BUS.ORG.
II
1) G.R. No. L-26649             July 13, 1927
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-
General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.
Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for defendant.
Wm. J. Rohde as amicus curiae.
STREET, J.:
This is a quo warranto proceeding instituted originally in this court by the Government of the
Philippine Islands on the relation of the Attorney-General against the building and loan
association known as El Hogar Filipino, for the purpose of depriving it of its corporate
franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution
of said corporation. The complaint enumerates seventeen distinct causes of action, to all of
which the defendant has answered upon the merits, first admitting the averments of the first
paragraph in the statement of the first cause of action, wherein it is alleged that the defendant
was organized in the year 1911 as a building and loan association under the laws of the
Philippine Islands, and that, since its organization, the corporation has been doing business in
the Philippine Islands, with its principal office in the City of Manila. Other facts alleged in the
various causes of action in the complaint are either denied in the answer or controverted in
legal effect by other facts.
After issue had been thus joined upon the merits, the attorneys entered into an elaborate
agreement as to the fact, thereby removing from the field of dispute such matters of fact as are
necessary to the solution of the controversy. It follows that we are here confronted only with the
legal questions arising upon the agreed statement.
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.
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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.
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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
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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:
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* * * 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.
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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
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BUS.ORG. II
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.'
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BUS.ORG. II
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
8
BUS.ORG. II
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:
9
BUS.ORG. II

ART. 71. The directors shall elect from among the shareholders members to fill the Sixth cause of action. — Under the sixth cause of action it is alleged that the directors of El Hogar
vacancies that may occur in the board of directors until the election at the general Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, — as the
meeting. complaint supposes would be proper, — have been receiving large compensation, varying in
amount from time to time, out of the profits of the respondent. The facts relating to this cause of
The person thus chosen to fill vacancies in the directorate have, it is admitted, uniformly been action are in substance these:
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 Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the
income as they derive from their properties. Moreover, it appears that several of the individuals annual balance sheet is distributed to the directors in proportion to their attendance at meetings
constituting the original directorate and persons chosen to supply vacancies therein belong to of the board. The compensation paid to the directors from time to time since the organization
prominent Filipino families, and that they are more or less related to each other by blood or was organized in 1910 to the end of the year 1925, together with the number of meetings of the
marriage. In addition to this it appears that it has been the policy of the directorate to keep board held each year, is exhibited in the following table:
thereon some member or another of a single prominent American law firm in the city.
Compensation Number of Rate per
It is supposed in the statement of the fifth cause of action in the complaint that the failure of the
Year paid directors meetings meeting
corporation to hold annual meetings and the filling of vacancies in the directorate in the manner
as a whole held as a whole
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 1911 .................................. P 4,167.96 25 P 166.71
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 1912 .................................. 10,511.87 29 362.47
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 shareholders to attend the annual meetings; and 1913 .................................. 15,479.29 27 573.30
their non-attendance at such meetings is doubtless to be interpreted in part as expressing their
1914 .................................. 19,164.72 27 709.80
satisfaction of the way in which things have been conducted. Upon failure of a quorum at any
annual meeting the directorate naturally holds over and continues to function until another 1915 .................................. 24,032.85 25 961.31
directorate is chosen and qualified. Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of the term of office for which the 1916 .................................. 27,539.50 28 983.55
officer was elected, the general rule is to allow the officer to holdover until his successor is duly
qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing 1917 .................................. 31,327.00 26 1,204.88
officers nor dissolve the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550;
1918 .................................. 32,858.35 20 1,642.91
Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466;
Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. 1919 .................................. 36,318.78 21 1,729.46
Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R.,
486). The doctrine above stated finds expressions in article 66 of the by-laws of the respondent 1920 .................................. 63,517.01 28 2,268.46
which declares in so many words that directors shall hold office "for the term of one year on
until their successors shall have been elected and taken possession of their offices." 1921 .................................. 36,815.33 25 1,472.61

