. Significantly, no
explanation was given by the petitioner, and no
advance notice either, of her relief after teaching
year in and year out for all of thirty-two years, the
private respondent was simply told she could not
teach any more.
The Court holds, after considering the particular
circumstance of Oh's employment, that she had
become a permanent employee of the school and
entitled to security of tenure at the time of her
dismissal. Since no cause was shown and established
at an appropriate hearing, and the notice then
required by law had not been given, such dismissal
was invalid.
The private respondent's position is no different
from that of the rank-and-file employees involved
in Gregorio Araneta University Foundation v.
NLRC, 9 of whom the Court had the following to say:
Undoubtedly, the private respondents' positions as
deans and department heads of the petitioner
university are necessary in its usual business.
Moreover, all the private respondents have been
serving the university from 18 to 28 years. All of
them rose from the ranks starting as instructors until
they became deans and department heads of the
university. A person who has served the University
for 28 years and who occupies a high administrative
position in addition to teaching duties could not
possibly be a temporary employee or a casual.
The applicable law is the Termination Pay Law, which
provided:
SECTION 1. In cases of employment, without a
definite period, in a commercial, industrial, or
agricultural establishment or enterprise, the
employer or the employee may terminate at any
time the employment with just cause; or without just
cause in the case of an employee by serving written
notice on the employer at least one month in
advance, or in the case of an employer, by serving
such notice to the employee at least one month in
advance or one-half month for every year of service
of the employee, whichever, is longer, a fraction of at
least six months being considered as one whole year.
The employer, upon whom no such notice was
served in case of termination of employment without
just cause may hold the employee liable for
damages.
The employee, upon whom no such notice was
served in case of termination of employment without
just cause shall be entitled to compensation from the
date of termination of his employment in an I
amount equivalent to his salaries or wages
correspond to the required period of notice. ... .
The respondent court erred, however, in awarding
her one month pay instead of only one-half month
salary for every year of service. The law is quite clear
on this matter. Accordingly, the separation pay
should be computed at P90.00 times 32 months, for
a total of P2,880.00.
Parenthetically, R.A. No. 4670, otherwise known as
the Magna Carta for Public School Teachers, confers
security of tenure on the teacher upon appointment
as long as he possesses the required
qualification. 10 And under the present policy of the
Department of Education, Culture and Sports, a
teacher becomes permanent and automatically
acquires security of tenure upon completion of three
years in the service. 11
While admittedly not applicable to the case at bar,
these I rules nevertheless reflect the attitude of the
government on the protection of the worker's
security of tenure, which is now guaranteed by no
less than the Constitution itself. 12
We find that the private respondent was arbitrarily
treated by the petitioner, which has shown no cause
for her removal nor had it given her the notice
required by the Termination Pay Law. As the
respondent court said, the contention that she could
not report one week before the start of classes is a
flimsy justification for replacing her. 13 She had been
in its employ for all of thirty-two years. Her record
was apparently unblemished. There is no showing of
any previous strained relations between her and the
petitioner. Oh had every reason to assume, as she
had done in previous years, that she would continue
teaching as usual.
It is easy to imagine the astonishment and hurt she
felt when she was flatly and without warning told she
was dismissed. There was not even the amenity of a
formal notice of her replacement, with perhaps a
graceful expression of thanks for her past services.
She was simply informed she was no longer in the
teaching staff. To put it bluntly, she was fired.
For the wrongful act of the petitioner, the private
respondent is entitled to moral damages. 14 As a
proximate result of her illegal dismissal, she suffered
mental anguish, serious anxiety, wounded feelings
and even besmirched reputation as an experienced
teacher for more than three decades. We also find
that the respondent court did not err in awarding her
exemplary damages because the petitioner acted in a
wanton and oppressive manner when it dismissed
her. 15
The Court takes this opportunity to pay a sincere
tribute to the grade school teachers, who are always
at the forefront in the battle against illiteracy and
ignorance. If only because it is they who open the
minds of their pupils to an unexplored world awash
with the magic of letters and numbers, which is an
extraordinary feat indeed, these humble mentors
deserve all our respect and appreciation.
WHEREFORE, the petition is DENIED. The appealed dues and to order him to pay damages in the amount
decision is AFFIRMED except for the award of of P25,000.00 and attorney's fees of P500.00. 1
separation pay, which is reduced to P2,880.00. All
the other awards are approved. Costs against the Private respondent moved to dismiss the complaint
petitioner. for lack of jurisdiction, claiming that jurisdiction was
lodged with the Securities and Exchange Commission
This decision is immediately executory. (SEC). The MCTC denied the motion on February 9,
1996. 2 It denied reconsideration on March 8, 1996. 3
SO ORDERED.
Private respondent filed a petition
REYNALDO M. LOZANO, Petitioner, v. HON. ELIEZER R. for certiorari before the Regional Trial Court, Branch
DE LOS SANTOS, Presiding Judge, RTC, Br. 58, Angeles 58, Angeles City. 4 The trial court found the dispute
City; and ANTONIO ANDA, Respondents. to be intracorporate, hence, subject to the
jurisdiction of the SEC, and ordered the MCTC to
PUNO, J.: dismiss Civil Case No. 1214 accordingly. 5 It denied
reconsideration on May 31, 1996. 6
This petition for certiorari seeks to annul and set
aside the decision of the Regional Trial Court, Branch Hence this petition. Petitioner claims that:
58, Angeles City which ordered the Municipal Circuit
Trial Court, Mabalacat and Magalang, Pampanga to THE RESPONDENT JUDGE ACTED
dismiss Civil Case No. 1214 for lack of jurisdiction. WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK
The facts are undisputed. On December 19, 1995, OR EXCESS OF JURISDICTION AND
petitioner Reynaldo M. Lozano filed Civil Case No. SERIOUS ERROR OF LAW IN
1214 for damages against respondent Antonio Anda CONCLUDING THAT THE
before the Municipal Circuit Trial Court (MCTC), SECURITIES AND EXCHANGE
Mabalacat and Magalang, Pampanga. Petitioner COMMISSION HAS JURISDICTION
alleged that he was the president of the Kapatirang OVER A CASE OF DAMAGES
Mabalacat-Angeles Jeepney Drivers' Association, Inc. BETWEEN HEADS/PRESIDENTS OF
(KAMAJDA) while respondent Anda was the TWO (2) ASSOCIATIONS WHO
president of the Samahang Angeles-Mabalacat INTENDED TO
Jeepney Operators' and Drivers' Association, Inc. CONSOLIDATE/MERGE THEIR
(SAMAJODA); in August 1995, upon the request of ASSOCIATIONS BUT NOT YET [SIC]
the Sangguniang Bayan of Mabalacat, Pampanga, APPROVED AND REGISTERED WITH
petitioner and private respondent agreed to THE SECURITIES AND EXCHANGE
consolidate their respective associations and form COMMISSION. 7
the Unified Mabalacat-Angeles Jeepney Operators'
and Drivers Association, Inc. (UMAJODA); petitioner The jurisdiction of the Securities and Exchange
and private respondent also agreed to elect one set Commission (SEC) is set forth in Section 5 of
of officers who shall be given the sole authority to Presidential Decree No. 902-A. Section 5 reads as
collect the daily dues from the members of the follows:
consolidated association; elections were held on
October 29, 1995 and both petitioner and private Sec. 5. . . . [T]he Securities and
respondent ran for president; petitioner won; private Exchange Commission [has]
respondent protested and, alleging fraud, refused to original and exclusive jurisdiction
recognize the results of the election; private to hear and decide cases involving:
respondent also refused to abide by their agreement
and continued collecting the dues from the members (a) Devices or schemes employed
of his association despite several demands to desist. by or any acts of the board of
Petitioner was thus constrained to file the complaint directors, business associates, its
to restrain private respondent from collecting the officers or partners, amounting to
fraud and misrepresentation which
 may be detrimental to the interest
of the public and/or of the
stockholders, partners, members
of associations or organizations
registered with the Commission.
(b) Controversies arising out of
intracorporate or partnership
relations, between and among
stockholders, members or
associates; between any or all of
them and the corporation,
partnership or association of which
they are stockholders, members, or
associates, respectively; and
between such corporation,
partnership or association and the
state insofar as it concerns their
individual franchise or right to exist
as such entity.
(c) Controversies in the election or
appointment of directors, trustees,
officers or managers of such
corporations, partnerships or
associations.
(d) Petitions of corporations,
partnerships or associations to be
declared in the state of suspension
of payments in cases where the
corporation, partnership or
association possesses sufficient
property to cover all its debts but
foresees the impossibility of
meeting them when they
respectively fall due or in cases
where the corporation, partnership
or association has no sufficient
assets to over its liabilities, but is
under the management of a
Rehabilitation Receiver or
Management Committee created
pursuant to this Decree.
The grant of jurisdiction to the SEC must be viewed in
the light of its nature and function under the
law. 8 This jurisdiction is determined by a
concurrence of two elements: (1) the status or
relationship of the parties; and (2) the nature of the
question that is the subject of their controversy. 9
The first element requires that the controversy must
arise out of intracorporate or partnership relations
between and among stockholders, members, or
associates; between any or all of them and the
corporation, partnership or association of which they
are stockholders, members or associates,
respectively; and between such corporation,
partnership or association and the State in so far as it
concerns their individual franchises. 10 The second
element requires that the dispute among the parties
be intrinsically connected with the regulation of the
corporation, partnership or association or deal with
the internal affairs of the corporation, partnership or
association. 11 After all, the principal function of the
SEC is the supervision and control of corporations,
partnership and associations with the end in view
that investments in these entities may be
encouraged and protected, and their entities may be
encouraged and protected, and their activities
pursued for the promotion of economic
development. 12
There is no intracorporate nor partnership relation
between petitioner and private respondent. The
controversy between them arose out of their plan to
consolidate their respective jeepney drivers' and
operators' associations into a single common
association. This unified association was, however,
still a proposal. It had not been approved by the SEC,
neither had its officers and members submitted their
articles of consolidation is accordance with Sections
78 and 79 of the Corporation Code. Consolidation
becomes effective not upon mere agreement of the
members but only upon issuance of the certificate of
consolidation by the SEC. 13 When the SEC, upon
processing and examining the articles of
consolidation, is satisfied that the consolidation of
the corporations is not inconsistent with the
provisions of the Corporation Code and existing laws,
it issues a certificate of consolidation which makes
the reorganization official. 14 The new consolidated
corporation comes into existence and the
constituent corporations dissolve and cease to
exist. 15
The KAMAJDA and SAMAJODA to which petitioner
and private respondent belong are duly registered
with the SEC, but these associations are two separate
entities. The dispute between petitioner and private
respondent is not within the KAMAJDA nor the
SAMAJODA. It is between members of separate and
distinct associations. Petitioner and private
respondent have no intracorporate relation much
less do they have an intracorporate dispute. The SEC
therefore has no jurisdiction over the complaint.
The doctrine of corporation by estoppel 16 advanced
by private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not
subject to the agreement of the parties. 17 It cannot
be acquired through or waived, enlarged or
diminished by, any act or omission of the parties,
neither can it be conferred by the acquiescence of
the court. 18
Corporation by estoppel is founded on principles of
equity and is designed to prevent injustice and
unfairness. 19 It applies when persons assume to
form a corporation and exercise corporate functions
and enter into business relations with third person.
Where there is no third person involved and the
conflict arises only among those assuming the form
of a corporation, who therefore know that it has not
been registered, there is no corporation by
estoppel. 20
IN VIEW WHEREOF, the petition is granted and the
decision dated April 18, 1996 and the order dated
May 31, 1996 of the Regional Trial Court, Branch 58,
Angeles City are set aside. The Municipal Circuit Trial
Court of Mabalacat and Magalang, Pampanga is
ordered to proceed with dispatch in resolving Civil
Case No. 1214. No costs.
SO ORDERED.
LIM TONG LIM, Petitioner, v. PHILIPPINE FISHING
GEAR INDUSTRIES, INC, Respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties
who agree to borrow money to pursue a business
and to divide the profits or losses that may arise
therefrom, even if it is shown that they have not
contributed any capital of their own to a "common
fund." Their contribution may be in the form of credit
or industry, not necessarily cash or fixed assets.
Being partners, they are all liable for debts incurred
by or on behalf of the partnership. The liability for a
contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a
person who may not have directly transacted on its
behalf, but reaped benefits from that
contract.chanroblesvirtuallawlibrary:red
The Case
In the Petition for Review on Certiorari before us, Lim
Tong Lim assails the November 26, 1998 Decision of
the Court of Appeals in CA-GR CV 41477, 1 which
disposed as follows:jgc:chanrobles.com.ph
"WHEREFORE, [there being] no reversible error in the
appealed decision, the same is hereby affirmed." 2
The decretal portion of the Quezon City Regional
Trial Court (RTC) ruling, which was affirmed by the CA,
reads as follows:jgc:chanrobles.com.ph
"WHEREFORE, the Court rules:chanrob1es virtual
1aw library
1. That plaintiff is entitled to the writ of preliminary
attachment issued by this Court on September 20,
1990;chanrobles virtual lawlibrary
2. That defendants are jointly liable to plaintiff for
the following amounts, subject to the modifications
as hereinafter made by reason of the special and
unique facts and circumstances and the proceedings
that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase
price of the fishing nets covered by the Agreement
plus P68,000.00 representing the unpaid price of the
floats not covered by said Agreement;
b. 12% interest per annum counted from date of
plaintiff’s invoices and computed on their respective
amounts as follows:chanrob1es virtual 1aw library
i. Accrued interest of P73,221.00 on Invoice No.
14407 for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No.
14413 for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No.
14426 for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney’s fees, plus
P8,500.00 representing P500.00 per appearance in
court;
d. P65,000.00 representing P5,000.00 monthly rental
for storage charges on the nets counted from
September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction
sale);chanroblesvirtuallawlibrary
e. Cost of suit.
defendants who are not entitled to damages and
who did not put up a single centavo to raise the
amount of P900,000.00 aside from the fact that they
are not the owners of the nets and floats. For this
reason, the defendants are hereby relieved from any
and all liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and
floats and for the reimbursement of the P900,000.00
deposited by it with the Clerk of Court.
SO ORDERED." 3chanroblesvirtuallawlibrary
The Facts

"With respect to the joint liability of defendants for

On behalf of "Ocean Quest Fishing Corporation,"
the principal obligation or for the unpaid price of
Antonio Chua and Peter Yao entered into a Contract
nets and floats in the amount of P532,045.00 and
dated February 7, 1990, for the purchase of fishing
P68,000.00, respectively, or for the total amount of
nets of various sizes from the Philippine Fishing Gear
P600,045.00, this Court noted that these items were
Industries, Inc. (herein respondent). They claimed
attached to guarantee any judgment that may be
that they were engaged in a business venture with
rendered in favor of the plaintiff but, upon
Petitioner Lim Tong Lim, who however was not a
agreement of the parties, and, to avoid further
signatory to the agreement. The total price of the
deterioration of the nets during the pendency of this
nets amounted to P532,045. Four hundred pieces of
case, it was ordered sold at public auction for not
floats worth P68,000 were also sold to the
less than P900,000.00 for which the plaintiff was the
Corporation. 4
sole and winning bidder. The proceeds of the sale
paid for by plaintiff was deposited in court. In effect,
The buyers, however, failed to pay for the fishing
the amount of P900,000.00 replaced the attached
nets and the floats; hence, private respondent filed a
property as a guaranty for any judgment that plaintiff
collection suit against Chua, Yao and Petitioner Lim
may be able to secure in this case with the
Tong Lim with a prayer for a writ of preliminary
ownership and possession of the nets and floats
attachment. The suit was brought against the three
awarded and delivered by the sheriff to plaintiff as
in their capacities as general partners, on the
the highest bidder in the public auction sale. It has
allegation that "Ocean Quest Fishing Corporation"
also been noted that ownership of the nets [was]
was a nonexistent corporation as shown by a
retained by the plaintiff until full payment [was]
Certification from the Securities and Exchange
made as stipulated in the invoices; hence, in effect,
Commission. 5 On September 20, 1990, the lower
the plaintiff attached its own properties. It [was] for
court issued a Writ of Preliminary Attachment, which
this reason also that this Court earlier ordered the
the sheriff enforced by attaching the fishing nets on
attachment bond filed by plaintiff to guaranty
board F/B Lourdes which was then docked at the
damages to defendants to be cancelled and for the
Fisheries Port, Navotas, Metro Manila.chanrobles law
P900,000.00 cash bidded and paid for by plaintiff to
library : red
serve as its bond in favor of defendants.

Instead of answering the Complaint, Chua filed a

"From the foregoing, it would appear therefore that
Manifestation admitting his liability and requesting a
whatever judgment the plaintiff may be entitled to in
reasonable time within which to pay. He also turned
this case will have to be satisfied from the amount of
over to respondent some of the nets which were in
P900,000.00 as this amount replaced the attached
his possession. Peter Yao filed an Answer, after which
nets and floats. Considering, however, that the total
he was deemed to have waived his right to
judgment obligation as computed above would
cross-examine witnesses and to present evidence on
amount to only P840,216.92, it would be inequitable,
his behalf, because of his failure to appear in
unfair and unjust to award the excess to the
subsequent hearings. Lim Tong Lim, on the other Ruling of the Court of Appeals
hand, filed an Answer with Counterclaim and
Crossclaim and moved for the lifting of the Writ of
Attachment. 6 The trial court maintained the Writ,
In affirming the trial court, the CA held that
and upon motion of private respondent, ordered the
petitioner was a partner of Chua and Yao in a fishing
sale of the fishing nets at a public auction. Philippine
business and may thus be held liable as such for the
Fishing Gear Industries won the bidding and
fishing nets and floats purchased by and for the use
deposited with the said court the sales proceeds of
of the partnership. The appellate court
P900,000. 7
ruled:jgc:chanrobles.com.ph
On November 18, 1992, the trial court rendered its
"The evidence establishes that all the defendants
Decision, ruling that Philippine Fishing Gear
including herein appellant Lim Tong Lim undertook a
Industries was entitled to the Writ of Attachment
partnership for a specific undertaking, that is for
and that Chua, Yao and Lim, as general partners,
commercial fishing . . . . Obviously, the ultimate
were jointly liable to pay Respondent. 8
undertaking of the defendants was to divide the
profits among themselves which is what a
The trial court ruled that a partnership among Lim,
partnership essentially is . . . . By a contract of
Chua and Yao existed based (1) on the testimonies of
partnership, two or more persons bind themselves to
the witnesses presented and (2) on a Compromise
contribute money, property or industry to a common
Agreement executed by the three 9 in Civil Case No.
fund with the intention of dividing the profits among
1492-MN which Chua and Yao had brought against
themselves (Article 1767, New Civil Code)."
Lim in the RTC of Malabon, Branch 72, for (a) a
13chanroblesvirtual|awlibrary
declaration of nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of
Hence, petitioner brought this recourse before this
ownership of fishing boats; (d) an injunction and (e)
Court. 14
damages. 10 The Compromise Agreement
provided:chanroblesvirtualawlibrary
The Issues
"a) That the parties plaintiffs & Lim Tong Lim agree to
have the four (4) vessels sold in the amount of
P5,750,000.00 including the fishing net. This In his Petition and Memorandum, Lim asks this Court
P5,750,000.00 shall be applied as full payment for to reverse the assailed Decision on the following
P3,250,000.00 in favor of JL Holdings Corporation grounds:jgc:chanrobles.com.ph
and/or Lim Tong Lim;
"I THE COURT OF APPEALS ERRED IN HOLDING,
"b) If the four (4) vessel[s] and the fishing net will be BASED ON A COMPROMISE AGREEMENT THAT CHUA,
sold at a higher price than P5,750,000.00 whatever YAO AND PETITIONER LIM ENTERED INTO IN A
will be the excess will be divided into 3: 1/3 Lim Tong SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT
Lim; 1/3 Antonio Chua; 1/3 Peter Yao; EXISTED AMONG THEM.

"c) If the proceeds of the sale the vessels will be less
than P5,750,000.00 whatever the deficiency shall be
shouldered and paid to JL Holding Corporation by 1/3
Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao." 11
The trial court noted that the Compromise
Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed
from the equal distribution of the profit and loss. 12
Lim appealed to the Court of Appeals (CA) which, as
already stated, affirmed the RTC.
"II SINCE IT WAS ONLY CHUA WHO REPRESENTED
THAT HE WAS ACTING FOR OCEAN QUEST FISHING
CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER
LIM AS WELL.
"III THE TRIAL COURT IMPROPERLY ORDERED THE
SEIZURE AND ATTACHMENT OF PETITIONER LIM’S
GOODS."cralaw virtua1aw library
In determining whether petitioner may be held liable
for the fishing nets and floats purchased from (1) That Petitioner Lim Tong Lim requested Peter Yao
respondent, the Court must resolve this key issue: who was engaged in commercial fishing to join him,
whether by their acts, Lim, Chua and Yao could be while Antonio Chua was already Yao’s partner;
deemed to have entered into a
partnership.chanroblesvirtuallawlibrary (2) That after convening for a few times, Lim Chua,
and Yao verbally agreed to acquire two fishing boats,
This Court’s Ruling the FB Lourdes and the FB Nelson for the sum of
P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim,