1922 .................................. 43,133.73 25 1,725.34

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 personality of the individuals 1923 .................................. 39,773.61 27 1,473.09
chosen by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that
they have chosen competent businessmen of financial responsibility instead of electing poor 1924 .................................. 38,651.92 26 1,486.61
persons to so responsible a position. The possession of means does not disqualify a man for
1925 .................................. 35,719.27 26 1,373.81
filling positions of responsibility in corporate affairs.
10
BUS.ORG. II
It will be note that the compensation above indicated as accruing to the directorate as a whole
has been divided among the members actually present at the different meetings. As a result of
this practice, and the liberal measure of compensation adopted, we find that the attendance of
the membership at the board meetings has been extraordinarily good. Thus, during the years
1920 to 1925, inclusive, when the board was composed of nine members, the attendance has
regularly been eight meeting with the exception of two years when the average attendance was
seven. It is insisted in the brief for the Attorney-General that the payment of the compensation
indicated is excessive and prejudicial to he interests of the shareholders at large. For the
respondent, attention is directed to the fact that the liberal policy adopted by the association
with respect to the compensation of the directors has had highly beneficial results, not only in
securing a constant attendance on the part of the membership, but in obtaining their intelligent
attention to the affairs of the association. Certainly, in this connection, the following words from
the report of the government examiners for 1918 to the Insular Treasurer contain matter worthy
of consideration:
The management of the association is entrusted to men of recognized ability in financial affairs
and it is believed that they have long foreseen all possible future contingencies and that under
such men the interests of the stockholders are duly protected. The steps taken by the directorate
to curtail the influx of unnecessary capital into the association's coffers, as mentioned above,
reveals how the men at grasp the situation and to apply the necessary remedy as the
circumstances were found in the same excellent condition as in the previous examination.
In so far as this court is concerned the question here before us is not one concerning the
propriety and wisdom of the measure of compensation adopted by the respondent but rather
the question of the validity of the measure. Upon this point there can, it seems to us, be no
difference of intelligent opinion. The Corporation Law does not undertake to prescribe the rate
of compensation for the directors of corporations. The power to fixed the compensation they
shall receive, if any, is left to the corporation, to be determined in its by-laws(Act No. 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 stated. The justice and property of this provision
was a proper matter for the shareholders when the by-laws were framed; and the circumstance
that, with the growth of the corporation, the amount paid as compensation to the directors has
increased beyond what would probably be necessary to secure adequate service from them is
matter that cannot be corrected in this action; nor can it properly be made a basis for depriving
the respondent of its franchise, or even for enjoining it from compliance with the provisions of
its own by-laws. If a mistake has been made, or the rule adopted in the by-laws meeting to
change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than
in a court proceeding. The sixth cause of action is in our opinion without merit.
Seventh cause of action. — It appears that the promoter and organizer of El Hogar Filipino was
Mr. Antonio Melian, and in the early stages of the organization of the association the board of
directors authorized the association to make a contract with him with regard to the services him
therefor. Pursuant to this authority the president of the corporation, on January 11, 1911,
entered into a written agreement with Mr. Melian, which is reproduced in the agreed statement
of facts and of which the important clauses are these:
1. The corporation "El Hogar Filipino Sociedad Mutua de Construccion y Prestamos,"
and on its behalf its president, Don Antonio R. Roxas, hereby confers on Don Antonio
Melian the office of manager of said association for the period of one year from the date
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.
11
BUS.ORG. II
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
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associations; and in particular, it is alleged that they are, in the main, held by well-to-wage- Ordinary shares .................................. 103,363
earners for accumulating their modest savings for the building of homes.

In the articles of incorporation we find the special shares described as follows: 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
"Special" shares shall be issued upon the payment of 80 per cent of their par value in
the issuance of such shares constituted a departure on the part of the association from the
cash, or in monthly dues of P10. The 20 per cent remaining of the par value of such
principle of mutuality; and it was claimed by the Collector of Internal Revenue that this
shares shall be completed by the accumulation thereto of their proportionate part of the
rendered the association liable for the income tax to which other corporate entities are subject. It
profits of the corporation. At the end of each quarter the holders of special shares shall
was held that this contention was untenable and that El Hogar Filipino was a legitimate
be entitled to receive in cash such part of the net profits of the corporation
building and loan association notwithstanding the issuance of said shares. In Sevireno vs. El
corresponding to the amount on such date paid in by the holders of special shares, on
Hogar Filipino (G. R. No. 24926),2 and the related cases of Gervasio Miraflores and Gil Lopes
account thereof, as shall be determined by the directors, and at the end of each year the
against the same entity, it was asserted by the plaintiffs that the emission of special shares
full amount of the net profits available for distribution corresponding to the special
deprived the herein responded of the privileges and immunities of a building and loan
shares. The directors shall apply such part as they deem advisable to the amortization
association and that as a consequence the loans that had been made to the plaintiffs in those
of the subscription to capital with respect to shares not fully paid up, and the remainder
cases were usurious. Upon an elaborate review of the authorities, the court, though divided,
of the profits, if any, corresponding to such shares, shall be delivered to the holders
adhered to the principle announced in the earlier case and held that the issuance of the special
thereof in accordance with the provision of the by-laws.
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
The ground for supposing the issuance of the "special" shares to be unlawful is that special would appear to be an act of supererogation on our part to go over the same ground again. The
shares are not mentioned in the Corporation Law as one of the forms of security which may be discussion will therefore not be repeated, and what is now to be said should be considered
issued by the association. In the agreed statement of facts it is said that special shares are issued supplemental thereto.
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
Upon examination of the nature of the special shares in the light of American usage, it will be
P160 per share. On December 31, 1925, there were outstanding 20,844 special shares of a total
found that said shares are precisely the same kind of shares that, in some American
paid value (including accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since
jurisdictions, are generally known as advance payment shares; in if close attention be paid to
1915, has been to accumulate to each special share, at the end of the year, one-tenth of the
the language used in the last sentence of section 178 of the Corporation Law, it will be found
divident declared and to pay the remainder of the divident in cash to the holders of shares.
that special shares where evidently created for the purpose of meeting the condition cause by
Since the same year dividend have been declared on the special and common shares at the rate
the prepayment of dues that is there permitted. The language of this provision is as follow
of 10 per centum per annum. When the amount paid in upon any special share plus the
"payment of dues or interest may be made in advance, but the corporation shall not allow
accumulated dividends accruing to it, amounts to the par value of the share (P200), such share
interest on such advance payment at a greater rate than six per centum per annum nor for a
matures and ceases to participate further in the earning. The amount of the par value of the
longer period than one year." In one sort of special shares the dues are prepaid to the extent of
share (P200) is then returned to the shareholder and the share cancelled. Holders of special and
P160 per share; in the other sort prepayment is made in the amount of P10 per share, and the
ordinary shares participate ratably in the dividends declared and distributed, the part
subscribers assume the obligation to pay P10 monthly until P160 shall have been paid.
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 It will escape notice that the provision quoted say that interest shall not be allowed on the
shareholders, and dividend into classes as follows: 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
Preferred shares .................................. 1,503 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
Special shares ..................................... 20,884
made on these shares; and the reason is to be found in the fact that the participation of the

13
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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
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BUS.ORG. II
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.)
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BUS.ORG. II
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
16
BUS.ORG. II
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
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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.
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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
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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.
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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
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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.
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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
23
BUS.ORG. II

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.

ROMUALDEZ, J., dissenting:

I believe that the defendant corporation should be compelled to observe the law and to confine
itself to its object and purposes as a building and loan association existing under Act. No. 1459,
and that it should be given a reasonable period within which to do so.

I am of this opinion on the ground that, to my mind, said corporation has deviated from the law
and its own object and purposes by adopting articles 10, 70, and 76 of its by-laws in permitting
the perpetuation of the same directors, and in making loans to persons who are not
stockholders and to wealthy persons or companies in extremely large amounts.

2) G.R. No. L-37331 March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that
all other stockholders of the Balatoc Mining Company, etc., plaintiffs-appellants,

vs.

BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E.

RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.

STREET, J.:

This action was originally instituted in the Court of First Instance of the City of Manila by F. M.
Harden, acting in his own behalf and that of all other stockholders of the Balatoc Mining Co.
who might join in the action and contribute to the expense of the suit. With the plaintiff Harden
two others, J. D. Highsmith and John C. Hart, subsequently associated themselves. The
defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E. Renz, John
W. Haussermann, and A. W. Beam. The principal purpose of the original action was to annul a
certificate covering 600,000 shares of the stock of the Balatoc Mining Co., which have been
issued to the Benguet Consolidated Mining Co., and to secure to the Balatoc Mining Co., the
restoration of a large sum of money alleged to have been unlawfully collected by the Benguet
Consolidated Mining Co., with legal interest, after deduction therefrom of the amount
24
BUS.ORG. II