The Petition is devoid of merit.
brother of Petitioner Lim Tong Lim, to finance the
venture.
First and Second Issues:chanrob1es virtual 1aw
library
(4) That they bought the boats from CMF Fishing
Corporation, which executed a Deed of Sale over
Existence of a Partnership and Petitioner’s Liability
these two (2) boats in favor of Petitioner Lim Tong
Lim only to serve as security for the loan extended by
In arguing that he should not be held liable for the
Jesus Lim;
equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed
(5) That Lim, Chua and Yao agreed that the
between him, Peter Yao and Antonio Chua. He
refurbishing , re-equipping, repairing, dry docking
asserts that the CA based its finding on the
and other expenses for the boats would be
Compromise Agreement alone. Furthermore, he
shouldered by Chua and Yao;
disclaims any direct participation in the purchase of
the nets, alleging that the negotiations were
(6) That because of the "unavailability of funds,"
conducted by Chua and Yao only, and that he has not
Jesus Lim again extended a loan to the partnership in
even met the representatives of the respondent
the amount of P1 million secured by a check,
company. Petitioner further argues that he was a
because of which, Yao and Chua entrusted the
lessor, not a partner, of Chua and Yao, for the
ownership papers of two other boats, Chua’s FB Lady
"Contract of Lease" dated February 1, 1990, showed
Anne Mel and Yao’s FB Tracy to Lim Tong
that he had merely leased to the two the main asset
Lim.chanroblesvirtual|awlibrary
of the purported partnership — the fishing boat F/B
Lourdes. The lease was for six months, with a
(7) That in pursuance of the business agreement,
monthly rental of P37,500 plus 25 percent of the
Peter Yao and Antonio Chua bought nets from
gross catch of the boat.
Respondent Philippine Fishing Gear, in behalf of
"Ocean Quest Fishing Corporation," their purported
We are not persuaded by the arguments of
business name.
petitioner. The facts as found by the two lower
courts clearly showed that there existed a
(8) That subsequently, Civil Case No. 1492-MN was
partnership among Chua, Yao and him, pursuant to
filed in the Malabon RTC, Branch 72 by Antonio Chua
Article 1767 of the Civil Code which
and Peter Yao against Lim Tong Lim for (a)
provides:jgc:chanrobles.com.ph
declaration of nullity of commercial documents; (b)
reformation of contracts; (c) declaration of
"ARTICLE 1767. By the contract of partnership, two
ownership of fishing boats; (4) injunction; and (e)
or more persons bind themselves to contribute
damages.
money, property, or industry to a common fund, with
the intention of dividing the profits among
(9) That the case was amicably settled through a
themselves." chanrobles lawlibrary : rednad
Compromise Agreement executed between the
parties-litigants the terms of which are already
Specifically, both lower courts ruled that a
enumerated above.
partnership among the three existed based on the
following factual findings: 15
From the factual findings of both lower courts, it is
clear that Chua, Yao and Lim had decided to engage
in a fishing business, which they started by buying
boats worth P3.35 million, financed by a loan secured
from Jesus Lim who was petitioner’s brother. In their
Compromise Agreement, they subsequently revealed
their intention to pay the loan with the proceeds of
the sale of the boats, and to divide equally among
them the excess or loss. These boats, the purchase
and the repair of which were financed with borrowed
money, fell under the term "common fund" under
Article 1767. The contribution to such fund need not
be cash or fixed assets; it could be an intangible like
credit or industry. That the parties agreed that any
loss or profit from the sale and operation of the
boats would be divided equally among them also
shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended
not only to the purchase of the boat, but also to that
of the nets and the floats. The fishing nets and the
floats, both essential to fishing, were obviously
acquired in furtherance of their business. It would
have been inconceivable for Lim to involve himself so
much in buying the boat but not in the acquisition of
the aforesaid equipment, without which the business
could not have
proceeded.chanroblesvirtual|awlibrary
Given the preceding facts, it is clear that there was,
among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the
boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from
the sales and operations thereof would be divided
among them.
We stress that under Rule 45, a petition for review
like the present case should involve only questions of
law. Thus, the foregoing factual findings of the RTC
and the CA are binding on this Court, absent any
cogent proof that the present action is embraced by
one of the exceptions to the rule. 16 In assailing the
factual findings of the two lower courts, petitioner
effectively goes beyond the bounds of a petition for
review under Rule 45.
Compromise Agreement Not the Sole Basis of
Partnership
Petitioner argues that the appellate court’s sole basis
for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the
settlement was entered into only to end the dispute
among them, but not to adjudicate their preexisting
rights and obligations. His arguments are baseless.
The Agreement was but an embodiment of the
relationship extant among the parties prior to its
execution.
A proper adjudication of claimants’ rights mandates
that courts must review and thoroughly appraise all
relevant facts. Both lower courts have done so and
have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts
have decided on the basis of one piece of document
alone, petitioner fails to appreciate that the CA and
the RTC delved into the history of the document and
explored all the possible consequential combinations
in harmony with law, logic and fairness. Verily, the
two lower courts’ factual findings mentioned above
nullified petitioner’s argument that the existence of a
partnership was based only on the Compromise
Agreement.chanrobles law library
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioner’s argument that
he was merely the lessor of the boats to Chua and
Yao, not a partner in the fishing venture. His
argument allegedly finds support in the Contract of
Lease and the registration papers showing that he
was the owner of the boats, including F/B Lourdes
where the nets were found.
His allegation defies logic. In effect, he would like this
Court to believe that he consented to the sale of his
own boats to pay a debt of Chua and Yao, with the
excess of the proceeds to be divided among the
three of them. No lessor would do what petitioner
did. Indeed, his consent to the sale proved that there
was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner
entered into a business agreement with Chua and
Yao, in which debts were undertaken in order to
finance the acquisition and the upgrading of the
vessels which would be used in their fishing business.
The sale of the boats, as well as the division among
the three of the balance remaining after the
payment of their loans, proves beyond cavil that F/B
Lourdes, though registered in his name, was not his
own property but an asset of the partnership. It is
not uncommon to register the properties acquired
from a loan in the name of the person the lender
trusts, who in this case is the petitioner himself. After
all, he is the brother of the creditor, Jesus
Lim.chanrobles.com.ph : virtual law library
We stress that it is unreasonable — indeed, it is
absurd — for petitioner to sell his property to pay a
debt he did not incur, if the relationship among the
three of them was merely that of lessor-lessee,
instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of
corporation by estoppel, liability can be imputed only
to Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines
provides:jgc:chanrobles.com.ph
"SECTION 21. Corporation by estoppel. — All persons
who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general
partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation
is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it
shall not be allowed to use as a defense its lack of
corporate personality.
"One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation." chanrobles.com:cralaw:red
Thus, even if the ostensible corporate entity is
proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The
reason behind this doctrine is obvious — an
unincorporated association has no personality and
would be incompetent to act and appropriate for
itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or
agents do so without authority and at their own risk.
And as it is an elementary principle of law that a
person who acts as an agent without authority or
without a principal is himself regarded as the
principal, possessed of all the right and subject to all
the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts performed as
such agent." 17
The doctrine of corporation by estoppel may apply to
the alleged corporation and to a third party. In the
first instance, an unincorporated association, which
represented itself to be a corporation, will be
estopped from denying its corporate capacity in a
suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for a
contract it entered into and by virtue of which it
received advantages and benefits.
On the other hand, a third party who, knowing an
association to be unincorporated, nonetheless
treated it as a corporation and received benefits
from it, may be barred from denying its corporate
existence in a suit brought against the alleged
corporation. In such case, all those who benefited
from the transaction made by the ostensible
corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly
assented to or took advantage of.chanrobles virtual
lawlibrary
There is no dispute that the respondent, Philippine
Fishing Gear Industries, is entitled to be paid for the
nets it sold. The only question here is whether
petitioner should be held jointly 18 liable with Chua
and Yao. Petitioner contests such liability, insisting
that only those who dealt in the name of the
ostensible corporation should be held liable. Since his
name does not appear on any of the contracts and
since he never directly transacted with the
respondent corporation, ergo, he cannot be held
liable.
Unquestionably, petitioner benefited from the use of
the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the
partnership. He in fact questions the attachment of
the nets, because the Writ has effectively stopped
his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that
Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown
reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in
representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
Technically, it is true that petitioner did not directly Separate Opinions
act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by
persons with whom he previously had an existing
VITUG, J., concurring:chanrob1es virtual 1aw library
relationship, he is deemed to be part of said
association and is covered by the scope of the
I share the views expressed in the ponencia of an
doctrine of corporation by estoppel. We reiterate the
esteemed colleague, Mr. Justice Artemio V.
ruling of the Court in Alonso v. Villamor:
Panganiban, particularly the finding that Antonio
19chanrobles.com.ph : virtual law library
Chua, Peter Yao and petitioner Lim Tong Lim have
incurred the liabilities of general partners. I merely
"A litigation is not a game of technicalities in which
would wish to elucidate a bit, albeit briefly, the
one, more deeply schooled and skilled in the subtle
liability of partners in a general partnership.
art of movement and position, entraps and destroys
the other. It is, rather, a contest in which each
When a person by his act or deed represents himself
contending party fully and fairly lays before the court
as a partner in an existing partnership or with one or
the facts in issue and then, brushing aside as wholly
more persons not actual partners, he is deemed an
trivial and indecisive all imperfections of form and
agent of such persons consenting to such
technicalities of procedure, asks that justice be done
representation and in the same manner, if he were a
upon the merits. Lawsuits, unlike duels, are not to be
partner with respect to persons who rely upon the
won by a rapier’s thrust. Technicality, when it deserts
representation. 1 The association formed by Chua,
its proper office as an aid to justice and becomes its
Yao and Lim, should be, as it has been deemed, a de
great hindrance and chief enemy, deserves scant
facto partnership with all the consequent obligations
consideration from courts. There should be no
for the purpose of enforcing the rights of third
vested rights in technicalities."cralaw virtua1aw
persons. The liability of general partners (in a general
library
partnership as so opposed to a limited partnership) is
laid down in Article 1816 2 which posits that all
Third Issue:chanrob1es virtual 1aw library
partners shall be liable pro rata beyond the
partnership assets for all the contracts which may
Validity of Attachment
have been entered into in its name, under its
signature, and by a person authorized to act for the
Finally, petitioner claims that the Writ of Attachment
partnership. This rule is to be construed along with
was improperly issued against the nets. We agree
other provisions of the Civil Code which postulate
with the Court of Appeals that this issue is now moot
that the partners can be held solidarily liable with the
and academic. As previously discussed, F/B Lourdes
partnership specifically in these instances — (1)
was an asset of the partnership and that it was
where, by any wrongful act or omission of any
placed in the name of petitioner, only to assure
partner acting in the ordinary course of the business
payment of the debt he and his partners owed. The
of the partnership or with the authority of his
nets and the floats were specifically manufactured
co-partners, loss or injury is caused to any person,
and tailor-made according to their own design, and
not being a partner in the partnership, or any penalty
were bought and used in the fishing venture they
is incurred, the partnership is liable therefor to the
agreed upon. Hence, the issuance of the Writ to
same extent as the partner so acting or omitting to
assure the payment of the price stipulated in the
act; (2) where one partner acting within the scope of
invoices is proper. Besides, by specific agreement,
his apparent authority receives money or property of
ownership of the nets remained with Respondent
a third person and misapplies it; and (3) where the
Philippine Fishing Gear, until full payment thereof.
partnership in the course of its business receives
money or property of a third person and the money
WHEREFORE, the Petition is DENIED and the assailed
or property so received is misapplied by any partner
Decision AFFIRMED. Costs against
while it is in the custody of the partnership 3 —
petitioner.chanrobles virtual lawlibrary
consistently with the rules on the nature of civil
liability in delicts and quasi-delicts.chanrobles law
SO ORDERED.
library : red
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
 Henri Kahn in his personal capacity and as President
of the Federation and impleaded the Federation as
an alternative defendant. Petitioner sought to hold
Henri Kahn liable for the unpaid balance for the
tickets purchased by the Federation on the ground
that Henri Kahn allegedly guaranteed the said
obligation. 6
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,
INC., Petitioner, v. HON. COURT OF APPEALS, HENRI
Henri Kahn filed his answer with counterclaim. While
KAHN, PHILIPPINES FOOTBALL
not denying the allegation that the Federation owed
FEDERATION, Respondents.
the amount P207,524.20, representing the unpaid
balance for the plane tickets, he averred that the
DECISION
petitioner has no cause of action against him either
in his personal capacity or in his official capacity as
president of the Federation. He maintained that he;
KAPUNAN, J.: did not guarantee payment but merely acted as an
agent of the Federation which has a separate and
distinct juridical personality. 7
On June 30 1989, petitioner International Express
On the other hand, the Federation failed to file its
Travel and Tour Services, Inc., through its managing
answer, hence, was declared in default by the trial
director, wrote a letter to the Philippine Football
court. 8
Federation (Federation), through its president
private respondent Henri Kahn, wherein the former
In due course, the trial court rendered judgment and
offered its services as a travel agency to the latter. 1
ruled in favor of the petitioner and declared Henri
Kahn personally liable for the unpaid obligation of
The offer was accepted.chanrob1es virtua1 1aw
the Federation. In arriving at the said ruling, the trial
1ibrary
court rationalized:chanrob1es virtual 1aw library
Petitioner secured the airline tickets for the trips of
Defendant Henri Kahn would have been correct in his
the athletes and officials of the Federation to the
contentions had it been duly established that
South East Asian Games in Kuala Lumpur as well as
defendant Federation is a corporation The trouble,
various other trips to the People’s Republic of China
however, is that neither the plaintiff nor the
and Brisbane. The total cost of the tickets amounted
defendant Henri Kahn has adduced any evidence
to P449,654.83. For the tickets received, the
proving the corporate existence of the defendant
Federation made two partial payments, both in
Federation. In paragraph 2 of its complaint, plaintiff
September of 1989, in the total amount of
asserted that "defendant Philippine Football
P176,467.50. 2
Federation is a sports association . . ." This has not
been denied by defendant Henri Kahn in his Answer.
On 4 October 1989, petitioner wrote the Federation,
Being the President of defendant Federation, its
through the private respondent a demand letter
corporate existence is within the personal knowledge
requesting for the amount of P265,894.33. 3 On 30
of defendant Henri Kahn. He could have easily denied
October 1989, the Federation, through the Project
specifically the assertion of the plaintiff that it is a
Gintong Alay, paid the amount of P31,603.00. 4
mere sports association if it were a domestic
corporation. But he did not.
On 27 December 1989, Henri Kahn issued a personal
check in the amount of P50,000 as partial payment x x x
for the outstanding balance of the Federation. 5
Thereafter, no further payments were made despite
repeated demands.chanrob1es virtua1 1aw 1ibrary
A voluntary unincorporated association, like
This prompted petitioner to file a civil case before defendant Federation has no power to enter into, or
the Regional Trial Court of Manila. Petitioner sued to ratify, a contract. The contract entered into by its
officers or agents on behalf of such association is not
binding on, or enforceable against it. The officers or
agents are themselves personally liable.
x x x9
The dispositive portion of the trial court’s decision
reads:chanrob1es virtual 1aw library
WHEREFORE, judgment is rendered ordering
defendant Henri Kahn to pay the plaintiff the
principal sum of P207,524.20, plus the interest
thereon at the legal rate computed from July 5, 1990,
the date the complaint was filed, until the principal
obligation is fully liquidated; and another sum of
P15,000.00 for attorney’s fees.chanrob1es virtua1
1aw 1ibrary
The complaint of the plaintiff against the Philippine
Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn. 10
Only Henri Kahn elevated the above decision to the
Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the
trial court, the decretal portion of said decision
reads:chanrob1es virtual 1aw library
WHEREFORE, premises considered, the judgment
appealed from is hereby REVERSED and SET ASIDE
and another one is rendered dismissing the
complaint against defendant Henri S. Kahn. 11
In finding for Henri Kahn, the Court of Appeals
recognized the juridical existence of the Federation.
It rationalized that since petitioner failed to prove
that Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same
as said entity has a separate and distinct personality
from its officers.
Petitioner filed a motion for reconsideration and as
an alternative prayer pleaded that the Federation be
held liable for the unpaid obligation. The same was
denied by the appellate court in its resolution of 8
February 1995, where it stated that:chanrob1es
virtua1 1aw 1ibrary
As to the alternative prayer for the Modification of
the Decision by expressly declaring in the dispositive
portion thereof the Philippine Football Federation
(PFF) as liable for the unpaid obligation, it should be
remembered that the trial court dismissed the
complaint against the Philippine Football Federation,
and the plaintiff did not appeal from this decision.
Hence, the Philippine Football Federation is not a
party to this appeal and consequently, no judgment
may be pronounced by this Court against the PFF
without violating the due process clause, let alone
the fact that the judgment dismissing the complaint
against it, had already become final by virtue of the
plaintiff’s failure to appeal therefrom. The alternative
prayer is therefore similarly DENIED. 12
Petitioner now seeks recourse to this Court and
alleges that the respondent court committed the
following assigned errors: 13
A. THE, HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONER HAD DEALT WITH THE
PHILIPPINE FOOTBALL FEDERATION (PFF) AS A
CORPORATE ENTITY AND IN NOT HOLDING THAT
PRIVATE RESPONDENT HENRI KAHN WAS THE ONE,
WHO REPRESENTED THE PFF AS HAVING CORPORATE
PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN
NOT HOLDING PRIVATE RESPONDENT HENRI KAHN
PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH
PETITIONER AND CONTRACTED THE OBLIGATION IN
BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AN
ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE
RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE
HONORABLE COURT OF APPEALS ERRED IN NOT
EXPRESSLY DECLARING IN ITS DECISION THAT THE
PFF IS SOLELY LIABLE FOR THE
OBLIGATION.chanrob1es virtua1 1aw 1ibrary
The resolution of the case at bar hinges on the
determination of the existence of the Philippine
Football Federation as a juridical person. In the
assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA
cited Republic Act 3135, otherwise known as the
Revised Charter of the Philippine Amateur Athletic
Federation, and Presidential Decree No. 604 as the
laws from which said Federation derives its
existence.chanrob1es virtua1 1aw 1ibrary
As correctly observed by the appellate court, both
R.A. 3135 and P.D. No. 604 recognized the juridical
existence of national sports associations. This may be
gleaned from the powers and functions granted to
these associations. Section 14 of R.A. 3135
provides:chanrob1es virtual 1aw library
SECTION 14. Functions, powers and duties of
Associations. — The National Sports’ Association
shall have the following functions, powers and
duties:chanrob1es virtual 1aw library
1. To adopt a constitution and by-laws for their
internal organization and government.
2. To raise funds by donations benefits, and other
means for their purposes.
3. To purchase, sell, lease or otherwise encumber
property both real and personal, for the
accomplishment of their purpose;
4. To affiliate with international or regional sports’
Associations after due consultation with the
executive committee;
x x x
13. To perform such other acts as may be necessary
for the proper accomplishment of their purposes and
not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to
these sports associations:chanrob1es virtual 1aw
library
SECTION. 8. Functions, Powers, and Duties of
National Sports Association. — The National sports
associations shall have the following functions,
powers, and duties:chanrob1es virtual 1aw library
1. Adopt a Constitution and By-Laws for their internal
organization and government which shall be
submitted to the Department and any amendment
hereto shall take effect upon approval by the
Department: Provided, however, That no team,
school, club, organization or entity shall be admitted
as a voting member of an association unless 60 per
cent of the athletes composing said team, school,
club, organization or entity are Filipino citizens.
2. Raise funds by donations, benefits, and other
means for their purpose subject to the approval of
the Department;
3. Purchase, sell, lease, or otherwise encumber
property, both real and personal, for the
accomplishment of their purpose;
4. Conduct local, interport, and international
competitions, other than the Olympic and Asian
Games, for the promotion of their sport;
5. Affiliate with international or regional sports
associations after due consultation with the
Department;
x x x
13. Perform such other functions as may be provided
by law.
The above powers and functions granted to national
sports associations clearly indicate that these entities
may acquire a juridical personality. The power to
purchase, sell, lease and encumber property are acts
which may only be done by persons, whether natural
or artificial, with juridical capacity. However, while
we agree with the appellate court that national
sports associations may be accorded corporate
status, such does not automatically take place by the
mere passage of these laws.chanrob1es virtua1 1aw
1ibrary
It is a basic postulate that before a corporation may
acquire juridical personality, the State must give its
consent either in the form of a special law or a
general enabling act. We cannot agree with the view
of the appellate court; and the private respondent
that the Philippine Football Federation came into
existence upon the passage of these laws. Nowhere
can it be found in R.A. 3135 or P.D. 604 any provision
creating the Philippine Football Federation. These
laws merely recognized the existence of national
sports associations and provided the manner by
which these entities may acquire juridical personality.
Section 11 of R.A. 3135 provides:chanrob1es virtual
1aw library
SECTION 11. National Sports’ Association;
organization and recognition. — A National
Association shall be organized for each individual
sports in the Philippines in the manner hereinafter
provided to constitute the Philippine Amateur
Athletic Federation. Applications for recognition as a
National Sports’ Association shall be filed with the
executive committee together with, among others, a
copy of the constitution and by-laws and a list of the
members of the proposed association, and a filing
fee of ten pesos.
The Executive Committee shall give the recognition
applied for if it is satisfied that said association will
promote the purposes of this Act and particularly
section three thereof. No application shall be held
pending for more than three months after the filing
thereof without any action having been taken
thereon by the executive committee. Should the
application be rejected, the reasons for such
rejection shall be clearly stated in a written
communication to the applicant. Failure to specify
the reasons for the rejection shall not affect the
application which shall be considered as unacted
upon: Provided however, That until the executive
committee herein provided shall have been formed,
applications for recognition shall be passed upon by
the duly elected members of the present executive
committee of the Philippine Amateur Athletic
Federation. The said executive committee shall be
dissolved upon the organization of the executive
committee herein provided: Provided, further, That
the functioning executive committee is charged with
the responsibility of seeing to it that the National
Sports’ Associations are formed and organized within
six months from and after the passage of this
Act.chanrob1es virtua1 1aw 1ibrary
Section 7 of P.D. 604, similarly provides:chanrob1es
virtual 1aw library
SECTION 7. National Sports Associations: —
Application for accreditation or recognition as a
national sports association for each individual sport
in the Philippines shall be filed with the Department
together with, among others, a copy of the
Constitution and By-Laws and a list of the members
of the proposed association.
The Department shall give the recognition applied for
if it is satisfied that the national sports association to
be organized will promote the objectives of this
Decree and has substantially complied with the rules
and regulations of the Department: Provided, That
the Department may withdraw accreditation or
recognition for violation of this Decree and such rules
and regulations formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have
exclusive technical control over the development and
promotion of the particular sport for which they are
organized.
Clearly the above cited provisions require that before
an entity may be considered as a national sports
association, such entity must be recognized by the
accrediting organization, the Philippine, Amateur
Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under
P.D. 604.
This fact of recognition, however, Henri Kahn failed
to substantiate. In attempting to prove the juridical
existence of the Federation, Henri Kahn attached to
his motion for reconsideration before the trial court
a copy of the constitution and by-laws of the
Philippine, Football Federation. Unfortunately, the
same does not prove that said Federation has indeed
been recognized and accredited by either the
Philippine Amateur Athletic Federation or the
Department of Youth and Sports Development.
Accordingly, we rule that the Philippine Football
Federation is not a national sports association within
the purview of the aforementioned laws and does
not have corporate existence of its own.chanrob1es
virtua1 1aw 1ibrary
Thus being said, it follows that private respondent
Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football
Federation. It is a settled principal in corporation law
that any person acting or purporting to act on behalf
of a corporation which has no valid existence
assumes such privileges and becomes personally
liable for contract entered into or for other acts
performed as such agent. 14 As president of the
Federation, Henri Kahn is presumed to have known
about the corporate existence or non-existence of
the Federation. We cannot subscribe to the position
taken by the appellate court that even assuming that
the Federation was defectively incorporated, the
petitioner cannot deny the corporate existence of
the Federation because it had contracted and dealt
with the Federation in such a manner as to recognize
and in effect admit its existence. 15 The doctrine of
corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application
of the doctrine applies to a third party only when he
tries to escape liabilities on a contract from which he
has benefited on the irrelevant ground of defective
incorporation. 16 In the case at bar, the petitioner is
not trying to escape liability from the contract but
rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is
REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil
Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)
ASSOCIATION, INC., petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND
GUARANTY CORPORATION, EMDEN ENCARNACION
and HORATIO AYCARDO, respondents.
ROMERO, J.:
May the failure of a corporation to file its by-laws
within one month from the date of its incorporation,
as mandated by Section 46 of the Corporation Code,
result in its automatic dissolution?
This is the issue raised in this petition for review
on certiorari of the Decision1 of the Court of Appeals
affirming the decision of the Home Insurance and
Guaranty Corporation (HIGC). This quasi-judicial body
recognized Loyola Grand Villas Homeowners
Association (LGVHA) as the sole homeowners'
association in Loyola Grand Villas, a duly registered
subdivision in Quezon City and Marikina City that was
owned and developed by Solid Homes, Inc. It
revoked the certificates of registration issued to
Loyola Grand Villas homeowners (North) Association
Incorporated (the North Association for brevity) and
Loyola Grand Villas Homeowners (South) Association
Incorporated (the South Association).
LGVHAI was organized on February 8, 1983 as the
association of homeowners and residents of the
Loyola Grand Villas. It was registered with the Home
Financing Corporation, the predecessor of herein
respondent HIGC, as the sole homeowners'
organization in the said subdivision under Certificate
of Registration No. 04-197. It was organized by the
developer of the subdivision and its first president
was Victorio V. Soliven, himself the owner of the
developer. For unknown reasons, however, LGVHAI
did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to
register its by-laws. They failed to do so. 2 To the
officers' consternation, they discovered that there
were two other organizations within the subdivision
— the North Association and the South Association.
According to private respondents, a non-resident and
Soliven himself, respectively headed these
associations. They also discovered that these
associations had five (5) registered homeowners
each who were also the incorporators, directors and
officers thereof. None of the members of the LGVHAI
was listed as member of the North Association while
three (3) members of LGVHAI were listed as
members of the South Association.3 The North
Association was registered with the HIGC on
February 13, 1989 under Certificate of Registration
No. 04-1160 covering Phases West II, East III, West III
and East IV. It submitted its by-laws on December 20,
1988.
In July, 1989, when Soliven inquired about the status
of LGVHAI, Atty. Joaquin A. Bautista, the head of the
legal department of the HIGC, informed him that
LGVHAI had been automatically dissolved for two
reasons. First, it did not submit its by-laws within the
period required by the Corporation Code and,
second, there was non-user of corporate charter
because HIGC had not received any report on the
association's activities. Apparently, this information
resulted in the registration of the South Association
with the HIGC on July 27, 1989 covering Phases West
I, East I and East II. It filed its by-laws on July 26,
1989.
These developments prompted the officers of the
LGVHAI to lodge a complaint with the HIGC. They
questioned the revocation of LGVHAI's certificate of
registration without due notice and hearing and
concomitantly prayed for the cancellation of the
certificates of registration of the North and South
Associations by reason of the earlier issuance of a
certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing,
private respondents obtained a favorable ruling from
HIGC Hearing Officer Danilo C. Javier who disposed of
HIGC Case No. RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered
recognizing the Loyola Grand Villas Homeowners
Association, Inc., under Certificate of Registration No.
04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas
homeowners, and declaring the Certificates of
Registration of Loyola Grand Villas Homeowners
(North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby
revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to
render an accounting and turn-over to Loyola Grand
Villas Homeowners Association, Inc., all assets and
records of the Association now under his custody and
possession.
The South Association appealed to the Appeals Board
of the HIGC. In its Resolution of September 8, 1993,
the Board 4 dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to
the Court of Appeals, raising two issues. First,
whether or not LGVHAI's failure to file its by-laws
within the period prescribed by Section 46 of the
Corporation Code resulted in the automatic
dissolution of LGVHAI. Second, whether or not two
homeowners' associations may be authorized by the
HIGC in one "sprawling subdivision." However, in the
Decision of August 23, 1994 being assailed here, the
Court of Appeals affirmed the Resolution of the HIGC
Appeals Board.
In resolving the first issue, the Court of Appeals held
that under the Corporation Code, a private
corporation commences to have corporate existence
and juridical personality from the date the Securities
and Exchange Commission (SEC) issues a certificate
of incorporation under its official seal. The
requirement for the filing of by-laws under Section
46 of the Corporation Code within one month from
official notice of the issuance of the certificate of
incorporation presupposes that it is already
incorporated, although it may file its by-laws with its
articles of incorporation. Elucidating on the effect of
a delayed filing of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the
petitioner, i.e., Section 46 and 22, Corporation Code,
or in any other provision of the Code and other laws
which provide or at least imply that failure to file the
by-laws results in an automatic dissolution of the
corporation. While Section 46, in prescribing that
by-laws must be adopted within the period
prescribed therein, may be interpreted as a
mandatory provision, particularly because of the use
of the word "must," its meaning cannot be stretched
to support the argument that automatic dissolution
results from non-compliance.
We realize that Section 46 or other provisions of the
Corporation Code are silent on the result of the
failure to adopt and file the by-laws within the
required period. Thus, Section 46 and other related
provisions of the Corporation Code are to be
construed with Section 6 (1) of P.D. 902-A. This
section empowers the SEC to suspend or revoke
certificates of registration on the grounds listed
therein. Among the grounds stated is the failure to
file by-laws (see also II Campos: The Corporation
Code, 1990 ed., pp. 124-125). Such suspension or
revocation, the same section provides, should be
made upon proper notice and hearing. Although P.D.
902-A refers to the SEC, the same principles and
procedures apply to the public respondent HIGC as it
exercises its power to revoke or suspend the
certificates of registration or homeowners
association. (Section 2 [a], E.O. 535, series 1979,
transferred the powers and authorities of the SEC
over homeowners associations to the HIGC.)
We also do not agree with the petitioner's
interpretation that Section 46, Corporation Code
prevails over Section 6, P.D. 902-A and that the latter
is invalid because it contravenes the former. There is
no basis for such interpretation considering that
these two provisions are not inconsistent with each
other. They are, in fact, complementary to each
other so that one cannot be considered as
invalidating the other.
The Court of Appeals added that, as there was no
showing that the registration of LGVHAI had been
validly revoked, it continued to be the duly registered
homeowners' association in the Loyola Grand Villas.
More importantly, the South Association did not
dispute the fact that LGVHAI had been organized and
that, thereafter, it transacted business within the
period prescribed by law.
On the second issue, the Court of Appeals reiterated
its previous ruling 5 that the HIGC has the authority
to order the holding of a referendum to determine
which of two contending associations should
represent the entire community, village or
subdivision.