expended by the latter company under a contract between the two companies, bearing date of Company shares of a par value of P600,000, in payment for the first P600,000 be thus advanced
March 9, 1927. The complaint was afterwards amended so as to include a prayer for the to it by the Benguet Company.
annulment of this contract. Shortly prior to the institution of this lawsuit, the Benguet
The performance of this contract was speedily begun, and by May 31, 1929, the Benguet
Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate for 600,000 shares
Company had spent upon the development the sum of P1,417,952.15. In compensation for this
of the Balatoc Mining Co. which constitute the principal subject matter of the action. This was
work a certificate for six hundred thousand shares of the stock of the Balatoc Company has been
done apparently to facilitate the splitting up to the shares in the course of the sale or
delivered to the Benguet Company, and the excess value of the work in the amount of
distribution. To prevent this the plaintiffs, upon filing their original complaint, procured a
P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends of the
preliminary injunction restraining the defendants, their agents and servants, from selling,
Balatoc Company have been enriching its stockholders, and at the time of the filing of the
assigning or transferring the 600,000 shares of the Balatoc Mining Co., or any part thereof, and
complaint the value of its shares had increased in the market from a nominal valuation to more
from removing said shares from the Philippine Islands. This explains the connection of Renz
than eleven pesos per share. While the Benguet Company was pouring its million and a half
with the case. The other individual defendants are made merely as officials of the Benguet
into the Balatoc property, the arrangements made between the two companies appear to have
Consolidated Mining Co. Upon hearing the cause the trial court dismissed the complaint and
been viewed by the plaintiff Harden with complacency, he being the owner of many thousands
dissolved the preliminary injunction, with costs against the plaintiffs. From this judgment the
of the shares of the Balatoc Company. But as soon as the success of the development had
plaintiffs appealed
become apparent, he began this litigation in which he has been joined by two others of the
The facts which have given rise this lawsuit are simple, as the financial interests involve are eighty shareholders of the Balatoc Company.
immense. Briefly told these facts are as follows: The Benguet Consolidated Mining Co. was
Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet
organized in June, 1903, as a sociedad anonima in conformity with the provisions of Spanish
Company to hold any interest in a mining corporation and that the contract by which the
law; while the Balatoc Mining Co. was organized in December 1925, as a corporation, in
interest here in question was acquired must be annulled, with the consequent obliteration of the
conformity with the provisions of the Corporation Law (Act No. 1459). Both entities were
certificate issued to the Benguet Company and the corresponding enrichment of the
organized for the purpose of engaging in the mining of gold in the Philippine Islands, and their
shareholders of the Balatoc Company
respective properties are located only a few miles apart in the subprovince of Benguet. The
capital stock of the Balatoc Mining Co. consists of one million shares of the par value of one When the Philippine Islands passed to the sovereignty of the United States, in the attention of
peso (P1) each. the Philippine Commission was early drawn to the fact that there is no entity in Spanish law
exactly corresponding to the notion of the corporation in English and American law; and in the
When the Balatoc Mining Co. was first organized the properties acquired by it were largely
Philippine Bill, approved July 1, 1902, the Congress of the United States inserted certain
undeveloped; and the original stockholders were unable to supply the means needed for
provisions, under the head of Franchises, which were intended to control the lawmaking power
profitable operation. For this reason, the board of directors of the corporation ordered a
in the Philippine Islands in the matter of granting of franchises, privileges and concessions.
suspension of all work, effective July 31, 1926. In November of the same year a general meeting
These provisions are found in section 74 and 75 of the Act. The provisions of section 74 have
of the company's stockholders appointed a committee for the purpose of interesting outside
been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there
capital in the mine. Under the authority of this resolution the committee approached A. W.
is a provision referring to mining corporations, which still remains the law, as amended. This
Beam, then president and general manager of the Benguet Company, to secure the capital
provisions, in its original form, reads as follows: "... it shall be unlawful for any member of a
necessary to the development of the Balatoc property. As a result of the negotiations thus
corporation engaged in agriculture or mining and for any corporation organized for any
begun, a contract, formally authorized by the management of both companies, was executed on
purpose except irrigation to be in any wise interested in any other corporation engaged in
March 9, 1927, the principal features of which were that the Benguet Company was to proceed
agriculture or in mining."
with the development and construct a milling plant for the Balatoc mine, of a capacity of 100
tons of ore per day, and with an extraction of at least 85 per cent of the gold content. The Under the guidance of this and certain other provisions thus enacted by Congress, the
Benguet Company also agreed to erect an appropriate power plant, with the aerial tramlines Philippine Commission entered upon the enactment of a general law authorizing the creation of
and such other surface buildings as might be needed to operate the mine. In return for this it corporations in the Philippine Islands. This rather elaborate piece of legislation is embodied in
was agreed that the Benguet Company should receive from the treasurer of the Balatoc what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident
25
BUS.ORG. II
purpose of the commission was to introduce the American corporation into the Philippine
Islands as the standard commercial entity and to hasten the day when the sociedad anonima of
the Spanish law would be obsolete. That statute is a sort of codification of American corporate
law.
For the purposes general description only, it may be stated that the sociedad anonima is
something very much like the English joint stock company, with features resembling those of
both the partnership is shown in the fact that sociedad, the generic component of its name in
Spanish, is the same word that is used in that language to designate other forms of partnership,
and in its organization it is constructed along the same general lines as the ordinary
partnership. It is therefore not surprising that for purposes of loose translation the expression
sociedad anonima has not infrequently the other hand, the affinity of this entity to the American
corporation has not escaped notice, and the expression sociedad anonima is now generally
translated by the word corporation. But when the word corporation is used in the sense of
sociedad anonima and close discrimination is necessary, it should be associated with the
Spanish expression sociedad anonima either in a parenthesis or connected by the word "or".
This latter device was adopted in sections 75 and 191 of the Corporation Law
In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of
section 13 of that Act (No. 1459) the words which we have already quoted from section 75 of the
Act of Congress of July 1, 1902 (Philippine Bill); and it is of course obvious that whatever
meaning originally attached to this provision in the Act of Congress, the same significance
should be attached to it in section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the American
Corporation into Philippine law in the place of the sociedad anonima, it was necessary to make
certain adjustments resulting from the continued co-existence, for a time, of the two forms of
commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found
making the sociedad anonima subject to the provisions of the Corporation Law "so far as such
provisions may be applicable", and giving to the sociedades anonimas previously created in the
Islands the option to continue business as such or to reform and organize under the provisions
of the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is
repealed in so far as it relates to sociedades anonimas. The purpose of the commission in
repealing this part of the Code of Commerce was to compel commercial entities thereafter
organized to incorporate under the Corporation Law, unless they should prefer to adopt some
form or other of the partnership. To this provision was added another to the effect that existing
sociedades anonimas, which elected to continue their business as such, instead of reforming and
reorganizing under the Corporation Law, should continue to be governed by the laws that were
in force prior to the passage of this Act "in relation to their organization and method of
transacting business and to the rights of members thereof as between themselves, but their
relations to the public and public officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress of July 1,
1902 (Philippine Bill), generally prohibiting corporations engaged in mining and members of
such from being interested in any other corporation engaged in mining, was amended by
section 7 of Act No. 3518 of the Philippine Legislature, approved by Congress March 1, 1929.
The change in the law effected by this amendment was in the direction of liberalization. Thus,
the inhibition contained in the original provision against members of a corporation engaged in
agriculture or mining from being interested in other corporations engaged in agriculture or in
mining was so modified as merely to prohibit any such member from holding more than fifteen
per centum of the outstanding capital stock of another such corporation. Moreover, the explicit
prohibition against the holding by any corporation (except for irrigation) of an interest in any
other corporation engaged in agriculture or in mining was so modified as to limit the restriction
to corporations organized for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate
clause directly penalizing the act of a corporation, a member of a corporation , in acquiring an
interest contrary to paragraph (5) of section 13 of the Act. The Philippine Legislature undertook
to remedy this situation in section 3 of Act No. 2792 of the Philippine Legislature, approved on
February 18, 1919, but this provision was declared invalid by this court in Government of the
Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act.
Subsequently the Legislature reenacted substantially the same penal provision in section 21 of
Act No. 3518, under a title sufficiently broad to comprehend the subject matter. This part of Act
No. 3518 became effective upon approval by the Governor-General, on December 3, 1928, and it
was therefore in full force when the contract now in question was made.
This provision was inserted as a new section in the Corporation Law, forming section 1990 (A)
of said Act as it now stands. Omitting the proviso, which seems not to be pertinent to the
present controversy, said provision 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 five thousand
pesos and by imprisonment for not more than five years, in the discretion of the court. If the
violation is committed by a corporation, the same shall, upon such 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: . . . .
Upon a survey of the facts sketched above it is obvious that there are two fundamental
questions involved in this controversy. The first is whether the plaintiffs can maintain an action
based upon the violation of law supposedly committed by the Benguet Company in this case.