Undaunted, the South Association filed the instant
petition for review on certiorari. It elevates as sole
issue for resolution the first issue it had raised before
the Court of Appeals, i.e., whether or not the
LGVHAI's failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code
had the effect of automatically dissolving the said
corporation.
Petitioner contends that, since Section 46 uses the
word "must" with respect to the filing of by-laws,
noncompliance therewith would result in
"self-extinction" either due to non-occurrence of a
suspensive condition or the occurrence of a
resolutory condition "under the hypothesis that (by)
the issuance of the certificate of registration alone
the corporate personality is deemed already
formed." It asserts that the Corporation Code
provides for a "gradation of violations of
requirements." Hence, Section 22 mandates that the
corporation must be formally organized and should
commence transaction within two years from date of
incorporation. Otherwise, the corporation would be
deemed dissolved. On the other hand, if the
corporation commences operations but becomes
continuously inoperative for five years, then it may
be suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other
provisions of the Corporation Code do not provide
for sanctions for non-filing of the by-laws. However,
it insists that no sanction need be provided "because
the mandatory nature of the provision is so clear that
there can be no doubt about its being an essential
attribute of corporate birth." To petitioner, its
submission is buttressed by the facts that the period
for compliance is "spelled out distinctly;" that the
certification of the SEC/HIGC must show that the
by-laws are not inconsistent with the Code, and that
a copy of the by-laws "has to be attached to the
articles of incorporation." Moreover, no sanction is
provided for because "in the first place, no corporate
identity has been completed." Petitioner asserts that
"non-provision for remedy or sanction is itself the
tacit proclamation that non-compliance is fatal and
no corporate existence had yet evolved," and
therefore, there was "no need to proclaim its
demise." 6 In a bid to convince the Court of its
arguments, petitioner stresses that:
. . . the word MUST is used in Sec. 46 in its universal
literal meaning and corollary human implication —
its compulsion is integrated in its very essence
— MUST is always enforceable by the inevitable
consequence — that is, "OR ELSE". The use of the
word MUST in Sec. 46 is no exception — it means file
the by-laws within one month after notice of
issuance of certificate of registration OR ELSE.
The OR ELSE, though not specified, is inextricably a
part of MUST . Do this or if you do not you are
"Kaput". The importance of the by-laws to corporate
existence compels such meaning for as decreed the
by-laws is "the government" of the corporation.
Indeed, how can the corporation do any lawful act as
such without by-laws. Surely, no law is indeed to
create chaos. 7
Petitioner asserts that P.D. No. 902-A cannot exceed
the scope and power of the Corporation Code which
itself does not provide sanctions for non-filing of
by-laws. For the petitioner, it is "not proper to assess
the true meaning of Sec. 46 . . . on an unauthorized
provision on such matter contained in the said
decree."
In their comment on the petition, private
respondents counter that the requirement of
adoption of by-laws is not mandatory. They point to
P.D. No. 902-A as having resolved the issue of
whether said requirement is mandatory or merely
directory. Citing Chung Ka Bio v. Intermediate
Appellate Court, 8 private respondents contend that
Section 6(I) of that decree provides that non-filing of
by-laws is only a ground for suspension or revocation
of the certificate of registration of corporations and,
therefore, it may not result in automatic dissolution
of the corporation. Moreover, the adoption and filing
of by-laws is a condition subsequent which does not
affect the corporate personality of a corporation like
the LGVHAI. This is so because Section 9 of the
Corporation Code provides that the corporate
existence and juridical personality of a corporation
begins from the date the SEC issues a certificate of
incorporation under its official seal. Consequently,
even if the by-laws have not yet been filed, a
corporation may be considered a de
facto corporation. To emphasize the fact the LGVHAI
was registered as the sole homeowners' association
in the Loyola Grand Villas, private respondents point
out that membership in the LGVHAI was an
"unconditional restriction in the deeds of sale signed
by lot buyers."
In its reply to private respondents' comment on the
petition, petitioner reiterates its argument that the
word " must" in Section 46 of the Corporation Code
is mandatory. It adds that, before the ruling in Chung
Ka Bio v. Intermediate Appellate Court could be
applied to this case, this Court must first resolve the
issue of whether or not the provisions of P.D. No.
902-A prescribing the rules and regulations to
implement the Corporation Code can "rise above and
change" the substantive provisions of the Code.
The pertinent provision of the Corporation Code that
is the focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. — Every corporation
formed under this Code, must within one (1) month
after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For
the adoption of by-laws by the corporation, the
affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of
at least a majority of the members, in the case of
non-stock corporations, shall be necessary. The
by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the
principal office of the corporation, subject to the
stockholders or members voting for them and shall
be kept in the principal office of the corporation,
subject to inspection of the stockholders or members
during office hours; and a copy thereof, shall be filed
with the Securities and Exchange Commission which
shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and
submitted to the Securities and Exchange
Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only upon the
issuance by the Securities and Exchange Commission
of a certification that the by-laws are not
inconsistent with this Code.
The Securities and Exchange Commission shall not
accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and
loan association, trust company, insurance company,
public utility, educational institution or other special
corporations governed by special laws, unless
accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or
amendments are in accordance with law.
As correctly postulated by the petitioner,
interpretation of this provision of law begins with the
determination of the meaning and import of the
word "must" in this section Ordinarily, the word
"must" connotes an imperative act or operates to
impose a duty which may be enforced. 9 It is
synonymous with "ought" which connotes
compulsion or mandatoriness. 10 However, the word
"must" in a statute, like "shall," is not always
imperative. It may be consistent with an exercise of
discretion. In this jurisdiction, the tendency has been
to interpret "shall" as the context or a reasonable
construction of the statute in which it is used
demands or requires. 11 This is equally true as
regards the word "must." Thus, if the languages of a
statute considered as a whole and with due regard to
its nature and object reveals that the legislature
intended to use the words "shall" and "must" to be
directory, they should be given that meaning.12
In this respect, the following portions of the
deliberations of the Batasang Pambansa No. 68 are
illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are
we made to understand here, Mr. Speaker, that
by-laws must immediately be filed within one month
after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker,
what would be the effect of the failure of the
corporation to file these by-laws within one month?
MR. MENDOZA. There is a provision in the latter part
of the Code which identifies and describes the
consequences of violations of any provision of this
Code. One such consequences is the dissolution of
the corporation for its inability, or perhaps, incurring
certain penalties.
MR. FUENTEBELLA. But it will not automatically
amount to a dissolution of the corporation by merely
failing to file the by-laws within one month.
Supposing the corporation was late, say, five days,
what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result
in the automatic or ipso facto dissolution of the
corporation. Perhaps, as in the case, as you
suggested, in the case of El Hogar Filipino where
a quo warranto action is brought, one takes into
account the gravity of the violation committed. If the
by-laws were late — the filing of the by-laws were
late by, perhaps, a day or two, I would suppose that
might be a tolerable delay, but if they are delayed
over a period of months — as is happening now —
because of the absence of a clear requirement that
by-laws must be completed within a specified period
of time, the corporation must suffer certain
consequences. 13
This exchange of views demonstrates clearly that
automatic corporate dissolution for failure to file the
by-laws on time was never the intention of the
legislature. Moreover, even without resorting to the
records of deliberations of the Batasang Pambansa,
the law itself provides the answer to the issue
propounded by petitioner.
Taken as a whole and under the principle that the
best interpreter of a statute is the statute itself
(optima statuli interpretatix est ipsum
statutum), 14 Section 46 aforequoted reveals the
legislative intent to attach a directory, and not
mandatory, meaning for the word "must" in the first
sentence thereof. Note should be taken of the
second paragraph of the law which allows the filing
of the by-laws even prior to incorporation. This
provision in the same section of the Code rules out
mandatory compliance with the requirement of filing
the by-laws "within one (1) month after receipt of
official notice of the issuance of its certificate of
incorporation by the Securities and Exchange
Commission." It necessarily follows that failure to file
the by-laws within that period does not imply the
"demise" of the corporation. By-laws may be
necessary for the "government" of the corporation
but these are subordinate to the articles of
incorporation as well as to the Corporation Code and
related statutes.15 There are in fact cases where
by-laws are unnecessary to corporate existence or to
the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to
the contrary, by-laws are not necessary either to the
existence of a corporation or to the valid exercise of
the powers conferred upon it, certainly in all cases
where the charter sufficiently provides for the
government of the body; and even where the
governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure
to exercise the power will be ascribed to mere
nonaction which will not render void any acts of the
corporation which would otherwise be
16
valid. (Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are
the rule of its life, and that until by-laws have been
adopted the corporation may not be able to act for
the purposes of its creation, and that the first and
most important duty of the members is to adopt
them. This would seem to follow as a matter of
principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a
matter of practical, if not one of legal, necessity.
Moreover, the peculiar circumstances attending the
formation of a corporation may impose the
obligation to adopt certain by-laws, as in the case of
a close corporation organized for specific purposes.
And the statute or general laws from which the
corporation derives its corporate existence may
expressly require it to make and adopt by-laws and
specify to some extent what they shall contain and
the manner of their adoption. The mere fact,
however, of the existence of power in the corporation
to adopt by-laws does not ordinarily and of necessity
make the exercise of such power essential to its
corporate life, or to the validity of any of its acts. 17
Although the Corporation Code requires the filing of
by-laws, it does not expressly provide for the
consequences of the non-filing of the same within
the period provided for in Section 46. However, such
omission has been rectified by Presidential Decree
No. 902-A, the pertinent provisions on the
jurisdiction of the SEC of which state:
Sec. 6. In order to effectively exercise such
jurisdiction, the Commission shall possess the
following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and
hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any
of the grounds provided by law, including the
following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx
In the exercise of the foregoing authority and
jurisdiction of the Commission or by a Commissioner
or by such other bodies, boards, committees and/or
any officer as may be created or designated by the
Commission for the purpose. The decision, ruling or
order of any such Commissioner, bodies, boards,
committees and/or officer may be appealed to the
Commission sitting en banc within thirty (30) days
after receipt by the appellant of notice of such
decision, ruling or order. The Commission shall
promulgate rules of procedures to govern the
proceedings, hearings and appeals of cases falling
with its jurisdiction.
The aggrieved party may appeal the order, decision
or ruling of the Commission sitting en banc to the
Supreme Court by petition for review in accordance
with the pertinent provisions of the Rules of Court.
Even under the foregoing express grant of power and
authority, there can be no automatic corporate
dissolution simply because the incorporators failed to
abide by the required filing of by-laws embodied in
Section 46 of the Corporation Code. There is no
outright "demise" of corporate existence. Proper
notice and hearing are cardinal components of due
process in any democratic institution, agency or
society. In other words, the incorporators must be
given the chance to explain their neglect or omission
and remedy the same.
That the failure to file by-laws is not provided for by
the Corporation Code but in another law is of no
moment. P.D. No. 902-A, which took effect
immediately after its promulgation on March 11,
1976, is very much apposite to the Code. Accordingly,
the provisions abovequoted supply the law governing
the situation in the case at bar, inasmuch as the
Corporation Code and P.D. No. 902-A are statutes
in pari materia. Interpretare et concordare legibus est
optimus interpretandi. Every statute must be so
construed and harmonized with other statutes as to
form a uniform system of jurisprudence. 18
As the "rules and regulations or private laws enacted
by the corporation to regulate, govern and control its
own actions, affairs and concerns and its
stockholders or members and directors and officers
with relation thereto and among themselves in their
relation to it," 19 by-laws are indispensable to
corporations in this jurisdiction. These may not be
essential to corporate birth but certainly, these are
required by law for an orderly governance and
management of corporations. Nonetheless, failure to
file them within the period required by law by no
means tolls the automatic dissolution of a
corporation.
In this regard, private respondents are correct in
relying on the pronouncements of this Court
in Chung Ka Bio v. Intermediate Appellate Court, 20 as
follows:
. . . . Moreover, failure to file the by-laws does not
automatically operate to dissolve a corporation but is
now considered only a ground for such dissolution.
Section 19 of the Corporation Law, part of which is
now Section 22 of the Corporation Code, provided
that the powers of the corporation would cease if it
did not formally organize and commence the
transaction of its business or the continuation of its
works within two years from date of its incorporation.
Section 20, which has been reproduced with some
modifications in Section 46 of the Corporation Code,
expressly declared that "every corporation formed
under this Act, must within one month after the filing
of the articles of incorporation with the Securities
and Exchange Commission, adopt a code of by-laws."
Whether this provision should be given mandatory or
only directory effect remained a controversial
question until it became academic with the adoption
of PD 902-A. Under this decree, it is now clear that
the failure to file by-laws within the required period
is only a ground for suspension or revocation of the
certificate of registration of corporations.
Non-filing of the by-laws will not result in automatic
dissolution of the corporation. Under Section 6(I) of
PD 902-A, the SEC is empowered to "suspend or
revoke, after proper notice and hearing, the
franchise or certificate of registration of a
corporation" on the ground inter alia of "failure to
file by-laws within the required period." It is clear
from this provision that there must first of all be a
hearing to determine the existence of the ground,
and secondly, assuming such finding, the penalty is
not necessarily revocation but may be only
suspension of the charter. In fact, under the rules
and regulations of the SEC, failure to file the by-laws
on time may be penalized merely with the imposition
of an administrative fine without affecting the
corporate existence of the erring firm.
It should be stressed in this connection that
substantial compliance with conditions subsequent
will suffice to perfect corporate personality.
Organization and commencement of transaction of
corporate business are but conditions subsequent
and not prerequisites for acquisition of corporate
personality. The adoption and filing of by-laws is also
a condition subsequent. Under Section 19 of the
Corporation Code, a Corporation commences its
corporate existence and juridical personality and is
deemed incorporated from the date the Securities
and Exchange Commission issues certificate of
incorporation under its official seal. This may be done
even before the filing of the by-laws, which under
Section 46 of the Corporation Code, must be
adopted "within one month after receipt of official
notice of the issuance of its certificate of
incorporation." 21
That the corporation involved herein is under the
supervision of the HIGC does not alter the result of
this case. The HIGC has taken over the specialized
functions of the former Home Financing Corporation
by virtue of Executive Order No. 90 dated December
17, 1989. 22 With respect to homeowners
associations, the HIGC shall "exercise all the powers,
authorities and responsibilities that are vested on the
Securities and Exchange Commission . . . , the
provision of Act 1459, as amended by P.D. 902-A, to
the contrary notwithstanding." 23
WHEREFORE, the instant petition for review
on certiorari is hereby DENIED and the questioned
Decision of the Court of Appeals AFFIRMED. This
Decision is immediately executory. Costs against
petitioner.
SO ORDERED.
HENRY FLEISCHER, Plaintiff-Appellee, vs. BOTICA
NOLASCO CO., INC., Defendant-Appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First
Instance of the Province of Oriental Negros on the
14th day of August, 1923, against the board of
directors of the Botica Nolasco, Inc., a corporation
duly organized and existing under the laws of the
Philippine Islands. The plaintiff prayed that said
board of directors be ordered to register in the books
of the corporation five shares of its stock in the name
of Henry Fleischer, the plaintiff, and to pay him the
sum of P500 for damages sustained by him resulting
from the refusal of said body to register the shares of
stock in question. The defendant filed a demurrer on
the ground that the facts alleged in the complaint did
not constitute sufficient cause of action, and that the
action was not brought against the proper party,
which was the Botica Nolasco, Inc. The demurrer was
sustained, and the plaintiff was granted five days to
amend his
complaint.chanroblesvirtualawlibrary chanrobles
virtual law library
On November 15, 1923, the plaintiff filed an
amended complaint against the Botica Nolasco, Inc.,
alleging that he became the owner of five shares of
stock of said corporation, by purchase from their
original owner, one Manuel Gonzalez; that the said
shares were fully paid; and that the defendant
refused to register said shares in his name in the
books of the corporation in spite of repeated
demands to that effect made by him upon said
corporation, which refusal caused him damages
amounting to P500. Plaintiff prayed for a judgment
ordering the Botica Nolasco, Inc. to register in his
name in the books of the corporation the five shares
of stock recorded in said books in the name of
Manuel Gonzalez, and to indemnify him in the sum
of P500 as damages, and to pay the costs. The
defendant again filed a demurrer on the ground that
the amended complaint did not state facts sufficient
to constitute a cause of action, and that said
amended complaint was ambiguous, unintelligible,
uncertain, which demurrer was overruled by the
court.chanroblesvirtualawlibrary chanrobles virtual
law library
The defendant answered the amended complaint
denying generally and specifically each and every one
of the material allegations thereof, and, as a special
defense, alleged that the defendant, pursuant to
article 12 of its by-laws, had preferential right to buy
from the plaintiff said shares at the par value of P100
a share, plus P90 as dividends corresponding to the
year 1922, and that said offer was refused by the
plaintiff. The defendant prayed for a judgment
absolving it from all liability under the complaint and
directing the plaintiff to deliver to the defendant the
five shares of stock in question, and to pay damages
in the sum of P500, and the
costs.chanroblesvirtualawlibrary chanrobles virtual
law library
Upon the issue presented by the pleadings above
stated, the cause was brought on for trial, at the
conclusion of which, and on August 21, 1924, the
Honorable N. Capistrano, judge, held that, in his
opinion, article 12 of the by-laws of the corporation
which gives it preferential right to buy its shares from
retiring stockholders, is in conflict with Act No. 1459
(Corporation Law), especially with section 35 thereof;
and rendered a judgment ordering the defendant
corporation, through its board of directors, to
register in the books of said corporation the said five
shares of stock in the name of the plaintiff, Henry
Fleischer, as the shareholder or owner thereof,
instead of the original owner, Manuel Gonzalez, with
costs against the
defendant.chanroblesvirtualawlibrary chanrobles
virtual law library
The defendant appealed from said judgment, and
now makes several assignment of error, all of which,
in substance, raise the question whether or not
article 12 of the by-laws of the corporation is in
conflict with the provisions of the Corporation Law
(Act No. 1459).chanroblesvirtualawlibrary chanrobles
virtual law library
There is no controversy as to the facts of the present
case. They are simple and may be stated as
follows:chanrobles virtual law library
That Manuel Gonzalez was the original owner of the
five shares of stock in question, Nos. 16, 17, 18, 19
and 20 of the Botica Nolasco, Inc.; that on March 11,
1923, he assigned and delivered said five shares to
the plaintiff, Henry Fleischer, by accomplishing the
form of endorsement provided on the back thereof,
together with other credits, in consideration of a
large sum of money owed by Gonzalez to Fleischer
(Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13,
1923, Dr. Eduardo Miciano, who was the
secretary-treasurer of said corporation, offered to
buy from Henry Fleischer, on behalf of the
corporation, said shares of stock, at their par value of
P100 a share, for P500; that by virtue of article 12 of
the by-laws of Botica Nolasco, Inc., said corporation
had the preferential right to buy from Manuel
Gonzalez said shares (Exhibit 2); that the plaintiff
refused to sell them to the defendant; that the
plaintiff requested Doctor Miciano to register said
shares in his name; that Doctor Miciano refused to
do so, saying that it would be in contravention of the
by-laws of the
corporation.chanroblesvirtualawlibrary chanrobles
virtual law library
It also appears from the record that on the 13th day
of March, 1923, two days after the assignment of the
shares to the plaintiff, Manuel Gonzales made a
written statement to the Botica Nolasco, Inc.,
requesting that the five shares of stock sold by him
to Henry Fleischer be noted transferred to Fleischer's
name. He also acknowledged in said written
statement the preferential right of the corporation to
buy said five shares (Exhibit 3). On June 14, 1923,
Gonzalez wrote a letter to the Botica Nolasco,
withdrawing and cancelling his written statement of
March 13, 1923 (Exhibit C), to which letter the Botica
Nolasco on June 15, 1923, replied, declaring that his
written statement was in conformity with the
by-laws of the corporation; that his letter of June
14th was of no effect, and that the shares in question
had been registered in the name of the Botica
Nolasco, Inc., (Exhibit
X).chanroblesvirtualawlibrary chanrobles virtual law
library
As indicated above, the important question raised in
this appeal is whether or not article 12 of the by-laws
of the Botica Nolasco, Inc., is in conflict with the
provisions of the Corporation Law (Act No. 1459).
Appellant invoked said article as its ground for
denying the request of the plaintiff that the shares in
question be registered in his (plaintiff's) name, and
for claiming that it (Botica Nolasco, Inc.) had the
preferential right to buy said shares from Gonzalez.
Appellant now contends that article 12 of the said
by-laws is in conformity with the provisions of Act No.
1459. Said article is as follows:
ART. 12. Las acciones de la
Corporacion pueden ser
transferidas a otra persona, pero
para que estas transferencias
tengan validez legal, deben constar
en los registros de la Corporacion
con el debido endoso del accionista
a cuyo nombre se ha expedido la
accion o acciones que se
transfieran, o un documento de
transferencia. Entendiendose que,
ningun accionista transferira accion
alguna a otra persona sin participar
antes por escrito al
Secretario-Tesorero. En igualdad
de condiciones, la sociedad tendra
el derecho de adquirir para si la
accion o acciones que se traten de
transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or
regulation adopted by the Botica Nolasco, Inc.,
governing the transfer of shares of stock of said
corporation. The latter part of said article creates in
favor of the Botica Nolasco, Inc., a preferential right
to buy, under the same conditions, the share or
shares of stock of a retiring shareholder. Has said
corporation any power, under the Corporation Law
(Act. No. 1459), to adopt such by-law?chanrobles
virtual law library
The particular provisions of the Corporation Law
referring to transfer of shares of stock are as follows:
SEC. 13. Every corporation has the
power:
xxx xxx xx
xchanrobles virtual law library
(7) To make by-laws, not
inconsistent with any existing law,
for the fixing or changing of the
number of its officers and directors
within the limits prescribed by law,
and for the transferring of its stock,
the administration of its corporate
affairs, etc.
xxx xxx xx
xchanrobles virtual law library
SEC. 35. The capital stock of stock
corporations shall de divided into
shares for which certificates signed
by the president or the
vice-president, countersigned by
the secretary or clerk and sealed
with the seal of the corporation,
shall be issued in accordance with
the by-laws. Shares of stock so
issued are personal property and
may be transferred by delivery of
the certificate indorsed by the
owner or his attorney in fact or
other person legally authorized to
make the transfer. No transfer,
however, shall be valid, except as
between the parties, until the
transfer is entered and noted upon
the books of the corporation so as
to show the names of the parties
to the transaction, that date of the
transfer, the number of the
certificate, and the number of
shares transferred. chanrobles
virtual law library
No share of stock against which the
corporation holds any unpaid claim
shall be transferable on the books
of the corporation.
Section 13, paragraph 7, above-quoted, empowers a
corporation to make by-laws, not inconsistent with
any existing law, for the transferring of its stock. It
follows from said provision, that a by-law adopted by
a corporation relating to transfer of stock should be
in harmony with the law on the subject of transfer of
stock. The law on this subject is found in section 35
of Act No. 1459 above quoted. Said section
specifically provides that the shares of stock "are
personal property and may be transferred by delivery
of the certificate indorsed by the owner, etc." Said
section 35 defines the nature, character and
transferability of shares of stock. Under said section
they are personal property and may be transferred
as therein provided. Said section contemplates no
restriction as to whom they may be transferred or
sold. It does not suggest that any discrimination may
be created by the corporation in favor or against a
certain purchaser. The holder of shares, as owner of
personal property, is at liberty, under said section, to
dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the
general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer
of shares of stock should take into consideration the
specific provisions of section 35 of Act No. 1459, and
said by-law should be made to harmonize with said
provisions. It should not be inconsistent
therewith.chanroblesvirtualawlibrary chanrobles
virtual law library
The by-law now in question was adopted under the
power conferred upon the corporation by section 13,
paragraph 7, above quoted; but in adopting said
by-law the corporation has transcended the limits
fixed by law in the same section, and has not taken
into consideration the provisions of section 35 of Act
No. 1459.chanroblesvirtualawlibrary chanrobles
virtual law library
As a general rule, the by-laws of a corporation are
valid if they are reasonable and calculated to carry
into effect the objects of the corporation, and are
not contradictory to the general policy of the laws of
the land. (Supreme Commandery of the Knights of
the Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am.
Rep., 332.)chanrobles virtual law library
On the other hand, it is equally well settled that
by-laws of a corporation must be reasonable and for
a corporate purpose, and always within the charter
limits. They must always be strictly subordinate to
the constitution and the general laws of the land.
They must not infringe the policy of the state, nor be
hostile to public welfare. (46 Am. Rep., 332.) They
must not disturb vested rights or impair the
obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect
rights of property or create obligations unknown to
the law. (People's Home Savings Bank vs. Superior
Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs.
Globe Milling Co., 79 Am. St. Rep., 769.)chanrobles
virtual law library
The validity of the by-law of a corporation is purely a
question of law. (South Florida Railroad Co. vs.
Rhodes, 25 Fla., 40.)
The power to enact by-laws
restraining the sale and transfer of
stock must be found in the
governing statute or the
charter. Restrictions upon the
traffic in stock must have their
source in legislative enactment, as
the corporation itself cannot create
such impediments. By-law are
intended merely for the protection
of the corporation, and prescribe
regulation and not restriction; they
are always subject to the charter of
the corporation. The corporation,
in the absence of such a power,
cannot ordinarily inquire into or
pass upon the legality of the
transaction by which its stock
passes from one person to another,
nor can it question the
consideration upon which a sale is
based. A by-law cannot take away
or abridge the substantial rights of
stockholder. Under a statute
authorizing by- laws for the
transfer of stock, a corporation can
do no more than prescribe a
general mode of transfer on the
corporate books and cannot justify
an unreasonable restriction upon
the right of sale. (4 Thompson on
Corporations, sec. 4137, p.
674.chanroblesvirtualawlibrary cha
nrobles virtual law library
The right of unrestrained transfer
of shares inheres in the very nature
of a corporation, and courts will
carefully scrutinize any attempt to
impose restrictions or limitations
upon the right of stockholders to
sell and assign their stock. The right
to impose any restraint in this
respect must be conferred upon
the corporation either by the
 governing statute or by the articles
of the corporation. It cannot be
done by a by-law without statutory
or charter authority. (4 Thompson
on Corporations, sec. 4334, pp. 818,
819.)chanrobles virtual law library
The jus disponendi, being an
incident of the ownership of
property, the general rule (subject
to exceptions hereafter pointed
out and discussed) is that every
owner of corporate shares has the
same uncontrollable right to alien
them which attaches to the
ownership of any other species of
property. A shareholder is under
no obligation to refrain from selling
his shares at the sacrifice of his
personal interest, in order to
secure the welfare of the
corporation, or to enable another
shareholder to make gains and
profits. (10 Cyc., p. 577.)chanrobles
virtual law library
It follows from the foregoing that
a corporation has no power to
prevent or to restrain transfers of
its shares, unless such power is
expressly conferred in its charter or
governing statute. This conclusion
follows from the further
consideration that by-laws or other
regulations restraining such
transfers, unless derived from
authority expressly granted by the
legislature, would be regarded as
impositions in restraint of trade.
(10 Cyc., p. 578.)
The foregoing authorities go farther than the stand
we are taking on this question. They hold that the
power of a corporation to enact by-laws restraining
the sale and transfer of shares, should not only be in
harmony with the law or charter of the corporation,
but such power should be expressly granted in said
law or charter.chanroblesvirtualawlibrary chanrobles
virtual law library
The only restraint imposed by the Corporation Law
upon transfer of shares is found in section 35 of Act
No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the
parties, until the transfer is entered and noted upon
the books of the corporation so as to show the
names of the parties to the transaction, the date of
the transfer, the number of the certificate, and the
number of shares transferred." This restriction is
necessary in order that the officers of the
corporation may know who are the stockholders,
which is essential in conducting elections of officers,
in calling meeting of stockholders, and for other
purposes. but any restriction of the nature of that
imposed in the by-law now in question, is ultra vires,
violative of the property rights of shareholders, and
in restraint of
trade.chanroblesvirtualawlibrary chanrobles virtual
law library
And moreover, the by-laws now in question cannot
have any effect on the appellee. He had no
knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and
for a valuable consideration. He was not a privy to
the contract created by said by-law between the
shareholder Manuel Gonzalez and the Botica Nolasco,
Inc. Said by-law cannot operate to defeat his rights as
a purchaser.
An unauthorized by-law forbidding
a shareholder to sell his shares
without first offering them to the
corporation for a period of thirty
days is not binding upon an
assignee of the stock as a personal
contract, although his assignor
knew of the by-law and took part in
its adoption. (10 Cyc., 579;
Ireland vs. Globe Milling Co., 21 R.I.,
9.)chanrobles virtual law library
When no restriction is placed by
public law on the transfer of
corporate stock, a purchaser is not
affected by any contractual
restriction of which he had no
notice. (Brinkerhoff-Farris Trust
and Savings Co. vs. Home Lumber
Co., 118 Mo., 447.)chanrobles
virtual law library
The assignment of shares of stock
in a corporation by one who has
 assented to an unauthorized accordance with law and should be and is hereby
by-law has only the effect of a affirmed, with costs. So ordered.
contract by, and enforceable
against, the assignor; the assignee
is not bound by such by-law by
virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21
R.I., 9.)chanrobles virtual law
library HE GOVERNMENT OF THE PHILIPPINE ISLANDS (on
relation of the Attorney-General), plaintiff,
A by-law of a corporation which vs.
provides that transfers of stock EL HOGAR FILIPINO, defendant.
shall not be valid unless approved
by the board of directors, while it Attorney-General Jaranilla and Solicitor-General
may be enforced as a reasonable Reyes for plaintiff.
regulation for the protection of the Fisher, DeWitt, Perkins and Brady; Camus, Delgado
corporation against worthless and Recto and Antonio Sanz for defendant.
stockholders, cannot be made Wm. J. Rohde as amicus curiae.
available to defeat the rights of
third persons. (Farmers' and
STREET, J.:
Merchants' Bank of Lineville vs.
Wasson, 48 Iowa, 336.)
This is a quo warranto proceeding instituted
originally in this court by the Government of the
Counsel for defendant incidentally argues in his brief,
Philippine Islands on the relation of the
that the plaintiff does not have any right of action
Attorney-General against the building and loan
against the defendant corporation, but against the
association known as El Hogar Filipino, for the
president and secretary thereof, inasmuch as the
purpose of depriving it of its corporate franchise,
signing and registration of shares is incumbent upon
excluding it from all corporate rights and privileges,
said officers pursuant to section 35 of the
and effecting a final dissolution of said corporation.
Corporation Law. This contention cannot be
The complaint enumerates seventeen distinct causes
sustained now. The question should have been raised
of action, to all of which the defendant has answered
in the lower court. It is too late to raise it now in this
upon the merits, first admitting the averments of the
appeal. Besides, as stated above, the corporation
first paragraph in the statement of the first cause of
was made defendant in this action upon the
action, wherein it is alleged that the defendant was
demurrer of the attorney of the original defendant in
organized in the year 1911 as a building and loan
the lower court, who contended that the Botica
association under the laws of the Philippine Islands,
Nolasco, Inc., should be made the party defendant in
and that, since its organization, the corporation has
this action. Accordingly, upon order of the court, the
been doing business in the Philippine Islands, with its
complaint was amended and the said corporation
principal office in the City of Manila. Other facts
was made the party
alleged in the various causes of action in the
defendant.chanroblesvirtualawlibrary chanrobles
complaint are either denied in the answer or
virtual law library
controverted in legal effect by other facts.