The second is whether, assuming the first question to be answered in the affirmative, the
Benguet Company, which was organized as a sociedad anonima, is a corporation within the
meaning of the language used by the Congress of the United States, and later by the Philippine
26
BUS.ORG. II
Legislature, prohibiting a mining corporation from becoming interested in another mining
corporation. It is obvious that, if the first question be answered in the negative, it will be
unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted by the
lawmakers with a sole view to the public policy that should control in the granting of mining
rights. Furthermore, the penalties imposed in what is now section 190 (A) of the Corporation
Law for the violation of the prohibition in question are of such nature that they can be enforced
only by a criminal prosecution or by an action of quo warranto. But these proceedings can be
maintained only by the Attorney-General in representation of the Government.
What room then is left for the private action which the plaintiffs seek to assert in this case? The
defendant Benguet Company has committed no civil wrong against the plaintiffs, and if a
public wrong has been committed, the directors of the Balatoc Company, and the plaintiff
Harden himself, were the active inducers of the commission of that wrong. The contract,
supposing it to have been unlawful in fact, has been performed on both sides, by the building of
the Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of
600,000 shares of the Balatoc Company. There is no possibility of really undoing what has been
done. Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the
possession of that improvement, and talk about putting the parties in status quo ante by
restoring the consideration with interest, while the Balatoc Company remains in possession of
what it obtained by the use of that money, does not quite meet the case. Also, to mulct the
Benguet Company in many millions of dollars in favor of individuals who have not the slightest
equitable right to that money in a proposition to which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the assumption that
only one of the contracting parties has been guilty of a misdemeanor, namely, the Benguet
Company, and that the other party, the Balatoc Company, is wholly innocent to participation in
that wrong. The plaintiffs would then have us apply the second paragraph of article 1305 of the
Civil Code which declares that an innocent party to an illegal contract may recover anything he
may have given, while he is not bound to fulfill any promise he may have made. But, supposing
that the first hurdle can be safely vaulted, the general remedy supplied in article 1305 of the
Civil Code cannot be invoked where an adequate special remedy is supplied in a special law. It
has been so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused
to apply that article to a case of nullity arising upon a usurious loan. The reason given for the
decision on this point was that the Usury Act, as amended, contains all the provisions necessary
for the effectuation of its purposes, with the result that the remedy given in article 1305 of the
Civil Code is unnecessary. Much more is that idea applicable to the situation now before us,
where the special provisions give ample remedies for the enforcement of the law by action in
the name of the Government, and where no civil wrong has been done to the party here seeking
redress.
The view of the case presented above rest upon considerations arising upon our own statutes;
and it would seem to be unnecessary to ransack the American decisions for analogies pertinent
to the case. We may observe, however, that the situation involved is not unlike that which has
frequently arisen in the United States under provisions of the National Bank Act prohibiting
banks organized under that law from holding real property. It has been uniformly held that a
trust deed or mortgaged conveying property of this kind to a bank, by way of security, is valid
until the transaction is assailed in a direct proceeding instituted by the Government against the
bank, and the illegality of such tenure supplies no basis for an action by the former private
owner, or his creditor, to annul the conveyance. (National Bank vs. Matthews, 98 U. S., 621;
Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction.
(South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs
Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77
Hun., 332.)
Most suggestive perhaps of all the cases in Compañia Azucarera de Carolina vs. Registrar (19
Porto Rico, 143), for the reason that this case arose under a provision of the Foraker Act, a law
analogous to our Philippine Bill. It appears that the registrar had refused to register two deeds
in favor of the Compañia Azucarera on the ground that the land thereby conveyed was in
excess of the area permitted by law to the company. The Porto Rican court reversed the ruling
of the registrar and ordered the registration of the deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter has until the State
acts every power and capacity that any other individual capable of acquiring lands, possesses.
The corporation may exercise every act of ownership over such lands; it may sue in ejectment or
unlawful detainer and it may demand specific performance. It has an absolute title against all
the world except the State after a proper proceeding is begun in a court of law. ... The Attorney
General is the exclusive officer in whom is confided the right to initiate proceedings for escheat
or attack the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the Benguet
Company for the infraction of law supposed to have been committed, we forego cny discussion
of the further question whether a sociedad anonima created under Spanish law, such as the
Benguet Company, is a corporation within the meaning of the prohibitory provision already so
many times mentioned. That important question should, in our opinion, be left until it is raised
in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered,
with costs against the appellants.
27
BUS.ORG. II