Whenever a corporation refuses to transfer and

After issue had been thus joined upon the merits, the
register stock in cases like the present, mandamus
attorneys entered into an elaborate agreement as to
will lie to compel the officers of the corporation to
the fact, thereby removing from the field of dispute
transfer said stock upon the books of the corporation.
such matters of fact as are necessary to the solution
(26 Cyc. 347; Hager vs. Bryan, 19 Phil.,
of the controversy. It follows that we are here
138.)chanrobles virtual law library
confronted only with the legal questions arising upon
the agreed statement.
In view of all the foregoing, we are of the opinion,
and so hold, that the decision of the lower court is in
On March 1, 1906, the Philippine Commission
enacted what is known as the Corporation Law (Act
No. 1459) effective upon April 1 of the same year.
Section 171 to 190, inclusive, of this Act are devoted
to the subject of building and loan associations,
defining their objects making various provisions
governing their organization and administration, and
providing for the supervision to be exercised over
them. These provisions appear to be adopted from
American statutes governing building and loan
associations and they of course reflect the ideals and
principles found in American law relative to such
associations. The respondent, El Hogar Filipino, was
apparently the first corporation organized in the
Philippine Islands under the provisions cited, and the
association has been favored with extraordinary
success. The articles of incorporation bear the date
of December 28, 1910, at which time capital stock in
the association had been subscribed to the amount
of P150,000 of which the sum of P10,620 had been
paid in. Under the law as it then stood, the capital of
the Association was not permitted to exceed
P3,000,000, but by Act No. 2092, passed December
23, 1911, the statute was so amended as to permit
the capitalization of building and loan associations to
the amount of ten millions. Soon thereafter the
association took advantage of this enactment by
amending its articles so as to provide that the capital
should be in an amount not exceeding the then
lawful limit. From the time of its first organization the
number of shareholders has constantly increased,
with the result that on December 31, 1925, the
association had 5,826 shareholders holding 125,750
shares, with a total paid-up value of P8,703,602.25.
During the period of its existence prior to the date
last above-mentioned the association paid to
withdrawing stockholders the amount of
P7,618,257,.72; and in the same period it distributed
in the form of dividends among its stockholders the
sum of P7,621,565.81.
First cause of action. — The first cause of action is
based upon the alleged illegal holding by the
respondent of the title to real property for a period
in excess of five years after the property had been
bought in by the respondent at one of its own
foreclosure sales. The provision of law relevant to the
matter is found in section 75 of Act of Congress of
July 1, 1902 (repeated in subsection 5 of section 13
of the Corporation Law.) In both of these provisions
it is in substance declared that while corporations
may loan funds upon real estate security and
purchase real estate when necessary for the
collection of loans, they shall dispose of real estate
so obtained within five years after receiving the title.
In this connection it appears that in the year 1920 El
Hogar Filipino was the holder of a recorded mortgage
upon a tract of land in the municipality of San
Clemente, Province of Tarlac, as security for a loan of
P24,000 to the shareholders of El Hogar Filipino who
were the owners of said property. The borrowers
having defaulted in their payments, El Hogar Filipino
foreclosed the mortgage and purchased the land at
the foreclosure sale for the net amount of the
indebtedness, namely, the sum of P23,744.18. The
auction sale of the mortgaged property took place
November 18, 1920, and the deed conveying the
property to El Hogar Filipino was executed and
delivered December 22, 1920. On December 27,
1920, the deed conveying the property to El Hogar
Filipino was sent to the register of deeds of the
Province of Tarlac, with the request that the
certificate of title then standing in the name of the
former owners be cancelled and that a new
certificate of title be issued in the name of El Hogar
Filipino. Said deed was received in the office of the
register of deeds of Tarlac on December 28, 1920,
together with the old certificate of title, and
thereupon the register made upon the said deed the
following annotation:
The foregoing document was received in this office
at 4.10 p. m., December 28, 1920, according to entry
1898, page 50 of Book One of the Day Book and
registered on the back of certificate of title No. 2211
and its duplicate, folio 193 of Book A-10 of the
register of original certificate. Tarlac, Tarlac, January
12, 1921. (Sgd.) SILVINO LOPEZ DE JESUS, Register of
Deeds.
For months no reply was received by El Hogar Filipino
from the register of deeds of Tarlac, and letters were
written to him by El Hogar Filipino on the subject in
March and April, 1921, requesting action. No answer
having been received to these letters, a complaint
was made by El Hogar Filipino to the Chief of the
General Land Registration Office; and on May 7, 1921,
the certificate of title to the San Clemente land was
received by El Hogar Filipino from the register of
deeds of Tarlac.
On March 10, 1921, the board of directors of El
Hogar Filipino adopted a resolution authorizing
Vicente Bengzon, an agent of the corporation, to
endeavor to find a buyer for the San Clemente land.
On July 27, 1921, El Hogar Filipino authorized one
Jose Laguardia to endeavor to find a purchaser for
the San Clemente land for the sum of P23,000
undertaking to pay the said Laguardia a commission
of 5 per centum of the selling price for his services,
but no offers to purchase were obtained through this
agent or through the agent Bengzon. In July, 1923,
plans of the San Clemente land were sent to Mr. Luis
Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi,
as prospective purchasers, but no offers were
received from them. In January, 1926, the agent not
having succeeded in finding a buyer, the San
Clemente land was advertised for sale by El Hogar
Filipino in El Debate, La Vanguardia and Taliba, three
newspapers of general circulation in the Philippine
Islands published in the City of Manila. On March 16,
1926, the first offer for the purchase of the San
Clemente land was received by El Hogar Filipino. This
offer was made to it in writing by one Alcantara, who
offered to buy it for the sum of P4,000, Philippine
currency, payable P500 in cash, and the remainder
within thirty days. Alcantara's offer having been
reported by the manager of El Hogar Filipino to its
board of directors, it was decided, by a resolution
adopted at a meeting of the board held on March 25,
1926, to accept the offer, and this acceptance was
communicated to the prospective buyer. Alcantara
was given successive extensions of the time, the last
of which expired April 30, 1926, within which to
make the payment agreed upon; and upon his failure
to do so El Hogar Filipino treated the contract with
him as rescinded, and efforts were made at once to
find another buyer. Finally the land was sold to Doña
Felipa Alberto for P6,000 by a public instrument
executed before a notary public at Manila, P. I., on
July 30, 1926.
Upon consideration of the facts above set forth it is
evident that the strict letter of the law was violated
by the respondent; but it is equally obvious that its
conduct has not been characterized by obduracy or
pertinacity in contempt of the law. Moreover, several
facts connected with the incident tend to mitigate
the offense. The Attorney-General points out that
the respondent acquired title on December 22, 1920,
when the deed was executed and delivered, by
which the property was conveyed to it as purchaser
at its foreclosure sale, and this title remained in it
until July 30, 1926, when the property was finally
sold to Felipa Alberto. The interval between these
two conveyances is thus more than five years; and it
is contended that the five year period did not begin
to run against the respondent until May 7, 1921,
when the register of deeds of Tarlac delivered the
new certificate of title to the respondent pursuant to
the deed by which the property was acquired. As an
equitable consideration affecting the case this
contention, though not decisive, is in our opinion
more than respectable. It has been held by this court
that a purchaser of land registered under the Torrens
system cannot acquire the status of an innocent
purchaser for value unless his vendor is able to place
in his hands an owner's duplicate showing the title of
such land to be in the vendor (Director of
Lands vs. Addison, 49, Phil., 19;
Rodriguez vs. Llorente, G. R. No. 266151). It results
that prior to May 7, 1921, El Hogar Filipino was not
really in a position to pass an indefeasible title to any
purchaser. In this connection it will be noted that
section 75 of the Act of Congress of July 1, 1902, and
the similar provision in section 13 of the Corporation
Law, allow the corporation "five years after receiving
the title," within which to dispose of the property. A
fair interpretation of these provisions would seem to
indicate that the date of the receiving of the title in
this case was the date when the respondent received
the owner's certificate, or May 7, 1921, for it was
only after that date that the respondent had an
unequivocal and unquestionable power to pass a
complete title. The failure of the respondent to
receive the certificate sooner was not due in any
wise to its fault, but to unexplained delay on the part
of the register of deeds. For this delay the
respondent cannot be held accountable.
Again, it is urged for the respondent that the period
between March 25, 1926, and April 30, 1926, should
not be counted as part of the five-year period. This
was the period during which the respondent was
under obligation to sell the property to Alcantara,
prior to the rescission of the contract by reason of
Alcantara's failure to make the stipulated first
payment. Upon this point the contention of the
respondent is, in our opinion, well founded. The
acceptance by it of Alcantara's offer obligated the
respondent to Alcantara; and if it had not been for
the default of Alcantara, the effective sale of the
property would have resulted. The respondent was
not at all chargeable with the collapse of these
negotiations; and hence in any equitable application
of the law this period should be deducted from the
five-year period within which the respondent ought
to have made the sale. Another circumstance
explanatory of the respondent's delay in selling the
property is found in the fact that it purchased the
property for the full amount of the indebtedness due
to it from the former owner, which was nearly
P24,000. It was subsequently found that the property
was not salable for anything like that amount and in
the end it had to be sold for P6,000, notwithstanding
energetic efforts on the part of the respondent to
find a purchaser upon better terms.
The question then arises whether the failure of the
respondent to get rid of the San Clemente property
within five years after it first acquired the deed
thereto, even supposing the five-year period to be
properly counted from that date, is such a violation
of law as should work a forfeiture of its franchise and
require a judgment to be entered for its dissolution
in this action of quo warranto. Upon this point we do
not hesitate to say that in our opinion the
corporation has not been shown to have offended
against the law in a manner that should entail a
forfeiture of its charter. Certainly no court with any
discretion to use in the matter would visit upon the
respondent and its thousands of shareholders the
extreme penalty of the law as a consequence of the
delinquency here shown to have been committed.
The law applicable to the case is in our opinion found
in section 212 of the Code of Civil Procedure, as
applied by this court in Government of the Philippine
Islands vs. Philippine Sugar Estates Development
Co. (38 Phil., 15). This section (212), in prescribing
the judgment to be rendered against a corporation in
an action of quo warranto, among other things says:
. . . When it is found and adjudged that a corporation
has offended in any matter or manner which does
not by law work as a surrender or forfeiture, or has
misused a franchise or exercised a power not
conferred by law, but not of such a character as to
work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be outset from
the continuance of such offense or the exercise of
such power.
This provision clearly shows that the court has a
discretion with respect to the infliction of capital
punishment upon corporation and that there are
certain misdemeanors and misuses of franchises
which should not be recognized as requiring their
dissolution. In Government of the Philippine Islands
vs. Philippine Sugar Estates Development Co. (38 Phil.,
15), it was found that the offending corporation had
been largely (though indirectly) engaged in the
buying and holding or real property for speculative
purposes in contravention of its charter and contrary
to the express provisions of law. Moreover, in that
case the offending corporation was found to be still
interested in the properties so purchased for
speculative at the time the action was brought.
Nevertheless, instead of making an absolute and
unconditional order for the dissolution of the
corporation, the judgment of ouster was made
conditional upon the failure of the corporation to
discontinue its unlawful conduct within six months
after final decision. In the case before us the
respondent appears to have rid itself of the San
Clemente property many months prior to the
institution of this action. It is evident from this that
the dissolution of the respondent would not be an
appropriate remedy in this case. We do not of course
undertake to say that a corporation might not be
dissolved for offenses of this nature perpetrated in
the past, especially if its conduct had exhibited a
willful obduracy and contempt of law. We content
ourselves with holding that upon the facts here
before us the penalty of dissolution would be
excessively severe and fraught with consequences
altogether disproportionate to the offense
committed.
The evident purpose behind the law restricting the
rights of corporations with respect to the tenure of
land was to prevent the revival of the entail
(mayorazgo) or other similar institution by which
land could be fettered and its alienation hampered
over long periods of time. In the case before us the
respondent corporation has in good faith disposed of
the piece of property which appears to have been in
its hands at the expiration of the period fixed by law,
and a fair explanation is given of its failure to dispose
of it sooner. Under these circumstances the
destruction of the corporation would bring
irreparable loss upon the thousand of innocent
shareholders of the corporation without any
corresponding benefit to the public. The discretion
permitted to this court in the application of the
remedy of quo warranto forbids so radical a use of
the remedy.
But the case for the plaintiff supposes that the
discretion of this court in matters like that now
before us has been expressly taken away by the third
section of Act No. 2792, and that the dissolution of
the corporation is obligatory upon the court a mere
finding that the respondent has violated the
provision of the Corporation Law in any respect. This
makes necessary to examine the Act last
above-mentioned with some care. Upon referring
thereto, we find that it consists of three sections
under the following style:
No. 2792. — An Act to amend certain sections of the
Corporation Law, Act Numbered Fourteen hundred
and fifty-nine, providing for the publication of the
assets and liabilities of corporations registering in the
Bureau of Commerce and Industry, determining the
liability of the officers of corporations with regard to
the issuance of stock or bonus, establishing penalties
for certain things, and for other purposes.
The first two section contain amendments to the
Corporation Law with respect to matters with which
we are not here concurred. The third section
contains anew enactment to be inserted as section
190 (A) in the corporation Law immediately following
section 190. This new section reads as follows:
SEC. 190. (A). Penalties. — The violation of any of the
provisions of this Act and its amendments not
otherwise penalized therein, shall be punished by a
fine of not more than one thousand pesos, or by
imprisonment for not more than five years, or both,
in the discretion of the court. If the violation being
proved, be dissolved by quo warranto proceedings
instituted by the Attorney-General or by any
provincial fiscal, by order of said Attorney-General:
Provided, That nothing in this section provided shall
be construed to repeal the other causes for the
dissolution of corporation prescribed by existing law,
and the remedy provided for in this section shall be
considered as additional to the remedies already
existing.
The contention for the plaintiff is to the effect that
the second sentence in this enactment has entirely
abrogated the discretion of this court with respect to
the application of the remedy of qou warranto, as
expressed in section 212 of the Code of Civil
Procedure, and that it is now mandatory upon us to
dissolved any corporation whenever we find that it
has committed any violation of the Corporation Law,
however trivial. In our opinion in this radical view of
the meaning of the enactment is untenable. When
the statute says, "If the violation is committed by a
corporation, the same shall, upon such violation
being proved, be dissolved by quo
warranto proceedings . . .," the intention was to
indicate that the remedy against the corporation
shall be by action of quo warranto. There was no
intention to define the principles governing said
remedy, and it must be understood that in applying
the remedy the court is still controlled by the
principles established in immemorial jurisprudence.
The interpretation placed upon this language in the
brief of the Attorney-General would be dangerous in
the extreme, since it would actually place the life of
all corporate investments in the official. No
corporate enterprise of any moment can be
conducted perpetually without some trivial
misdemeanor against corporate law being
committed by some one or other of its numerous
employees. As illustrations of the preposterous
effects of the provision, in the sense contended for
by the Attorney-General, the attorneys for the
respondent have called attention to the fact that
under section 52 of the Corporation Law, a business
corporation is required to keep a stock book and a
transfer book in which the names of stockholders
shall kept in alphabetical order. Again, under section
94, railroad corporations are required to cause all
employees working on passenger trains or at a
station for passengers to wear a badge on his cap or
hat which will indicate his office. Can it be supposed
that the Legislature intended to penalize the
violation of such provisions as these by dissolution of
the corporation involved? Evidently such could not
have been the intention; and the only way to avoid
the consequence suggested is to hold, as we now
hold, that the provision now under consideration has
not impaired the discretion of this court in applying
the writ of quo warranto.
Another way to put the same conclusion is to say
that the expression "shall be dissolved by quo
warranto proceedings" means in effect, "may be
dissolved by quo warranto proceedings in the
discretion of the court." The proposition that the
word "shall" may be construed as "may", when
addressed by the Legislature to the courts, is well
supported in jurisprudence. In the case of Becker vs.
Lebanon and M. St. Ry. Co., (188 Pa., 484), the
Supreme Court of Pennsylvania had under
consideration a statute providing as follows:
It shall be the duty of the court . . . to examine,
inquire and ascertain whether such corporation does
in fact posses the right or franchise to do the act
from which such alleged injury to private rights or to
the rights and franchises of other corporations
results; and if such rights or franchises have not been
conferred upon such corporations, such courts, it
exercising equitable power, shall, by injunction, at
suit of the private parties or other corporations,
restrain such injurious acts.
In an action based on this statute the plaintiff
claimed injunctive relief as a matter of right. But this
was denied the court saying:
Notwithstanding, therefore, the use of the
imperative "shall" the injunction is not to be granted
unless a proper case for injunction be made out, in
accordance with the principles and practice of equity.
The word "shall" when used by the legislature to a
court, is usually a grant of authority and means
"may", and even if it be intended to be mandatory it
must be subject to the necessary limitation that a
proper case has been made out for the exercise of
the power.
Other authorities amply sustain this view
(People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West
Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law.
Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac.,
1095; State vs. West, 3 Ohio State, 509, 511; In
re Lent, 40 N. Y. Supp., 570, 572; 16 Misc. Rep., 606;
Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard],
387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789,
790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal.,
505, 506; Beasley vs. People, 89 Ill., 571, 575;
Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the
respondent on the ground that the subject-matter of
this section is not expressed in the title of the Act,
with the result that the section is invalid. This
criticism is in our opinion well founded. Section 3 of
our organic law (Jones Bill) declares, among other
things, that "No bill which may be enacted into law
shall embrace more than one subject, and that
subject shall be expressed in the title of the bill." Any
law or part of a law passed by the Philippine
Legislature since this provision went into effect and
offending against its requirement is necessarily void.
Upon examining the entire Act (No. 2792), we find
that it is directed to three ends which are
successively dealt with in the first three sections of
the Act. But it will be noted that these three matters
all relate to the Corporation Law; and it is at once
apparent that they might properly have been
embodied in a single Act if a title of sufficient unity
and generality had been prefixed thereto.
Furthermore, it is obvious, even upon casual
inspection, that the subject-matter of each of the
first two sections is expressed and defined with
sufficient precision in the title. With respect to the
subject-matter of section 3 the only words in the title
which can be taken to refer to the subject-matter of
said section are these, "An Act . . . establishing
penalties for certain things, and for other purposes."
These words undoubtedly have sufficient generality
to cover the subject-matter of section 3 of the Act.
But this is not enough. The Jones Law requires that
the subject-matter of the bill "shall be expressed in
the title of the bill."
When reference is had to the expression
"establishing penalties for certain things," it is
obvious that these words express nothing. The
constitutional provision was undoubtedly adopted in
order that the public might be informed as to what
the Legislature is about while bills are in process of
passage. The expression "establishing penalties for
certain things" would give no definite information to
anybody as to the project of legislation intended
under this expression. An examination of the decided
cases shows that courts have always been indulgent
of the practices of the Legislature with respect to the
form and generality of title, for if extreme
refinements were indulged by the courts, the work of
legislation would be unnecessarily hampered. But, as
has been observed by the California court, there
must be some reasonable limit to the generality of
titles that will be allowed. The measure of legality is
whether the title is sufficient to give notice of the
general subject of the proposed legislation to the
persons and interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had
before it a statute entitled "An Act to revise the Code
of Civil Procedure of the State of California, by
amending certain sections, repealing others, and
adding certain new sections." This title was held to
embrace more than one subject, which were not
sufficiently expressed in the title. In discussing the
question the court said:
* * * It is apparent that the language of the title of
the act in question, in and of itself, express no
subject whatever. No one could tell from the title
alone what subject of legislation was dealt with in
the body of the act; such subject so far as the title of
the act informs us, might have been entirely different
from anything to be found in the act itself.
We cannot agree with the contention of some of
respondent's counsel — apparently to some extent
countenanced by a few authorities — that the
provision of the constitution in question can be
entirely avoided by the simple device of putting into
the title of an act words which denote a subject
"broad" enough to cover everything. Under that view,
the title, "An act concerning the laws of the state,"
would be good, and the convention and people who
framed and adopted the constitution would be
convicted of the folly of elaborately constructing a
grave constitutional limitation of legislative power
upon a most important subject, which the legislature
could at once circumvent by a mere verbal trick. The
word "subject" is used in the constitution embrace
but "one subject" it necessarily implies — what
everybody knows — that there are numerous
subjects of the legislation, and declares that only one
of these subjects shall embraced in any one act. All
subjects cannot be conjured into one subject by the
mere magic of a word in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515),
the Supreme Court of New Jersey made the following
observation:
* * * It is true, that it may be difficult to indicate, by a
formula, how specialized the title of a statute must
be; but it is not difficult to conclude that it must
mean something in the way of being a notice of what
is doing. Unless it does not enough that it embraces
the legislative purpose — it must express it; and
where the language is too general, it will accomplish
the former, but not the latter. Thus, a law entitled
"An act for a certain purpose," would embrace any
subject, but would express none, and, consequently,
it would not stand the constitutional test.
The doctrine properly applicable in matters of this
kind is, we think, fairly summed up in a current
repository of jurisprudence in the following
language:
* * * While it may be difficult to formulate a rule by
which to determine the extent to which the title of a
bill must specialize its object, it may be safely
assumed that the title must not only embrace the
subject of proposed legislation, but also express it
clearly and fully enough to give notice of the
legislative purpose. (25 R. C. L., p. 853.)
In dealing with the problem now before us the words
"and for other purposes "found at the end of the
caption of Act No. 2792, must be laid completely out
of consideration. They express nothing, and amount
to nothing as a compliance with the constitutional
requirement to which attention has been directed.
This expression "(for other purposes") is frequently
found in the title of acts adopted by the Philippine
Legislature; and its presence in our laws is due to the
adoption by our Legislature of the style used in
Congression allegation. But it must be remembered
that the legislation of Congress is subject to no
constitutional restriction with respect to the title of
bills. Consequently, in Congressional legislation the
words "and for other purposes" at least serve the
purpose of admonishing the public that the bill
whose heading contains these words contains
legislation upon other subjects than that expressed
in the title. Now, so long as the Philippine Legislature
was subject to no restriction with respect to the title
of bills intended for enactment into general laws, the
expression "for other purposes" could be
appropriately used in titles, not precisely for the
purpose of conveying information as to the matter
legislated upon, but for the purpose ad admonishing
the public that any bill containing such words in the
title might contain other subjects than that
expressed in the definitive part of the title. But, when
congress adopted the Jones Law, the restriction with
which we are now dealing became effective here and
the words "for other purposes" could no longer be
appropriately used in the title of legislative bills.
Nevertheless, the custom of using these words has
still been followed, although they can no longer serve
to cover matter not germane to the bill in the title of
which they are used. But the futility of adding these
words to the style of any act is now obvious (Cooley,
Const. Lims., 8th ed., p. 302)
In the brief for the plaintiff it is intimated that the
constitutional restriction which we have been
discussing is more or less of a dead letter in this
jurisdiction; and it seems to be taken for granted that
no court would ever presume to hold a legislative act
or part of a legislative act invalid for non-compliance
with the requirement. This is a mistake; and no
utterance of this court can be cited as giving
currency to any such notion. On the contrary the
discussion contained in Central Capiz vs. Ramirez (40
Phil., 883), shows that when a case arises where a
violation of the restriction is apparent, the court has
no alternative but to declare the legislation affected
thereby to be invalid.
Second cause of action. — The second cause of
action is based upon a charge that the respondent is
owning and holding a business lot, with the structure
thereon, in the financial district of the City of Manila
is excess of its reasonable requirements and in
contravention of subsection 5 of section 13 of the
corporation Law. The facts on which this charge is
based appear to be these:
On August 28, 1913, the respondent purchased
1,413 square meters of land at the corner of Juan
Luna Street and the Muelle de la Industria, in the City
of Manila, immediately adjacent to the building then
occupied by the Hongkong and Shanghai Banking
Corporation. At the time the respondent acquired
this lot there stood upon it a building, then nearly
fifty years old, which was occupied in part by the
offices of an importing firm and in part by
warehouses of the same firm. The material used in
the construction was Guadalupe stone and hewn
timber, and the building contained none of the
facilities usually found in a modern office building.
In purchase of a design which had been formed prior
to the purchase of the property, the directors of the
El Hogar Filipino caused the old building to be
demolished; and they erected thereon a modern
reinforced concrete office building. As at first
constructed the new building was three stories high
in the main, but in 1920, in order to obtain greater
advantage from the use of the land, an additional
story was added to the building, making a structure
of four stories except in one corner where an
additional story was place, making it five stories high
over an area of 117.52 square meters. It is admitted
in the plaintiffs brief that this "noble and imposing
structure" — to use the words of the
Attorney-General — "has greatly improved the
aspect of the banking and commercial district of
Manila and has greatly contributed to the movement
and campaign for the Manila Beautiful." It is also
admitted that the competed building is reasonably
proportionate in value and revenue producing
capacity to the value of the land upon which it stands.
The total outlay of the respondent for the land and
the improvements thereon was P690,000 and at this
valuation the property is carried on the books of the
company, while the assessed valuation of the land
and improvements is at P786,478.
Since the new building was completed the
respondent has used about 324 square meters of
floor space for its own offices and has rented the
remainder of the office space in said building,
consisting of about 3,175 square meters, to other
persons and entities. In the second cause of action of
the complaint it is supposed that the acquisition of
this lot, the construction of the new office building
thereon, and the subsequent renting of the same in
great part to third persons, are ultra vires acts on the
part of the corporation, and that the proper penalty
to be enforced against it in this action is that if
dissolution.
With this contention we are unable to agree. Under
subsection 5 of section 13 of the Corporation Law,
every corporation has the power to purchase, hold
and lease such real property as the transaction of the
lawful business of the corporation may reasonably
and necessarily require. When this property was
acquired in 1916, the business of El Hogar Filipino
had developed to such an extent, and its prospects
for the future were such as to justify its directors in
acquiring a lot in the financial district of the City of
Manila and in constructing thereon a suitable
building as the site of its offices; and it cannot be
fairly said that the area of the lot — 1,413 square
meters — was in excess of its reasonable
requirements. The law expressly declares that
corporations may acquire such real estate as is
reasonably necessary to enable them to carry out the
purposes for which they were created; and we are of
the opinion that the owning of a business lot upon
which to construct and maintain its offices is
reasonably necessary to a building and loan
association such as the respondent was at the time
this property was acquired. A different ruling on this
point would compel important enterprises to
conduct their business exclusively in leased offices —
a result which could serve no useful end but would
retard industrial growth and be inimical to the best
interests of society.
We are furthermore of the opinion that, inasmuch as
the lot referred to was lawfully acquired by the
respondent, it is entitled to the full beneficial use
thereof. No legitimate principle can discovered which
would deny to one owner the right to enjoy his (or its)
property to the same extent that is conceded to any
other owner; and an intention to discriminate
between owners in this respect is not lightly to be
imputed to the Legislature. The point here involved
has been the subject of consideration in many
decisions of American courts under statutes even
more restrictive than that which prevails in this
jurisdiction; and the conclusion has uniformly been
that a corporations whose business may properly be
conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice with
facilities in excess of its own immediate
requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill.,
125; 64 L. R. A., 366), it appeared that the
respondent corporation owned and controlled a
large ten-story business block in the City of Chicago,
worth $2,000,000, and that it occupied only about
one-fourth thereof for its own purposes, leasing the
remainder to others at heavy rentals. The corporate
charter merely permitted the holding of such real
estate by the respondent as might be necessary for
the successful prosecution of its business. An
attempt was made to obtain the dissolution of the
corporation in a quo warranto proceeding similar to
that now before us, but the remedy was denied.
In Rector vs. Hartford Deposit Co., a question was
raised as to the power of the Deposit Company to
erect and own a fourteen-story building —
containing eight storerooms, one hundred suites of
offices, and one safety deposit vault, under a statute
authorizing the corporation to possess so much real
estate "as shall be necessary for the transaction of
their business." The court said:
That the appellee company possessed ample power
to acquire real property and construct a building
thereon for the purpose of transacting therein the
legitimate business of the corporation is beyond the
range of debate. Nor is the contrary contended, but
the insistence is that, under the guise of erecting a
building for corporate purposes, the appellee
company purposely constructed a much larger
building than its business required, containing many
rooms intended to be rented to others for offices
and business purposes, — among them, the
basement rooms contracted to be leased to the
appellant, — and that in so doing it designedly
exceeded its corporate powers. The position off
appellant therefore is that the appellee corporation
has flagrantly abused its general power to acquire
real estate and construct a building thereon . . . It
was within the general scope of the express powers
of the appellee corporation to own and possess a
building necessary for its proper corporate purposes.
In planning and constructing such a building, as was
said in People vs. Pullman's Palace Car Co., supra, the
corporation should not necessarily be restricted to a
building containing the precise number of rooms its
then business might require, and no more, but that
the future probable growth and volume of its
business might be considered and anticipated, and a
larger building, and one containing more rooms than
the present volume of business required be erected,
and the rooms not needed might be rented by the
corporation, — provided, of course, such course
should be taken in good faith, and not as a mere
evasion of the public law and the policy of the state
relative to the ownership of real estate by
corporations. In such state of case the question is
whether the corporation has abused or excessively
and unjustifiably used the power and authority
granted it by the state to construct buildings and
own real estate necessary for its corporate purposes.
In Home savings building Association vs. Driver (129
Ky., 754), one of the questions before the court was
precisely the same as that now before us. Upon this
the Supreme Court of Kentucky said:
The third question is, has the association the right to
erect, remodel, or own a building of more than
sufficient capacity to accommodate its own business
and to rent out the excess? There is nothing in the
Constitution, charter of the association, or statutes
placing any limitation upon the character of a
building which a corporation may erect as a home in
which to conduct its business. A corporation
conducting a business of the character of that in
which appellant is engaged naturally expects its
business to grow and expand from time to time, and,
in building a home it would be exercising but a
short-sighted judgment if it did not make provision
for the future by building a home large enough to
take care of its expanding business, and hence, even
if it should build a house larger and roomier than its
present needs or interests require, it would be acting
clearly with the exercise of its corporate right and
power. The limitation which the statute imposes is
that proper conduct of its business, but it does not
attempt to place any restriction or limitation upon
the right of the corporation or association as to the
character of building it shall erect on said real estate;
and, while the Constitution and the statutes provide
that no corporation shall engage in any business
other than that expressly authorized by its charter,
we are of opinion that, in renting out the unoccupied
and unused portions of the building so erected, the
association could not be said to engaged in any other
business than that authorized by its charter. The
renting of the unused portions of the building is a
mere incident in the conduct of its real business. We
would not say that a building association might
embark in the business of building houses and
renting or leasing them, but there is quite a
difference in building or renting a house in which to
conduct its own business and leasing the unused
portion thereof for the time being, or until such time
as they may be needed by the association, and in
building houses for the purpose of renting or leasing
them. The one might properly be said to be the
proper exercise of a power incident to the conduct of
its legitimate business, whereas the other would be a
clear violation of that provision of the statute which
denies to any corporation the right to conduct any
business other than that authorized by its charter. To
hold otherwise would be to charge most of the
banking institutions, trust companies and other
corporations, such as title guaranty companies, etc.,
doing with violating the law; for it is known that
there are few of such institutions that do not, at
times, rent out or lease the unneeded portions of the
building occupied by them as homes. We do not
think that in so doing they are violating any
provisions of the law, but that the renting out of the
unused or unoccupied portions of their buildings is
but an incident in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown,
Md. (175 Fed., 739, 741), a stockholder sought to
enjoin the bank from building a six-story building
owned by the bank in the commercial district of
Hagerstown of which only the first story was to be
used by the bank, the remaining stories to be rented
out for offices and places of business, on the theory
that such action was ultra vires and in violation of the
provisions of the national banking act confining such
corporations to the holding, only, of such real estate
"as shall be necessary for its immediate
accommodation in the transaction of its business."
The injunction was denied, the court adopting the
opinion of the lower court in which the following was
said:
'The other ground urged by the complainant is that
the proposed action is violative of the restriction
which permits a national bank to hold only such real
estate as shall be necessary for its immediate
accommodation in the transaction of its business,
and that, therefore, the erection of a building which
will contain offices not necessary for the business of
the bank is not permitted by the law, although that
method of improving the lot may be the most
beneficial use that can be made of it. It is matter of
common knowledge that the actual practice of
national banks is to the contrary. Where ground is
valuable, it may probably be truly said that the
majority of national bank buildings are built with
accommodations in excess of the needs of the bank
for the purpose of lessening the bank's expense by
renting out the unused portion. If that were not
allowable, many smaller banks in cities would be
driven to become tenants as the great cost of the lot
would be prohibitive of using it exclusively for the
banking accommodation of a single bank. As
indicative of the interpretation of the law commonly
received and acted upon, reference may be made to
the reply of the Comptroller of the Currency to the
injury by the bank in this case asking whether the law
forbids the bank constructing such a building as was
contemplated.
'The reply was follows: "Your letter of the 9th instant
received, stating that the directors contemplate
making improvements in the bank building and
inquiring if there is anything in the national banking
laws prohibiting the construction of a building which
will contain floors for offices to be rented out by the
bank as well as the banking room. Your attention is
called to the case of Brown vs. Schleier, 118 Fed., 981
[55 C. C. A, 475], in which the court held that: 'If the
land which a national bank purchases or leases for
the accommodation of its business is very valuable it
may exercise the same rights that belong to other
landowners of improving it in a way that will yield the
largest income, lessen its own rent, and render that
part of its funds which are invested in realty most
productive.'" This seems to be the common sense
interpretation of the act of Congress and is the one
which prevails.'
It would seem to be unnecessary to extend the
opinion by lengthy citations upon the point under
consideration, but Brown vs. Schleier (118 Fed., 981),
may be cited as being in harmony with the foregoing
authorities. In dealing with the powers of a national
bank the court, in this case, said:
When an occasion arises for an investment in real
property for either of the purposes specified in the
statute the national bank act permits banking
associations to act as any prudent person would act
in making an investment in real estate, and to
exercise the same measure of judgment and
discretion. The act ought not to be construed in such
as way as to compel a national bank, when it
acquires real property for a legitimate purpose, to
deal with it otherwise than a prudent land owner
would ordinarily deal with such property.
In the brief of the Attorney-General reliance is place
almost entirely upon two Illinois cases,
namely Africani Home Purchase and Loan Association
vs. Carroll (267 Ill., 380), and First Methodist
Episcopal Church of Chicago vs. Dixon (178 Ill., 260).
In our opinion these cases are either distinguishable
from that now before us, or they reflect a view of the
law which is incorrect. At any rate the weight of
judicial opinion is so overwhelmingly in favor of
sustaining the validity of the acts alleged in the
second cause of action to have been done by the
respondent in excess of its powers that we refrain
from commenting at any length upon said cases. The
ground stated in the second cause of action is in our
opinion without merit.
Third cause of action. — Under the third cause of
action the respondent is charged with engaging in
activities foreign to the purposes for which the
corporation was created and not reasonable
necessary to its legitimate ends. The specifications
under this cause of action relate to three different
sorts of activities. The first consist of the
administration of the offices in the El Hogar building
not used by the respondent itself and the renting of
such offices to the public. As stated in the discussion
connected with the second cause of action, the
respondent uses only about ten per cent of the office
space in the El Hogar building for its own purposes,
and it leases the remainder to strangers. In the years
1924 and 1925 the respondent received as rent for
the leased portions of the building the sums of
P75,395.06 and P58,259.27, respectively. The
activities here criticized clearly fall within the
legitimate powers of the respondent, as shown in
what we have said above relative to the second
cause of action. This matter will therefore no longer
detain us. If the respondent had the power to
acquire the lot, construct the edifice and hold it
beneficially, as there decided, the beneficial
administration by it of such parts of the building as
are let to others must necessarily be lawful.
The second specification under the third cause of
action has reference to the administration and
management of properties belonging to delinquent
shareholders of the association. In this connection it
appears that in case of delinquency on the part of its
shareholders in the payment of interest, premium,
and dues, the association has been accustomed
(pursuant to clause 8 of its standard mortgage) to
take over and manage the mortgaged property for
the purpose of applying the income to the
obligations of the debtor party. For these services
the respondent charges a commission at the rate of
2½ per centum on sums collected. The case for the
government supposes that the only remedy which
the respondent has in case of default on the part of
its shareholders is to proceed to enforce collection of
the whole loan in the manner contemplated in
section 185 of the Corporation Law. It will be noted,
however, that, according to said section, the
association may treat the whole indebtedness as due,
"at the option of the board of directors," and this
remedy is not made exclusive. We see no reason to
doubt the validity of the clause giving the association
the right to take over the property which constitutes
the security for the delinquent debt and to manage it
with a view to the satisfaction of the obligations due
to the debtor than the immediate enforcement of
the entire obligation, and the validity of the clause
allowing this course to be taken appears to us to be
not open to doubt. The second specification under
this cause of action is therefore without merit, as
was true of the first.
The third specification under this cause of action
relates to certain activities which are described in the
following paragraphs contained in the agreed
statements of facts:.
El Hogar Filipino has undertaken the management of
some parcels of improved real estate situated in
Manila not under mortgage to it, but owned by
shareholders, and has held itself out by
advertisement as prepared to do so. The number of
properties so managed during the years 1921 to
1925, inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of
the persons whose properties are so managed for
them became shareholders only to enable them to
take advantage thereof.
The services rendered in the management of such
improved real estate by El Hogar Filipino consist in
the renting of the same, the payment of real estate
taxes and insurance for the account of the owner,
causing the necessary repairs for upkeep to be made,
and collecting rents due from tenants. For the
services so rendered in the management of such
properties El Hogar Filipino receives compensation in
the form of commissions upon the gross receipts
from such properties at rates varying from two and
one-half per centum to five per centum of the sums
so collected, according to the location of the
property and the effort involved in its management.
The work of managing real estate belonging to
non-borrowing shareholders administered by El
Hogar Filipino is carried on by the same members of
the staff who attend to the details of the
management of properties administered by the
manager of El Hogar Filipino under the provisions of
paragraph 8 of the standard mortgage form, and of
properties bought in on foreclosure of mortgage.
The practice described in the passage above quoted
from the agreed facts is in our opinion unauthorized
by law. Such was the view taken by the bank
examiner of the Treasury Bureau in his report to the
Insular Treasurer on December 21, 1925, wherein
the practice in question was criticized. The
administration of property in the manner described
is more befitting to the business of a real estate
agent or trust company than to the business of a
building and loan association. The practice to which
this criticism is directed relates of course solely to
the management and administration of properties
which are not mortgaged to the association. The
circumstance that the owner of the property may
have been required to subscribe to one or more
shares of the association with a view to qualifying
him to receive this service is of no significance. It is a
general rule of law that corporations possess only
such express powers. The management and
administration of the property of the shareholders of
the corporation is not expressly authorized by law,
and we are unable to see that, upon any fair
construction of the law, these activities are necessary
to the exercise of any of the granted powers. The
corporation, upon the point now under the criticism,
has clearly extended itself beyond the legitimate
range of its powers. But it does not result that the
dissolution of the corporation is in order, and it will
merely be enjoined from further activities of this
sort.
Fourth cause of action. — It appears that among the
by laws of the association there is an article (No. 10)
which reads as follows:
The board of directors of the association, by the vote
of an absolute majority of its members, is
empowered to cancel shares and to return to the
owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their
conduct, or for any other motive, the continuation as
members of the owners of such shares is not
desirable.
This by-law is of course a patent nullity, since it is in
direct conflict with the latter part of section 187 of
the Corporation Law, which expressly declares that
the board of directors shall not have the power to
force the surrender and withdrawal of unmatured
stock except in case of liquidation of the corporation
or of forfeiture of the stock for delinquency. It is
agreed that this provision of the by-laws has never
been enforced, and in fact no attempt has ever been
made by the board of directors to make use of the
power therein conferred. In November, 1923, the
Acting Insular Treasurer addressed a letter to El
Hogar Filipino, calling attention to article 10 of its
by-laws and expressing the view that said article was
invalid. It was therefore suggested that the article in
question should be eliminated from the by-laws. At
the next meeting of the board of directors the matter
was called to their attention and it was resolved to
recommend to the shareholders that in their next
annual meeting the article in question be abrogated.
It appears, however, that no annual meeting of the
shareholders called since that date has been
attended by a sufficient number of shareholders to
constitute a quorum, with the result that the
provision referred to has no been eliminated from
the by-laws, and it still stands among the by-laws of
the association, notwithstanding its patent conflict
with the law.
It is supposed, in the fourth cause of action, that the
existence of this article among the by-laws of the
association is a misdemeanor on the part of the
respondent which justifies its dissolution. In this view
we are unable to concur. The obnoxious by-law, as it
stands, is a mere nullity, and could not be enforced
even if the directors were to attempt to do so. There
is no provision of law making it a misdemeanor to
incorporate an invalid provision in the by-laws of a
corporation; and if there were such, the hazards
incident to corporate effort would certainly be
largely increased. There is no merit in this cause of
action.
Fifth cause of action. — In section 31 of the
Corporation Law it is declared that, "at all elections
of directors there must be present, either in person
or by representative authorized to act by written
proxy, the owners of the majority of the subscribed
capital stock entitled to vote. . . ." Conformably with
this requirement it is declared in article 61 of the
by-laws of El Hogar Filipino that, "the attendance in
person or by proxy of shareholders owning one-half
plus one of the shareholders shall be necessary to
constitute a quorum for the election of directors. At
the general annual meetings of the El Hogar Filipino
held in the years 1911 and 1912, there was a quorum
of shares present or represented at the meetings and
directors were duly elected accordingly. As the
corporation has grown, however, it has been fond
increasingly difficult to get together a quorum of the
shareholders, or their proxies, at the annual
meetings; and with the exception of the annual
meeting held in 1917, when a new directorate was
elected, the meetings have failed for lack of quorum.
It has been foreseen by the officials in charge of the
respondent that this condition of affairs would lead
to embarrassment, and a special effort was made by
the management to induce a sufficient number of
shareholders to attend the annual meeting for
February, 1923. In addition to the publication of
notices in the newspapers, as required by the
by-laws, a letter of notification was sent to every
shareholder at his last known address, together with
a blank form of proxy to be used in the event the
shareholder could not personally attend the meeting.
Notwithstanding these special efforts the meeting
was attended only by shareholders, in person and by
proxy, representing 3,889 shares, out of a total of
106,491 then outstanding and entitled to vote.
Owing to the failure of a quorum at most of the
general meetings since the respondent has been in
existence, it has been the practice of the directors to
fill vacancies in the directorate by choosing suitable
persons from among the stockholders. This custom
finds its sanction in article 71 of the by-laws, which
reads as follows:
ART. 71. The directors shall elect from among the
shareholders members to fill the vacancies that may
occur in the board of directors until the election at
the general meeting.
The person thus chosen to fill vacancies in the
directorate have, it is admitted, uniformly been
experienced and successful business and professional
men of means, enjoying earned incomes of from
P12,000 to P50,000 per annum, with an annual
average of P30,000 in addition to such income as
they derive from their properties. Moreover, it
appears that several of the individuals constituting
the original directorate and persons chosen to supply
vacancies therein belong to prominent Filipino
families, and that they are more or less related to
each other by blood or marriage. In addition to this it
appears that it has been the policy of the directorate
to keep thereon some member or another of a single
prominent American law firm in the city.
It is supposed in the statement of the fifth cause of
action in the complaint that the failure of the
corporation to hold annual meetings and the filling of
vacancies in the directorate in the manner described
constitute misdemeanors on the part of the
respondent which justify the resumption of the
franchise by the Government and dissolution of the
corporation; and in this connection it is charge that
the board of directors of the respondent has become
a permanent and self perpetuating body composed
of wealthy men instead of wage earners and persons
of moderate means. We are unable to see the
slightest merit in the charge. No fault can be imputed
to the corporation on account of the failure of the Under section 92 of the by-laws of El Hogar Filipino 5
shareholders to attend the annual meetings; and per centum of the net profit shown by the annual
their non-attendance at such meetings is doubtless balance sheet is distributed to the directors in
to be interpreted in part as expressing their proportion to their attendance at meetings of the
satisfaction of the way in which things have been board. The compensation paid to the directors from
conducted. Upon failure of a quorum at any annual time to time since the organization was organized in
meeting the directorate naturally holds over and 1910 to the end of the year 1925, together with the
continues to function until another directorate is number of meetings of the board held each year, is
chosen and qualified. Unless the law or the charter of exhibited in the following table:
a corporation expressly provides that an office shall
become vacant at the expiration of the term of office
Rate
for which the officer was elected, the general rule is Compensat Numbe
per
to allow the officer to holdover until his successor is ion r of
meetin
duly qualified. Mere failure of a corporation to elect Year paid meetin
g
officers does not terminate the terms of existing directors gs
as a
officers nor dissolve the corporation (Quitman Oil as a whole held
whole
Company vs. Peacock, 14 Ga. App., 550;
Jenkins vs. Baxter, 160 Pa. State, 199; New York B. &
E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill 1911 ......................... P
P 4,167.96 25
Mining Company, 71 Pac., 865; Youree vs. Home ......... 166.71
Town Matual Ins. Company, 180 Missouri, 153;
Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 1912 .........................
10,511.87 29 362.47
Ky. L. R., 486). The doctrine above stated finds .........
expressions in article 66 of the by-laws of the
respondent which declares in so many words that 1913 .........................
directors shall hold office "for the term of one year 15,479.29 27 573.30
.........
on until their successors shall have been elected and
taken possession of their offices."
1914 .........................
19,164.72 27 709.80
.........
It result that the practice of the directorate of filling
vacancies by the action of the directors themselves is
valid. Nor can any exception be taken to then 1915 .........................
24,032.85 25 961.31
personality of the individuals chosen by the directors .........
to fill vacancies in the body. Certainly it is no fair
criticism to say that they have chosen competent 1916 .........................
businessmen of financial responsibility instead of 27,539.50 28 983.55
.........
electing poor persons to so responsible a position.
The possession of means does not disqualify a man
1917 ......................... 1,204.
for filling positions of responsibility in corporate 31,327.00 26
......... 88
affairs.

Sixth cause of action. — Under the sixth cause of 1918 ......................... 1,642.
32,858.35 20
action it is alleged that the directors of El Hogar ......... 91
Filipino, instead of serving without pay, or receiving
nominal pay or a fixed salary, — as the complaint 1919 ......................... 1,729.
36,318.78 21
supposes would be proper, — have been receiving ......... 46
large compensation, varying in amount from time to
time, out of the profits of the respondent. The facts 1920 ......................... 2,268.
relating to this cause of action are in substance 63,517.01 28
......... 46
these:

1921 ......................... 36,815.33 25 1,472.

 circumstances were found in the same excellent
......... 61
condition as in the previous examination.

1922 ......................... 1,725. In so far as this court is concerned the question here
43,133.73 25
......... 34 before us is not one concerning the propriety and
wisdom of the measure of compensation adopted by
1923 ......................... 1,473. the respondent but rather the question of the
39,773.61 27
......... 09 validity of the measure. Upon this point there can, it
seems to us, be no difference of intelligent opinion.
1924 ......................... 1,486. The Corporation Law does not undertake to
38,651.92 26 prescribe the rate of compensation for the directors
......... 61
of corporations. The power to fixed the
compensation they shall receive, if any, is left to the
1925 ......................... 1,373.
35,719.27 26 corporation, to be determined in its by-laws(Act No.
......... 81
1459, sec. 21). Pursuant to this authority the
compensation for the directors of El Hogar Filipino
has been fixed in section 92 of its by-laws, as already
It will be note that the compensation above indicated
stated. The justice and property of this provision was
as accruing to the directorate as a whole has been
a proper matter for the shareholders when the
divided among the members actually present at the
by-laws were framed; and the circumstance that,
different meetings. As a result of this practice, and
with the growth of the corporation, the amount paid
the liberal measure of compensation adopted, we
as compensation to the directors has increased
find that the attendance of the membership at the
beyond what would probably be necessary to secure
board meetings has been extraordinarily good. Thus,
adequate service from them is matter that cannot be
during the years 1920 to 1925, inclusive, when the
corrected in this action; nor can it properly be made
board was composed of nine members, the
a basis for depriving the respondent of its franchise,
attendance has regularly been eight meeting with
or even for enjoining it from compliance with the
the exception of two years when the average
provisions of its own by-laws. If a mistake has been
attendance was seven. It is insisted in the brief for
made, or the rule adopted in the by-laws meeting to
the Attorney-General that the payment of the
change the rule. The remedy, if any, seems to lie
compensation indicated is excessive and prejudicial
rather in publicity and competition, rather than in a
to he interests of the shareholders at large. For the
court proceeding. The sixth cause of action is in our
respondent, attention is directed to the fact that the
opinion without merit.
liberal policy adopted by the association with respect
to the compensation of the directors has had highly
Seventh cause of action. — It appears that the
beneficial results, not only in securing a constant
promoter and organizer of El Hogar Filipino was Mr.
attendance on the part of the membership, but in
Antonio Melian, and in the early stages of the
obtaining their intelligent attention to the affairs of
organization of the association the board of directors
the association. Certainly, in this connection, the
authorized the association to make a contract with
following words from the report of the government
him with regard to the services him therefor.
examiners for 1918 to the Insular Treasurer contain
Pursuant to this authority the president of the
matter worthy of consideration:
corporation, on January 11, 1911, entered into a
written agreement with Mr. Melian, which is
The management of the association is entrusted to
reproduced in the agreed statement of facts and of
men of recognized ability in financial affairs and it is
which the important clauses are these:
believed that they have long foreseen all possible
future contingencies and that under such men the
1. The corporation "El Hogar Filipino Sociedad Mutua
interests of the stockholders are duly protected. The
de Construccion y Prestamos," and on its behalf its
steps taken by the directorate to curtail the influx of
president, Don Antonio R. Roxas, hereby confers on
unnecessary capital into the association's coffers, as
Don Antonio Melian the office of manager of said
mentioned above, reveals how the men at grasp the
association for the period of one year from the date
situation and to apply the necessary remedy as the
of this contract.
2. Don Antonio Melian accepts said office and
undertakes to render the services thereto
corresponding for the period of one year, as
prescribed by the by-laws of the corporation, without
salary.
3. Don Antonio Melian furthermore undertakes to
pay for his own account, all the expenses incurred in
the organization of the corporation.
4. Don Antonio Melian further undertakes to lend to
the corporation, without interest the sum of six
thousand pesos (P6,000), Philippine Currency, for the
purpose of meeting the expense of rent, office
supplies, etcetera, until such time as the association
has sufficient funds of its own with which to return
this loan: Provided, nevertheless, That the maximum
period thereof shall not exceed three (3) years.
5. Don Antonio Melian undertakes that the capital of
the association shall amount to the sum of four
hundred thousand pesos (P400,000), Philippine
currency, par value, during the first year of its
duration.
6. In compensation of the studies made and services
rendered by Don Antonio Melian for its organization,
the expenses incurred by him to that end, and in
further consideration of the said loan of six thousand
pesos (P6,000), and of the services to be rendered by
him as manager, and of the obligation assumed by
him that the nominal value of the capital of the
association shall reach the sum of four hundred
thousand pesos (P400,000) during the first year of its
duration, the corporation 'El Hogar Filipino Sociedad
Mutua de Construccion y Prestamos' hereby grants
him five per centum (5%) of the net profits to be
earned by it in each year during the period fixed for
the duration of the association by its articles of
incorporation; Provided, that this participation in the
profits shall be transmitted to the heirs of Señor
Melian in the event of his death; And provided
further, that the performance of all the obligations
assumed by Señor Melian in favor of the association,
in accordance with this contract, shall and does
constitute a condition precedent to the acquisition
by Señor Melian of the right to the said participation
in the profits of the association, unless the
non-performance of such obligations shall be due to
a fortuitous event or force majeure.
In conformity with this agreement there was inserted
in section 92 of the by-laws of the association a
provision recognizing the rights of Melian, as founder,
to 5 per centum of the net profits shown by the
annual balance sheet, payment of the same to be
made to him or his heirs during the life of the
association. It is declared in said article that this
portion of the earnings of the association is
conceded to him in compensation for the studies,
work and contributions made by him for the
organization of El Hogar Filipino and the
performance on his part of the contract of January
11, 1911, above quoted. During the whole life of the
association, thus far, it has complied with the
obligations assumed by it in the contract above-
mentioned; and during the years 1911 to 1925,
inclusive, it paid to him as founder's royalty the sum
of P459,011.19, in addition to compensation
received from the association by him in to
remuneration of services to the association in various
official capacities.
As a seventh cause of action it is alleged in the
complaint that this royalty of the founder is
"unconscionable, excessive and out of all proportion
to the services rendered, besides being contrary to
and incompatible with the spirit and purpose of
building and loan associations." It is not alleged that
the making of this contract was beyond the powers
of the association (ultra vires); nor it alleged that it is
vitiated by fraud of any kind in its procurement.
Nevertheless, it is pretended that in making and
observing said contract the respondent committed
an offense requiring its dissolution, or, as is
otherwise suggested, that the association should be
enjoined from performing the agreement.
It is our opinion that this contention is entirely
without merit. Stated in its true simplicity, the
primary question here is whether the making of a
(possibly) indiscreet contract is a capital offense in a
corporation, — a question which answers itself. No
possible doubt exists as to the power of a
corporation to contract for services rendered and to
be rendered by a promoter in connection with
organizing and maintaining the corporation. It is true
that contracts with promoters must be characterized
by good faith; but could it be said with certainty, in
the light of facts existing at the time this contract
was made, that the compensation therein provided
was excessive? If the amount of the compensation
now appears to be a subject of legitimate criticism,
this must be due to the extraordinary development
of the association in recent years.
If the Melian contract had been clearly ultra vires —
which is not charged and is certainly untrue — its
continued performance might conceivably be
enjoined in such a proceeding as this; but if the
defect from which it suffers is mere matter for an
action because Melian is not a party. It is
rudimentary in law that an action to annul a contract
cannot be maintained without joining both the
contracting parties as defendants. Moreover, the
proper party to bring such an action is either the
corporation itself, or some shareholder who has an
interest to protect.
The mere fact that the compensation paid under this
contract is in excess of what, in the full light of
history, may be considered appropriate is not a
proper consideration for this court, and supplies no
ground for interfering with its performance. In the
case of El Hogar Filipino vs. Rafferty (37 Phil., 995),
which was before this court nearly ten years ago, this
court held that the El Hogar Filipino is contract with
Mr. Melian did not affect the association's legal
character. The inference is that the contract under
consideration was then considered binding, and it
occurred to no one that it was invalid. It would be a
radical step indeed for a court to attempt to
substitute its judgment for the judgment of the
contracting parties and to hold, as we are invited to
hold under this cause of action, that the making of
such a contract as this removes the respondent
association from the pale of the law. The majority of
the court is of the opinion that our traditional
respect for the sanctity of the contract obligation
should prevail over the radical and innovating
tendencies which find acceptance with some and
which, if given full rein, would go far to sink
legitimate enterprise in the Islands into the pit of
populism and bolshevism. The seventh count is not
sustainable.
Eight cause of action. — Under the fourth cause of
action we had case where the alleged ground for the
revocation of the respondent's charter was based
upon the presence in the by-laws of article 10 that
was found to be inconsistent with the express
provisions of law. Under the eight cause of action the
alleged ground for putting an end to the corporate
life of the respondent is found in the presence of
other articles in the by-laws, namely, articles 70 and
76, which are alleged to be unlawful but which, as
will presently be seen, are entirely valid. Article 70 of
the by-laws in effect requires that persons elected to
the board of directors must be holders of shares of
the paid up value of P5,000 which shall be held as
security may be put up in the behalf of any director
by some other holder of shares in the amount stated.
Article 76 of the by-laws declares that the directors
waive their right as shareholders to receive loans
from the association.
It is asserted, under the eight cause of action, that
article 70 is objectionable in that, under the
requirement for security, a poor member, or
wage-earner, cannot serve as director, irrespective of
other qualifications and that as a matter of fact only
men of means actually sit on the board. Article 76 is
criticized on the ground that the provision requiring
directors to renounce their right to loans
unreasonably limits their rights and privileges as
members. There is nothing of value in either of
theses suggestions. Section 21 of the Corporation
Law expressly gives the power to the corporation to
provide in its by-laws for the qualifications of
directors; and the requirement of security from them
for the proper discharge of the duties of their office,
in the manner prescribed in article 70, is highly
prudent and in conformity with good practice. Article
76, prohibiting directors from making loans to
themselves, is of course designed to prevent the
possibility of the looting of the corporation by
unscrupulous directors. A more discreet provision to
insert in the by-laws of a building and loan
association would be hard to imagine. Clearly, the
eighth cause of action cannot be sustained.
Ninth cause of action. — The specification under this
head is in effect that the respondent has abused its
franchise in issuing "special" shares. The issuance of
these shares is allege to be illegal and inconsistent
with the plan and purposes of building and loan
associations; and in particular, it is alleged and
inconsistent with the plan and purposes of building
and loan associations; and in particular, it is alleged
that they are, in the main, held by
well-to-wage-earners for accumulating their modest
savings for the building of homes.
In the articles of incorporation we find the special
shares described as follows:
"Special" shares shall be issued upon the payment of
80 per cent of their par value in cash, or in monthly
dues of P10. The 20 per cent remaining of the par
value of such shares shall be completed by the
accumulation thereto of their proportionate part of
the profits of the corporation. At the end of each
quarter the holders of special shares shall be entitled
to receive in cash such part of the net profits of the
corporation corresponding to the amount on such
date paid in by the holders of special shares, on
account thereof, as shall be determined by the
directors, and at the end of each year the full
amount of the net profits available for distribution
corresponding to the special shares. The directors
shall apply such part as they deem advisable to the
amortization of the subscription to capital with
respect to shares not fully paid up, and the
remainder of the profits, if any, corresponding to
such shares, shall be delivered to the holders thereof
in accordance with the provision of the by-laws.
The ground for supposing the issuance of the
"special" shares to be unlawful is that special shares
are not mentioned in the Corporation Law as one of
the forms of security which may be issued by the
association. In the agreed statement of facts it is said
that special shares are issued upon two plans. By the
second, the shareholder, upon subscribing, pays in
cash P10 for each share taken, and undertakes to pay
P10 a month, as dues, until the total so paid in
amounts to P160 per share. On December 31, 1925,
there were outstanding 20,844 special shares of a
total paid value (including accumulations ) of
P3,680,162.51. The practice of El Hogar Filipino,
since 1915, has been to accumulate to each special
share, at the end of the year, one-tenth of the
divident declared and to pay the remainder of the
divident in cash to the holders of shares. Since the
same year dividend have been declared on the
special and common shares at the rate of 10 per
centum per annum. When the amount paid in upon
any special share plus the accumulated dividends
accruing to it, amounts to the par value of the share
(P200), such share matures and ceases to participate
further in the earning. The amount of the par value
of the share (P200) is then returned to the
shareholder and the share cancelled. Holders of
special and ordinary shares participate ratably in the
dividends declared and distributed, the part
pertaining to each share being computed on the
basis of the capital paid in, plus the accumulated
dividends pertaining to each share at the end of the
year. The total number of shares of El Hogar Filipino
outstanding on December 31, 1925, was 125,750,
owned by 5,826 shareholders, and dividend into
classes as follows:
Preferred shares .................................. 1,503
Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special
shares by El Hogar Filipino has been before this court
in two earlier cases, in both of which the question
has received the fullest consideration from this court.
In El Hogar Filipino vs. Rafferty (37 Phil., 995), it was
insisted that the issuance of such shares constituted
a departure on the part of the association from the
principle of mutuality; and it was claimed by the
Collector of Internal Revenue that this rendered the
association liable for the income tax to which other
corporate entities are subject. It was held that this
contention was untenable and that El Hogar Filipino
was a legitimate building and loan association
notwithstanding the issuance of said shares.
In Sevireno vs. El Hogar Filipino (G. R. No.
24926),2 and the related cases of Gervasio Miraflores
and Gil Lopes against the same entity, it was asserted
by the plaintiffs that the emission of special shares
deprived the herein responded of the privileges and
immunities of a building and loan association and
that as a consequence the loans that had been made
to the plaintiffs in those cases were usurious. Upon
an elaborate review of the authorities, the court,
though divided, adhered to the principle announced
in the earlier case and held that the issuance of the
special shares did not affect the respondent's
character as a building and loan association nor make
its loans usurious. In view of the lengthy discussion
contained in the decisions above-mentioned, it
would appear to be an act of supererogation on our
part to go over the same ground again. The
discussion will therefore not be repeated, and what
is now to be said should be considered supplemental
thereto.
Upon examination of the nature of the special shares
in the light of American usage, it will be found that
said shares are precisely the same kind of shares that,
in some American jurisdictions, are generally known
as advance payment shares; in if close attention be
paid to the language used in the last sentence of
section 178 of the Corporation Law, it will be found
that special shares where evidently created for the
purpose of meeting the condition cause by the
prepayment of dues that is there permitted. The
language of this provision is as follow "payment of
dues or interest may be made in advance, but the
corporation shall not allow interest on such advance
payment at a greater rate than six per centum per
annum nor for a longer period than one year." In one
sort of special shares the dues are prepaid to the
extent of P160 per share; in the other sort
prepayment is made in the amount of P10 per share,
and the subscribers assume the obligation to pay P10
monthly until P160 shall have been paid.
It will escape notice that the provision quoted say
that interest shall not be allowed on the advance
payments at a greater rate than six per centum per
annum nor for a longer period than one year. The
word "interest " as there used must be taken in its
true sense of compensation for the used of money
loaned, and it not must not be confused with the
dues upon which it is contemplated that the interest
may be paid. Now, in the absence of any showing to
the contrary, we infer that no interest is ever paid by
the association in any amount for the advance
payments made on these shares; and the reason is to
be found in the fact that the participation of the
special shares in the earnings of the corporation, in
accordance with section 188 of the Corporation Law,
sufficiently compensates the shareholder for the
advance payments made by him; and no other
incentive is necessary to induce inventors to
purchase the stock.
It will be observed that the final 20 per centum of the
par value of each special share is not paid for by the
shareholder with funds out of the pocket. The
amount is satisfied by applying a portion of the
shareholder's participation in the annual earnings.
But as the right of every shareholder to such
participation in the earnings is undeniable, the
portion thus annually applied is as much the property
of the shareholder as if it were in fact taken out of
his pocket. It follows that the mission of the special
shares does not involve any violation of the principle
that the shares must be sold at par.
From what has been said it will be seen that there is
express authority, even in the very letter of the law,
for the emission of advance-payment or "special"
shares, and the argument that these shares are
invalid is seen to be baseless. In addition to this it is
satisfactorily demonstrated in Severino vs. El Hogar
Filipino, supra, that even assuming that the statute
has not expressly authorized such shares, yet the
association has implied authority to issue them. The
complaint consequently fails also as regards the
stated in the ninth cause of action.
Tenth cause of action. — Under this head of the
complaint it is alleged that the defendant is pursuing
a policy of depreciating, at the rate of 10 per centum
per annum, the value of the real properties acquired
by it at its sales; and it is alleged that this rate is
excessive. From the agreed statement it appears that
since its organization in 1910 El Hogar Filipino, prior
to the end of the year 1925, had made 1,373 loans to
its shareholders secured by first mortgages on real
estate as well as by the pledge of the shares of the
borrowers. In the same period the association has
purchased at foreclosure sales the real estate
constituting the security for 54 of the aforesaid loans.
In making these purchases the association has always
bid the full amount due to it from the debtor, after
deducting the withdrawal value of the shares
pledged as collateral, with the result that in no case
has the shareholder been called upon to pay a
deficiency judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its
inventory at actual cost, as determined by the
amount bid on foreclosure sale; and thereafter until
sold the book value of such real estate is depreciated
at the rate fixed by the directors in accordance with
their judgment as to each parcel, the annual average
depreciation having varied from nothing to a
maximum of 14.138 per cent. The sales thereof, but
sales are made for the best prices obtainable,
whether greater or less than the book value.
It is alleged in the complaint that depreciation is
charged by the association at the rate of 10 per
centum per annum. The agreed statement of facts
on this point shows that the annual average varies
from nothing to a maximum of something over 14
per centum. We are thus left in the dark as to the
precise depreciation allowed from year to year. It is
not claimed for the Government that the association
is without power to allow some depreciation; and it
is quite clear that the board of directors possesses a
discretion in this matter. There is no positive
provision of law prohibiting the association from
writing off a reasonable amount for depreciation on
its assets for the purpose of determining its real
profits; and article 74 of its by-laws expressly
authorizes the board of directors to determine each
year the amount to be written down upon the
expenses of installation and the property of the
corporation. There can be no question that the
power to adopt such a by-law is embraced within the
power to make by-laws for the administration of the
corporate affairs of the association and for the
management of its business, as well as the care,
control and disposition of its property (Act No. 1459,
sec. 13 [7]). But the Attorney-General questions the
exercise of the direction confided to the board; and it
is insisted that the excessive depreciation of the
property of the association is objectionable in several
respects, but mainly because it tends to increase
unduly the reserves of the association, thereby
frustrating the right of the shareholders to
participate annually and equally in the earnings of
the association.
This count for the complaint proceeds, in our opinion,
upon an erroneous notion as to what a court may do
in determining the internal policy of a business
corporation. If the criticism contained in the brief of
the Attorney-General upon the practice of the
respondent association with respect to depreciation
be well founded, the Legislature should supply the
remedy by defining the extent to which depreciation
may be allowed by building and loan associations.
Certainly this court cannot undertake to control the
discretion of the board of directors of the association
about an administrative matter as to which they have
legitimate power of action. The tenth cause of action
is therefore not well founded.
Eleventh and twelfth causes of action. — The same
comment is appropriate with respect to the eleventh
and twelfth causes of action, which are treated
together in the briefs, and will be here combined.
The specification in the eleventh cause of action is
that the respondent maintains excessive reserve
funds, and in the twelfth cause of action that the
board of directors has settled upon the unlawful
policy of paying a straight annual dividend of 10 per
centum, regardless of losses suffered and profits
made by the corporation and in contravention of the
requirements of section 188 of the Corporation Law.
The facts relating to these two counts in the
complaint, as set forth in the stipulation, are these:
In article 92 of the by-laws of El Hogar Filipino it is
provided that 5 per centum of the net profits earned
each year, as shown by the annual balance sheet
shall be carried to a reserve fund. The fund so
created is called the General Reserve. Article 93 of
the by-laws authorizes the directors to carry funds to
a special reserve, whenever in their judgment it is
advisable to do so, provided that the annual dividend
in the year in which funds are carried to special
reserve exceeds 8 per centum. It appears to have
been the policy of the board of directors for several
years past to place in the special reserve any balance
in the profit and loss account after the satisfaction of
preferential charges and the payment of a dividend
of 10 per centum to all special and ordinary shares
(with accumulated dividends). As things stood in
1926 the general reserve contained an amount
equivalent to about 5 per centum of the paid-in value
of shared. This fund has never been drawn upon for
the purpose of maintaining the regular annual
dividend; but recourse has been had to the special
reserve on three different occasions to make good
the amount necessary to pay dividends. It appears
that in the last five years the reserves have declined
from something over 9 per cent to something over 7.
It is insisted in the brief of the Attorney-General that
the maintenance of reserve funds is unnecessary in
the case of building and loan associations, and at any
rate the keeping of reserves is inconsistent with
section 188 of the Corporation Law. Moreover, it is
said that the practice of the association in declaring
regularly a 10 per cent dividend is in effect a
guaranty by the association of a fixed dividend which
is contrary to the intention of the statute.
Upon careful consideration of the questions involved
we find no reason to doubt the right of the
respondent to maintain these reserves. It is true that
the corporation law does not expressly grant this
power, but we think it is to be implied. It is a fact of
common observation that all commercial enterprises
encounter periods when earnings fall below the
average, and the prudent manager makes provision
for such contingencies. To regard all surplus as profit
is to neglect one of the primary canons of good
business practice. Building and loan associations,
though among the most solid of financial institutions,
are nevertheless subject to vicissitudes. Fluctuations
in the dividend rate are highly detrimental to any
fiscal institutions, while uniformity in the payments
of dividends, continued over long periods, supplies
the surest foundations of public confidence.
The question now under consideration is not new in
jurisprudence, for the American courts have been
called upon more than once to consider the legality
of the maintenance of reserves by institutions of this
or similar character.
In Greeff vs. Equitable Life Assurance Society, the
court had under consideration a charter provision of
a life insurance company, organized on the mutual
plan, in its relation to the power of the company to
provide reserves. There the statute provided that
"the officers of the company, within sixty days from
the expiration of the first five years, from December
31, 1859, and within the first sixty days of every
subsequent period of five years, shall cause a balance
to be struck of the affairs of the company, which
shall exhibit its assets and liabilities, both present
and contingent, and also the net surplus, after
deducting a sufficient amount to cover all
outstanding risks and other obligations. Each policy
holder shall be credited with an equitable share of
the said surplus."
The court said:
No prudent person would be inclined to take a policy
in a company which had so improvidently conducted
its affairs that it only retained a fund barely sufficient
to pay its present liabilities, and, therefore, was in a
condition where any change by the reduction of
interest upon, or depreciation in, the value of its
securities, or any increase of mortality, would render
it insolvent and subject to be placed in the hands of a
receiver. The evident purpose of the provisions of
the defendant's charter and policy relating to this
subject was to vest in the directors of the
corporation a discretion to determine the proportion
of its surplus which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin
in 1916, entitled Boheman Bldg. and Loan
Association vs. Knolt, the court, in commenting on
the nature of these reserves, said:
The apparent function of this fund is to insure the
stockholders against losses. Its purpose is not unlike
that of the various forms of insurance now in such
common use. This contribution is as legitimate an
item of expense as are the premiums paid on any
insurance policy. (See Clarks and Chase, Building and
Loan Association, footnote, page 344.)
In commenting on the necessity of such funds,
Sundheim says:
It is optional with the association whether to
maintain such a fund or not, but justice and good
business policy seem to require it. The retiring
stockholder must be paid the value of his stock in
cash and leave for those remaining a large number of
securities and perhaps some real estate purchased to
protect the associations interest. How much will be
realized on these securities, or real estate, no human
foresight can tell. Further, the realizing on these
securities may entail considerable litigation and
expense. There are many other contingencies which
might cause a shrinkage in the association's assets,
such as defective titles, undisclosed defalcations on
the part of an officer, a miscalculation of assets and
liabilities, and many other errors and omissions
which must always be reckoned within the conduct
of human affairs.
The contingent fund is merely insurance against
possible loss. That losses may occur from time to
time seems almost inevitable and it is, therefore,
inequitable that the remaining stockholders should
be compelled to accept all securities at par, so, to say
the least, the maintenance of this fund is justified.
The association teaches the duty of providing for the
proverbial rainy day. Why should it not provide for
the hour of adversity? The reserve fund has
protected the maturing or withdrawing member
during the period of his membership. In case of loss
it has or would have reimbursed him and, at all times,
it has protected him and given strength and standing
to the association. Losses may occur, after his
membership ceases, that arose from some mistake
or mismanagement committed during the period of
his membership, and in fairness and equity the
remaining members should have some protection
against this. (Sundheim, Law of Building and Loan
Association, sec. 53.)
The government insists, we thing, upon an
interpretation of section 188 of the Corporation Law
that is altogether too strict and literal. From the fact
that the statute provides that profits and losses shall
be annually apportioned among the shareholders it is
argued that all earnings should be distributed
without carrying anything to the reserve. But it will
be noted that it is provided in the same section that
the profits and losses shall be determined by the
board of directors: and this means that they shall
exercise the usual discretion of good businessmen in
allocating a portion of the annual profits to purposes
needful to the welfare of the association. The law
contemplates the distribution of earnings and losses
after other legitimate obligations have been met.
Our conclusion is that the respondent has the power
to maintain the reserves criticized in the eleventh
and twelfth counts of the complaint; and at any rate,
if it be supposed that the reserves referred to have
become excessive, the remedy is in the hands of the
Legislature. It is no proper function of the court to
arrogate to itself the control of administrative
matters which have been confided to the discretion
of the board of directors. The causes of action under
discussion must be pronounced to be without merit.
Thirteenth cause of action. — The specification under
this head is, in effect, that the respondent
association has made loans which, to the knowledge
of the associations officers were intended to be used
by the borrowers for other purposes than the
building of homes. In this connection it appears that,
though loans have been made by the association
exclusively to its shareholders, no attempt has been
made by it to control the borrowers with respect to
the use made of the borrowed funds, the association
being content to see that the security given for the
loan in each case is sufficient. On December 31, 1925,
the respondent had five hundred forty-four loans
outstanding secured by mortgages upon real estate
and by the pledge of the borrowers' shares in an
amount sufficient at maturity to amortize the loans.
With respect to the nature of the real estate upon
which these loans were made it appears that three
hundred fifty-one loans were secured by mortgages
upon city residences, seven by mortgages upon
commercial building in cities, and three mortgages
upon unimproved city lots. At the same time one
hundred eighty-three of the loans were secured by
mortgages upon groves, sugar land, and rice land,
with a total area of about 7,558 hectares. From
information gathered by the association from
voluntary statements of borrowers given at the time
of application with respect to the use intended to be
made of the borrowed funds, it appears that the
amount of P693,200 was borrowed to redeem real
property from existing mortgages or pactos de retro,
P280,800 to buy real estate, P449,100 to erect
buildings, P24,000 to improve and repair buildings,
P1,480,900 for agricultural purposes, while the
amount of P5,763,700 was borrowed for purposes
not disclosed.
Upon these facts an elaborate argument has been
constructed in behalf of the plaintiff to the effect
that in making loans for other purposes than the
building of residential houses the association has
illegally departed from its character and made itself
amenable to the penalty of dissolution. Aside from
being directly opposed to the decision of this court
in Lopez and Javelona vs. El Hogar Filipino and
Registrar of Deeds of Occidental Negros (47 Phil.,
249), this contention finds no substantial support in
the prevailing decisions made in American courts;
and our attention has not been directed to a single
case wherein the dissolution of a building and loan
association has been decreed in a quo
warranto proceeding because the association
allowed its borrowers to use the loans for other
purposes than the acquisition of homes.
The case principally relied upon for the Government
appears to be Pfeister vs. Wheeling Building
Association (19 W. Va., 676, 716),which involved the
question whether a building and loan association
could recover the full amount of a note given to it by
a member and secured by a mortgage from a
stranger. At the time the case arose there was a
statute in force in the State of West Virginia
expressly forbidding building and loan associations to
use or direct their funds for or to any other object or
purpose than the buying of lots or houses or in
building and repairing houses, and it was declared
that in case the funds should be improperly directed
to other objects, the offending association should
forfeit all rights and privileges as a corporation.
Under the statute so worded the court held that the
plaintiff could only recover the amount actually
advanced by it with lawful interest and fines, without
premium; and judgment was given accordingly. The
suggestion in that case that the result would have
been the same even in the absence of statute was
mere dictum and is not supported by respectable
authority.
Reliance is also placed in the plaintiff's brief
upon McCauley vs. Building & Saving Association. The
statute in force in the State of Tennessee at the time
this action arose provided that all loans should be
made to the members of the association at open
stated meetings and that the money should be lent
to the highest bidder. Inconsistently with this
provision, there was inserted in the by-laws of the
association a provision to the effect that no loan
should be made at a greater premium than 30 per
cent, nor at a less premium than 29 7/8 per cent. It
was held that this by-law made free and open
competition impossible and that it in effect
established a fixed premium. It was accordingly held,
in the case cited, that an association could not
recover such part of the loan as had been applied by
it to the satisfaction of a premium of 30 per centum.
We have no criticism to make upon the result
reached in either of the two decisions cited, but it is
apparent that much of the discussion contained in
the opinions in those cases does not reflect the
doctrine now prevailing in the United States; and
much less are those decisions applicable in this
jurisdiction. There is no statute here expressly
declaring that loans may be made by these
associations solely for the purpose of building homes.
On the contrary, the building of homes is mentioned
in section 171 of the Corporation Law as only one
among several ends which building and loan
associations are designed to promote. Furthermore,
section 181 of the Corporation Law expressly
authorities the Board of directors of the association
from time to time to fix the premium to be charged.
In the brief of the plaintiff a number of excerpts from
textbooks and decisions have been collated in which
the idea is developed that the primary design of
building and loan associations should be to help poor
people to procure homes of their own. This
beneficent end is undoubtedly served by these
associations, and it is not to be denied that they have
been generally fostered with this end in view. But in
this jurisdiction at least the lawmaker has taken care
not to limit the activities of building and loan
associations in an exclusive manner, and the exercise
of the broader powers must in the end approve itself
to the business community. Judging from the past
history of these institutions it can be truly said that
they have done more to encourage thrift, economy
and saving among the people at large than any other
institution of modern times, not excepting even the
saving banks. In this connection Mr. Sundheim, in a
late treatise upon the subject of the law of building
and loan associations, makes the following comment:
They have grown to such an extent in recent years
that they no longer restrict their money to the home
buyer, but loan their money to the mere investor or
dealer in real estate. They are the holder of large
mortgages secured upon farms, factories and other
business properties and rows of stores and dwellings.
This is not an abuse of their powers or departure
from their main purposes, but only a natural and
proper expansion along healthy and legitimate lines.
(Sundheim, Building and Loan Associations, sec. 7.)
Speaking of the purpose for which loans may be
made, the same author adds:
Loans are made for the purpose of purchasing a
homestead, or other real estate, or for any lawful
purpose or business, but there is no duty or
obligation of the association to inquire for what
purpose the loan is obtained, or to require any
stipulation from the borrower as to what use he will
make of the money, or in any manner to supervise or
control its disbursement. (Sundheim, Building and
Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and
Registrar of Deeds of Occidental Negros, this court
had before it the question whether a loan made by
the respondent association upon the security of a
mortgage upon agricultural land, — where the loan
was doubtless used for agricultural purposes, — was
usurious or not; and the case turned upon the point
whether, in making such loans, the association had
violated the law and departed from its fundamental
purposes. The conclusion of the court was that the
loan was valid and could be lawfully enforced by a
nonjudicial foreclosure in conformity with the terms
of the contract between the association and the
borrowing member. We now find no reason to
depart from the conclusion reached in that case, and
it is unnecessary to repeat what was then said. The
thirteenth cause of action must therefore be
pronounced unfounded.
Fourteenth cause of action. — The specification
under this head is that the loans made by the
defendant for purposes other than building or
acquiring homes have been extended in extremely
large amounts and to wealthy persons and large
companies. In this connection attention is directed to
eight loans made at different times in the last several
years to different persons or entities, ranging in
amounts from P120,000 to P390,000 and to two
large loans made to the Roxas Estate and to the
Pacific Warehouse Company in the amounts of
P1,122,000 and P2,320,000, respectively. In
connection with the larger of the two after this loan
was made the available funds of El Hogar Filipino
were reduced to the point that the association was
compelled to take advantage of certain provisions of
its by-laws authorizing the postponement of the
payment of claims resulting from withdrawals,
whereas previously the association had always
settled these claims promptly from current funds. At
no time was there apparently any delay in the
payment of matured shares; but in four or five cases
there was as much as ten months delay in the
payment of withdrawal applications.
There is little that can be said upon the legal aspects
of this cause of action. In so far, as it relates to the
purposes for which these loans were made, the
matter is covered by what was said above with
reference to the thirteenth cause of action; and in so
far as it relates to the personality of the borrowers,
the question belongs more directly to the discussion
under the sixteenth cause of action, which will be
found below. The point, then, which remains for
consideration here is whether it is a suicidal act on
the part of a building and loan association to make
loans in large amount. If the loans which are here the
subject of criticism had been made upon inadequate
security, especially in case of the largest two, the
consequences certainly would have been disastrous
to the association in the extreme; but no such fact is
alleged; and it is to be assumed that none of the ten
borrowers have defaulted in their contracts.
Now, it must be admitted that two of these loans at
least are of a very large size, considering the average
range of financial transaction in this country; and the
making of the largest loan was followed, as we have
already see, with unpleasant consequences to the
association in dealing with current claims.
Nevertheless the agreed statement of facts shoes
that all of the loan referred to are only ten out of a
total of five hundred forty-four outstanding on
December 31, 1925; and the average of all the loans
taken together is modest enough. It appears that the
chief examiner of banks and corporations of the
Philippine Treasury, after his examination of El Hogar
Filipino at the end of the year 1925, made a report
concerning this association as of January 31, 1926, in
which he criticized the Pacific Warehouse Company
loan as being so large that it temporarily crippled the
lending power of the association for some time. This
criticism was apparently justified as proper comment
on the activities of the association; but the question
for use here to decide is whether the making of this
and the other large loans constitutes such a misuser
of the franchise as would justify us in depriving the
association of its corporate life. This question
appears to us to be so simple as almost to answer
itself. The law states no limit with respect to the size
of the loans to be made by the association. That
matter is confided to the discretion of the board of
directors; and this court cannot arrogate to itself a
control over the discretion of the chosen officials of
the company. If it should be thought wise in the
future to put a limit upon the amount of loans to be
made to a single person or entity, resort should be
had to the Legislature; it is not a matter amenable to
judicial control. The fourteenth cause of action is
therefore obviously without merit.
Fifteenth cause of action. — The criticism here comes
back to the supposed misdemeanor of the
respondent in maintaining its reserve funds, — a
matter already discussed under the eleventh and
twelfth causes of action. Under the fifteenth cause of
action it is claimed that upon the expiration of the
franchise of the association through the effluxion of
time, or earlier liquidation of its business, the
accumulated reserves and other properties will
accrue to the founder, or his heirs, and the then
directors of the corporation and to those persons
who may at that time to be holders of the ordinary
and special shares of the corporation. In this
connection we note that article 95 of the by-laws
reads as follows:
ART. 95. The funds obtained by the liquidation of the
association shall be applied in the first place to the
repayment of shares and the balance, if any, shall be
distribute in accordance with the system established
for the distribution of annual profits.
It will be noted that the cause of action with which
we are now concerned is not directed to any positive
misdemeanor supposed to have been committed by
the association. It has exclusive relation to what may
happen some thirty-five years hence when the
franchise expires, supposing of course that the
corporation should not be reorganized and
continued after that date. There is nothing in article
95 of the by-laws which is, in our opinion, subject to
criticism. The real point of criticism is that upon the
final liquidation of the corporation years hence there
may be in existence a reserve fund out of all
proportion to the requirements that may then fall
upon it in the liquidation of the company. It seems to
us that this is matter that may be left to the prevision
of the directors or to legislative action if it should be
deemed expedient to require the gradual
suppression of the reserve funds as the time for
dissolution approaches. It is no matter for judicial
interference, and much less could the resumption of
the franchise on this ground be justified. There is no
merit in the fifteenth cause of action.
Sixteenth cause of action. — This part of the
complaint assigns as cause of action that various
loans now outstanding have been made by the
respondent to corporations and partnerships, and
that these entities have in some instances subscribed
to shares in the respondent for the sole purpose of
obtaining such loans. In this connection it appears
from the stipulation of facts that of the 5,826
shareholders of El Hogar Filipino, which composed its
membership on December 31, 1925, twenty-eight
are juridical entities, comprising sixteen corporations
and fourteen partnerships; while of the five hundred
forty-four loans of the association outstanding on the
same date, nine had been made to corporations an
five to partnerships. It is also admitted that some of
these juridical entities became shareholders merely
for the purpose of qualifying themselves to take
loans from the association, and the same is said with
respect to many natural persons who have taken
shares in the association. Nothing is said in the
agreed statement of facts on the point whether the
corporations and partnerships that have taken loans
from the respondent are qualified by law governing
their own organization to enter into these contracts
with the respondent.
In section 173 of the Corporation Law it is declared
that "any person" may become a stockholder in
building and loan associations. The word "person"
appears to be here used in its general sense, and
there is nothing in the context to indicate that the
expression is used in the restricted sense of both
natural and artificial persons, as indicated in section
2 of the Administrative Code. We would not say that
the word "person" or persons," is to be taken in this
broad sense in every part of the Corporation Law. For
instance, it would seem reasonable to say that the
incorporators of a corporation ought to be natural
persons, although in section 6 it is said that five or
more "persons", although in section 6 it is said that
five or more "persons," not exceeding fifteen, may
form a private corporation. But the context there, as
well as the common sense of the situation, suggests
that natural persons are meant. When it is said,
however, in section 173, that "any person" may
become a stockholder in a building and loan
association, no reason is seen why the phrase may
not be taken in its proper broad sense of either a
natural or artificial person. At any rate the question
whether these loans and the attendant subscriptions
were properly made involves a consideration of the
power of the subscribing corporations and
partnerships to own the stock and take the loans;
and it is not alleged in the complaint that they were
without power in the premises. Of course the mere
motive with which subscriptions are made, whether
to qualify the stockholders to take a loan or for some
other reason, is of no moment in determining
whether the subscribers were competent to make
the contracts. The result is that we find nothing in
the allegations of the sixteenth cause of action, or in
the facts developed in connection therewith, that
would justify us in granting the relief.
Seventeenth cause of action. — Under the
seventeenth cause of action, it is charged that in
disposing of real estates purchased by it in the
collection of its loans, the defendant has no various
occasions sold some of the said real estate on credit,
transferring the title thereto to the purchaser; that
the properties sold are then mortgaged to the
defendant to secure the payment of the purchase
price, said amount being considered as a loan, and
carried as such in the books of the defendant, and
that several such obligations are still outstanding. It is
further charged that the persons and entities to
which said properties are sold under the condition
charged are not members or shareholders nor are
they made members or shareholders of the
defendant.
This part of the complaint is based upon a mere
technicality of bookkeeping. The central idea
involved in the discussion is the provision of the
Corporation Law requiring loans to be stockholders
only and on the security of real estate and shares in
the corporation, or of shares alone. It seems to be
supposed that, when the respondent sells property
acquired at its own foreclosure sales and takes a
mortgage to secure the deferred payments, the
obligation of the purchaser is a true loan, and hence
prohibited. But in requiring the respondent to sell
real estate which it acquires in connection with the
collection of its loans within five years after receiving
title to the same, the law does not prescribe that the
property must be sold for cash or that the purchaser
shall be a shareholder in the corporation. Such sales
can of course be made upon terms and conditions
approved by the parties; and when the association
takes a mortgage to secure the deferred payments,
the obligation of the purchaser cannot be fairly
described as arising out of a loan. Nor does the fact
that it is carried as a loan on the books of the
respondent make it a loan on the books of the
respondent make it a loan in law. The contention of
the Government under this head is untenable.
In conclusion, the respondent is enjoined in the
future from administering real property not owned
by itself, except as may be permitted to it by contract
when a borrowing shareholder defaults in his
obligation. In all other respects the complaint is
dismissed, without costs. So ordered.
Avanceña, C. J., Johnson, Villamor and Vila-Real, JJ.,
concur.
Separate Opinions
MALCOLM, J., with whom concur OSTRAND and
JOHNS, JJ., dissenting:
For the second time in the history of the court — so
counsel for plaintiff inform us — we must try a
corporation for the violation of a law which carries
with it a death warrant — so counsel for defendant
intimates. That the corporation at bar is wealthy and
powerful should neither prejudice us against it nor
cause us to cringe before its might. The court has a
duty to perform and should perform it with fairness
to the corporation and with justice to the public,
whose interests are involved. El Hogar Filipino,
deserves exactly the same consideration as any other
litigant. No more, no less.
The proceeding is one of quo warranto, begun by the
Government of the Philippine Islands under authority
of section 190-A of the Corporation Law, and of
sections 197-216, 519 of the Code of Civil Procedure.
The complaint contains seventeen causes of action.
To all of them, the defendant has made answer. The
facts have been covered by stipulation. The
government asks for an order of dissolution.
Defendant tenaciously resists.
El Hogar de Filipino is a corporation organized as a
mutual building and loan association under the
provisions of the Corporation Law (Act No. 1459).
The law last mentioned, it may recalled, is divided
into two parts. Chapter one is entitled "General
Provisions." In chapter two is entitled "Special
Provisions". In chapter two, section 171 to 190,
inclusive, are found the special provisions pertaining
to building and loan corporations. Section 171
thereof is indicative of the legislative purpose. It
provides:
All corporations whose capital stock is required or is
permitted to be paid in by the stockholders in regular,
equal, periodical payments and whose purpose is to
accumulate the savings of its stockholders, to repay
to said stockholder their accumulated savings and
profits upon surrender of their stock, to encourage
industry, frugality, and home building among its
stockholders, and to loan its funds and funds
borrowed for the purpose to stockholders on the
security of unencumbered real estate and the pledge
of shares of capital stock owned by the stockholders
as collateral security, shall be known as building and
loan corporation, and the words mutual building and
loan association shall form part of the name of every
such corporation.
The articles of incorporation of El Hogar Filipino show
that the purpose of the corporation are: (1) The
accumulation of the savings of its shareholders; (2)
the return to said shareholders of their accumulated
savings and profits upon the surrender and
cancellation of their shares; (3) the encouragement
of industry, frugality, and home building among its
shareholders; (4) the loan of its funds and funds
borrowed for the purpose to its shareholders on the
security of unencumbered real estate and the pledge
of shares of capital stock of the company owned by
its shareholders as collateral security; and (5) the
borrowing of money upon the credit of the
corporation and the issuance of bonds or other
documents evidencing the existence of such
obligations. The capital of the corporation is made
not to exceed P10,000,000. At the end of 1925 it had
5,826 shareholders holding 125,750 shares, the total
paid up value of which was P8,703,602.25.
El Hogar Filipino having been incorporated under
Philippine law as a mutual building and loan
association, the primary inquiry should naturally be
as to the nature, purposes, and operations of mutual
building and loan associations.
In the case of El Hogar Filipino vs. Rafferty ([1918] 37
Phil., 995),this court had presented the question of
whether El Hogar Filipino, as a building and loan
association, was relieved from the necessity of
paying an income tax. It was held that it was. Mr.
Justice Johnson, speaking for the court, said:
A building and loan association is an organization
created for the purpose of accumulating a fund by
the monthly subscription or saving of its members, to
assist them in building or purchasing for themselves
dwellings or real estate, by loaning to them the
requisite money from the funds of the society. To all
particular intent it may be said to be to enable a
number of associates to have and invest their savings
to mutual advantage, so that, from time to time, any
individual among them may receive, out of the
accumulation of the pittances which each
contributes periodically, a sum, by way of loan,
wherewith to build or pay for a home, and ultimately
making it absolutely his own by the payment of such
small amounts from time to time.
(Rhodes vs. Missouri Savings & Loan Co., 173 Ill., 621;
42 L. R. A., 93.)
The same opinion quoted from Endlich on Building
Associations, section 7, who was termed a leading
authority upon such associations, on the subject of
the primary designs and general operation of
building associations, the following:
The idea which first gave rise to the institution of
building associations, which furnished their
ostensible and legitimate raison d'etre, and which
secured to them their popularity and their, in many
respects, exceptionally favored position before the
law, is that of enabling persons belonging to a class
whose earning are small, and with whom the
slowness of the accumulation discourages the effort,
to become by a process of gradual and compulsory
savings, either at the end of a certain period, or by
anticipation of it, the owners of homesteads. The
operation of the scheme may be easily understood.
The same opinion quoted from Thornton and
Blackledge in their work on Building and Loan
Associations, at page 6 the following:
Societies, known as building, loan fund, and savings
association, are now recognized as important factors
in the social and economic development of this
country. The controlling idea is the massing of the
separate earnings of wage-workers, and the savings
of persons of small means, in such a manner as to aid
them in procuring homes. It is the organization of
thrift and self-help; a practical application of the
maxim that in "union there is strength." The effect of
such a movement is to dignify the home; to foster
morality, and to make thoughtful, wise, and
responsible citizens. It is for such reason that the law
and the courts, where such associations have been
properly conducted, have looked upon them with
favor. Whether they shall retain the favorable
estimation of legislatures and courts will depend in
large measure upon the wise forecast and
determined purpose of those who control such
institutions. Those departures from the original idea,
intended to enhance the profits of investors, without
in any degree aiding those who are endeavoring to
build homes, have been, and in the future probably
will be, severely censured by the courts.
In the case of Lopez and Javelona vs. El Hogar Filipino
and Registrar of Deeds of Occidental Negros ([1925],
47 Phil., 249), the principal issue had to do with the
relation of El Hogar Filipino to the Usury Law
permitting it to charge a higher rate of interest than
persons or entities, charge than similarly organized
mutual building and loan associations. Mr. Justice
Johns, in a vigorous dissenting opinion, said:
There must be and is valid reason for the exception
made in the statute which permits building and loan
associations to charge and receive 18 per cent per
annum as interest, and which limits all other loans
made by any other person, firm or corporation to
interest at 12 per cent per annum.
All building and loan associations are founded, and
exceptions made in their favor as to the rate of
interest, upon the theory that they will enable a
person with small means or small income who has a
family to support, to build a home in which to live
and to improve his property and develop the country.
When the exception was made by the Legislature, it
was never intended that the El Hogar Filipino or any
other corporation, under the guise of a building and
loan association, should make a loan upon a sugar
plantation of the nature of the one in question.
xxx xxx xxx
It will be noted that the exception made in the
statute above quoted is for mutual building and loan
societies incorporated under the Corporation Act.
The use of the word mutual is significant and
important. Under the statute, it is not sufficient that
the corporation should be a building and loan
association. It must be a mutual building and loan
association.
In the same dissent, reference was made to the case
of El Hogar Filipino vs. Rafferty, supra, and the
remarks of Endlich, and Thornton and Blackledge on
the purposes of mutual building and loan
associations. Fletcher, Cyclopedia of Corporation,
volume 1, page 136, was also quoted from as follows:
An incorporated building and loan association is a
corporation for the purpose of raising, by periodical
subscriptions of members, a stock or fund to assist
members by advances or loans, generally on
mortgage security, in building or purchasing homes.
Such corporations are different from corporations
formed for pecuniary profit.
The term (building and loan association) does not
generally include corporations unless their purpose is
to accumulate funds and lend the same to members
to assists them in purchasing or building homes . . .
(Cases cited.) It does not include a corporation . . . for
the purpose of purchasing and improving real estate
and advancing money on mortgages . . . or a
corporation merely for the purpose of loaning
money.
In the same dissent, reference was made to what
Corpus Juris, volume 9, page 920, contains on the
subject of the object and purpose of building and
loan associations, namely:
As it is sometimes stated in the statutes relating to,
and in the charters and constitutions of, building and
loan associations, the principal object of a building
and loan association is to create a loan fund for the
benefit of its borrowing members, the underlying
idea being that, by means of the system of small
periodical payments provided, people of limited
means will be enabled to become the owners of
homes, and thrift, economy, and good citizenship will
thereby be promoted. By reason of the favorable
results attending the operation of these associations,
and their beneficent purposes, they have, especially
before they attained their present tremendous
growth, been favored and granted special privileges
by the various legislatures, such as permission to
charge high rates of interest and exemption from
taxation. . . ." In lieu of asterisk the next succeeding
sentence from Corpus Juris could also have been
appropriately used: "However, with the growth of
these organizations, evils have crept in, the privileges
granted have in many instances been abused by
unscrupulous officers, and, in recent years, the
courts have been compelled to subject their
transactions to closer scrutiny.
Speaking of the purposes for which loans can be
made by building and loan associations, Rosenthal, in
his work on Building, Loan and Savings Associations,
third edition, page 108, says:
In our opinion, the object of building, loan and
savings associations is to furnish funds for homes
rather than for mercantile or manufacturing
improvements. Some of the larger associations have
granted loans of this character, and we consider it a
dangerous departure from the purposes for which
these associations were created.
Thompson on Building Associations, page 5, 23, 24,
232 and 558, says:
The building association as now existing is a private
corporation designed for the accumulation, by the
members, of their money, by periodical payments
into its treasury, to be invested from time to time in
loans to the members upon real estate for home
purposes,
The building association is a home builder. The
member by its system is enabled to acquire a home,
and to pay for it he pledges his future savings. . . . It
enforces economy, and awakens thoughts of
citizenship in its better sense of offering homes. This
is the first purpose of these institutions. The
language of the Supreme Court of Georgia is timely:
"The they have improved our towns by leading to the
erection of a number of new buildings, furnished
many families with homes of their own, that could
not otherwise have possessed the, given a
considerable impulse to mechanical enterprise, and
in many other ways promoted the prosperity and
welfare of the communities where they exist, is
undoubtedly true. But whether they will continue to
be entitled to the epithet of the "poor man's
exchequer," and whether they will, as they promise
to do, enable every man to become his own landlord,
will depend entirely upon the manner in which they
conduct their business . . ."
These institutions are well known all over the United
States to be depositories of money savings, and
investors of those savings in homes for members.
The legislature has created them in the interest of
good citizenship, to enable the people to save their
money and acquire homes and become steady
citizens. The ultimate legislative purpose is
home-building. If it was merely a depository of
savings it would have no strong reason for existence,
because the savings banks furnish that; but it goes
further, and is designed by law to use those savings
in procuring homes for its members. And the courts
should promptly curb any disposition to depart from
the corporate purposes.
. . . But a building association is not an ordinary
corporation; in fact, it exercises some extraordinary
privileges, particularly in not being amenable to the
usury laws. It is created for the declared purposes of
accumulating money and lending the accumulation
to members to build or acquire homes for
themselves. The legislature devised this plan of
cooperative accumulations for the purpose of
assisting each member to become his own landlord.
The state has a selfish motive in the promotion of a
building association, as through its workings it is
planting deeply the roots of citizenship. The drifting,
thriftless classes are offered a school of economy,
and the earnest and economical classes are given an
opportunity. There is, then, the formation of a steady,
energetic and accumulating citizen. The cares of the
state are lessened by decreasing poverty, and its
prosperity is increased by growing material wealth.
We may clearly conceive, then, that the intention of
the legislature in the creation of building associations
is, first, to encourage savings; second, to secure
homes for the savers.
In the case of Mandlin vs. American Savings and Loan
Association ([1896],63 Minn., 358), the court said:
So-called "building societies," operated on the plan
of the defendant, have so often become the
instrument of oppression and extortion as to call
down the censure of some eminent courts. The
original purpose of building societies, viz., to enable
people of small means to build or buy homes, is
entirely wanting.
"Such a body" says Follet, J., in Seibel vs. Victoria
Building Association (43 Ohio St., 371, p. 373), "exists
for the equal benefit of all its members, who are
presumed to be persons whose earnings are small,
and who seek to use weekly savings in procuring
suitable homesteads. Every member is presumed to
become after sometime a borrower to the extent of
his interest. Building associations are not intended to
enable money lenders to obtain extraordinary
interest, but they are intended to help in securing
homes with the aid of small incomes." (Barry Law of
Building Societies, p. 3, sec. 4.)
In case of North American Building Associaton vs.
Sutton ([1860], 35 Pa., 463), the court said:
It is well known that the original design of the
legislature was to encourage the erection of
buildings. The motive for the grant of the franchise
was public improvement. But the practical working of
the associations formed under the law has not been
what was anticipated. Though called "building
societies," they are, in truth, only agencies by which a
greater than legal interest is obtained from the
necessitous and unwary.
In the case of Continental National Building and Loan
Association vs. Miller ([1902], 44 Fla., 757), the court
said:
When local in their operations and prudently
managed they have served a useful purpose enabling
the man of small means to build his modest homes
or to make a safe and profitable investment of his
meager earnings; but when they branch out and
forget the original purposes and limitations that have
given them this favored position, trouble not
infrequently arises.
In the case of St. Joseph and Kansas Loan and
Building Association vs. Thompson ([1877], 19 Kansas,
321), the court said:
It was never intended that these corporations,
organized as this one was for the purpose of giving to
its members through their savings an easy way to
discharge encumbrances and to build homes, should
loan their funds to others than their own members.
In case of Parker vs. Fulton Loan and Building
Association ([1872],46 Ga., 166), the court said:
Whether such a contract though legal upon its face,
was, in fact, illegal, would depend upon the object of
the association. If it were, in truth, a mere devise to
evade the usury laws, then it would depend upon the
object of the association. If it were, in truth, a mere
devise to evade the usury laws, then it would be
illegal, if in fact more was taken for the use of money
than 7 per cent per annum. But if the organization
were in fact and bona fide a plan with the real intent
and object of accumulating a fund by monthly
subscriptions or savings of the members thereof, to
assist them in procuring for themselves such real
estates as they may deem proper,' then it would not
be illegal.
The practical application of the resources of these
institutions (building and loan associations) to the
building of homes and aiding their members to
change their conditions from rent-paying tenants to
home-owning citizens has been recognized as a work
of vital importance and of the highest helpfulness to
the interest of the state and nation. (Rosenthal Cyc.
of Building, Loan & Savings Association, p. 73.)
The aim and purpose of a building association is to
aid and encourage its members to learn and practice
thrift by regular systematic saving, and to provide
ways and means so that every family may procure
home. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 9.)
The funds of the first associations were applied to aid
its members to procure homes. This was in fact the
one outstanding feature of the plan and the high
purpose for which the association was organized.
The wish and desire to own their own home, was, in
fact the primary, fundamental inspiration on which
the first building association was formed, and has
ever continued to be the shining pole star which has
guided and directed the progress of these building
associations to the present day. The desire to own a
home is one of the primary, natural instincts of every
real man or woman. An institution organized and
operated on a fair and equitable plan which has for
its object the gratifying of that desire, is sure to make
a strong appeal to all humanity. The constant appeal
which building associations have always made to this
deep-seated human desire, is the real secret of their
great success. (Rosenthal Cyc. of Building, Loan &
Savings Association, p. 13.)
A recent president of the United States League of
Local Building and Loan Associations said the "Our
associations are serving just two classes of customers:
receiving the savings of thrifty and farseeing people,
and loaning these funds to members who wish to
buy or build a home. Never was the need for building
or owning a home greater than in the past few years,
and as you well know, lack of sufficient funds has
been one of our problems."
Building and Loan Associations started as
neighborhood clubs in most parts of the country.
Neighbors wished to become home owners and
began contributing a certain sum monthly to a
treasurer. The aggregate of these monthly payments
was soon sufficient to buy or build a home for one of
the members. The fund was then loaned to one of
them, and as other funds accumulated, others could
borrow. The joint purposes of thrift and home
ownership are inseparable and are of equal
importance. There could be no cooperative building
and loan association without both. (Clark and Chase
Building and Loan Association, p. 4).
The Commissioner of Internal Revenue of the United
States in article 515 of his new regulations, outlines
the particular associations entitled to exemption,
under the Federal Law as follows:
In general, a building and loan association entitled to
exemption is one organized pursuant to the laws of
any state, territory or the District of Colulmbia, which
accumulates funds to be loaned primarily to the
shareholders for the purpose of building or acquiring
homes. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 94.)
The authorities could be piled up mountain high.
They all disclose that mutual building and loan
associations are peculiar and special corporations.
They can exercise only such powers as are conferred
by the legislative body creating them, either by
express terms or by necessary implication. Their
basic and essential idea is mutuality. The primary
object is to encourage thrift and to assist in home
building. "El Hogar Filipino" — or as it is in English
"The Filipino Home" — that is the magic thought
which attracts small investors. But when pseudo
associations branch out and forget the original
purposes and limitations that have given them their
favored positions, it is incumbent on the judiciary to
place them back in their rightful places. We are frank
to say that it is these elementary principles, which, in
our opinion, the majority have failed to grasp, which
have led them into error in the decision of this case.
Why are mutual building and loan associations
granted special privileges? Why are mutual building
and loan associations exempted from taxation, as
disclosed in El Hogar Filipino vs. Rafferty, supra? Why
are building and loan associations permitted to
charge high rates of interest, as disclosed in Lopez
and Javelona vs. El Hogar Filipino, and Registrar of
Deeds of Occidental Negros, supra? Why? Need
answers be given. If so, it is so that mutual building
and loan associations may with one hand accept
favors rightfully theirs, and with the other hand grasp
favors properly belonging to strictly private
corporations or loan societies.
El Hogar Filipino has offended against the law of its
creation, and has departed from the fundamental
purposes of mutual building and loan associations in
this:
A. In that it has engaged in business activities entirely
foreign to and not reasonably necessary for the
purposes for which it was organized, such as the
administration of properties and the management of
properties not mortgaged;
B. In that it has inserted in article 10 of its by-laws a
provision giving the board of directors, by majority
vote, the unqualified right to cancel and forfeit
shares by merely returning to their owners the
amount which may result from the accounting, in
violation of the Corporation Law;
C. In that its board of directors has become a
permanent and self- perpetuating body, since with
the exception of the years 1911, 1912, and 1917,
there has been no election of directors and since
between 1912 and 1917, and from 1917 until the
present, the membership of the board has not been
changed, except to fill vacancies which have been
filled by the board itself, in violation of the
Corporation Law, and of the by-laws of the
corporation;
D. In that the directors, instead of serving without
pay or for nominal salaries, have been receiving
relatively large compensations out of the profits in
accordance with article 92 of the by-laws, providing
that 5 percent of the annual profits shall be devoted
to the compensation of the directors, according to
their attendance at the meetings;
E. In that the corporation has been giving to Antonio
Melian, its founder, under provisions of article 92 of
its by-laws 5 per cent of the yearly net profits, and
will continue to do so, for the full fifty-year period of
life of the defendant, and under which Mr. Melian
has received a total sum of P615,834;
F. In that articles 70 and 76 of its by-laws are
contrary to law, since they only permit the election
or appointment to the board of directors of persons
owning P5,000 worth of paid up shares, which is
made a condition precedent to eligibility to the board
of directors;
G. In that it has issued so-called special shares, in
violation both of the letter and spirit of the
Corporation Law;
H. In that it has maintained out of its profits an
unnecessarily large reserve fund, classified into
general reserve fund and special reserve fund,
instead of distributing its profits among its members;
I. In that it has made large loans to persons and
companies, such as a loan of P2,320,000 to the
Pacific Warehouse Company, which so depleted the
funds of the corporation that for sometime it was
unable to act on applications for small loans and for
the retirement of shares;
J. In that under articles 92 and 95 of the by-laws of
the corporation, upon the expiration of its period of
life or upon earlier liquidation of its business, the
accumulated reserves and other properties will be
distributed among and will benefit only its directors
and its founder, together with a few other persons;
K. In that its membership is in part composed of
corporations, companies, and associations, for
instance of sixteen corporations and fourteen
partnerships;
L. In that it has disposed of real estate purchased by
it in the collection of its loans on credit, thereafter
accepting mortgages on the property transferred, in
violation of the Corporation Law;

M. And, lastly, in the El Hogar Filipino has failed to

carry our and fulfill the main purpose for which it was
created, and in consideration of which it has been
granted special privileges and exemptions.

The foregoing are not trivial or isolated infractions of

the law to be brushed away with a wave of the hand.
They constitute grave abuses. They disclose El Hogar
Filipino as an octopus whose tentacles have reached
out to embrace and stifle vital public interests. The
court would be entirely justified in peremptorily
decreeing the dissolution of the corporation for
misuse of its powers.

Section 190-A of the Corporation Law, inserted by

section 3 of Act No. 2792, makes it the imperative
duty of the court to dissolve a corporation for any
violation which it has committed. It is believed,
however, that counsel for the defendant is entirely
correct in his argument to the effect that the
legislature is without power to diminish the
jurisdiction of the court, and to direct a particular
judgment in a particular case. Rather would we
prefer to follow the precedent in the case of the
Government of the Philippine Islands vs. Philippine
Sugar Estates Development Company ([1918], 38
Phil., 15),wherein in was ordered that the
corporation be dissolved and prohibited from
continuing to do business in the Philippine Islands
unless it complied with the conditions mentioned in
the decision.

In amplification of the above suggestion, it must be

said that El Hogar Filipino is the possessor of
important property rights which should not be
disastrously disturbed. It must also be said that a
mutual building and loan association properly
conducted is an institution which should be
encourage in the community. The result should,
therefore, be to 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.