3) G.R. No. L-17160 November 29, 1965

PHILIPPINE PRODUCTS COMPANY, plaintiff-appellant,

vs.
PRIMATERIA SOCIETE ANONYME POUR LE COMMERCE EXTERIEUR: PRIMATERIA
(PHILIPPINES) INC., ALEXANDER G. BAYLIN and JOSE M. CRAME, defendants-
appellees.
BENGZON, C.J.:

This is an action to recover from defendants, the sum of P33,009.71 with interest and attorney's
fees of P8,000.00.

Defendant Primateria Societe Anonyme Pour Le Commerce Exterieur (hereinafter referred to as

Primateria Zurich) is a foreign juridical entity and, at the time of the transactions involved
herein, had its main office at Zurich, Switzerland. It was then engaged in "Transactions in
international trade with agricultural products, particularly in oils, fats and oil-seeds and related
products."

The record shows that:

On October 24, 1951, Primateria Zurich, through defendant Alexander B. Baylin, entered into an
agreement with plaintiff Philippine Products Company, whereby the latter undertook to buy
copra in the Philippines for the account of Primateria Zurich, during "a tentative experimental
period of one month from date." The contract was renewed by mutual agreement of the parties
to cover an extended period up to February 24, 1952, later extended to 1953. During such
period, plaintiff caused the shipment of copra to foreign countries, pursuant to instructions
from defendant Primateria Zurich, thru Primateria (Phil.) Inc. — referred to hereafter as
Primateria Philippines — acting by defendant Alexander G. Baylin and Jose M. Crame, officers
of said corporation. As a result, the total amount due to the plaintiff as of May 30, 1955, was
P33,009.71
28
BUS.ORG. II
At the trial, before the Manila court of first instance, it was proven that the amount due from
defendant Primateria Zurich, on account of the various shipments of copra, was P31,009.71,
because it had paid P2,000.00 of the original claim of plaintiff. There is no dispute about
accounting.
And there is no question that Alexander G. Baylin and Primateria Philippines acted as the duly
authorized agents of Primateria Zurich in the Philippines. As far as the record discloses, Baylin
acted indiscriminately in these transactions in the dual capacities of agent of the Zurich firm
and executive vice-president of Primateria Philippines, which also acted as agent of Primateria
Zurich. It is likewise undisputed that Primateria Zurich had no license to transact business in
the Philippines.
For failure to file an answer within the reglementary period, defendant Primateria Zurich was
declared in default.
After trial, judgment was rendered by the lower court holding defendant Primateria Zurich
liable to the plaintiff for the sums of P31,009.71, with legal interest from the date of the filing of
the complaint, and P2,000.00 as and for attorney's fees; and absolving defendants Primateria
(Phil.), Inc., Alexander G. Baylin, and Jose M. Crame from any and all liability.
Plaintiff appealed from that portion of the judgment dismissing its complaint as regards the
three defendants.
It is plaintiff's theory that Primateria Zurich is a foreign corporation within the meaning of
Sections 68 and 69 of the Corporation Law, and since it has transacted business in the
Philippines without the necessary license, as required by said provisions, its agents here are
personally liable for contracts made in its behalf.
Section 68 of the Corporation Law states: "No foreign corporation or corporation formed,
organized, or existing under any laws other than those of the Philippines shall be permitted to
transact business in the Philippines, until after it shall have obtained a license for that purpose
from the Securities and Exchange Commission .. ." And under Section 69, "any officer or agent
of the corporation or any person transacting business for any foreign corporation not having the
license prescribed shall be punished by imprisonment for etc. ... ."
The issues which have to be determined, therefore, are the following:
1. Whether defendant Primateria Zurich may be considered a foreign corporation within the
meaning of Sections 68 and 69 of the Corporation Law;
2. Assuming said entity to be a foreign corporation, whether it may be considered as having
transacted business in the Philippines within the meaning of said sections; and
3. If so, whether its agents may be held personally liable on contracts made in the name of the
entity with third persons in the Philippines.
The lower court ruled that the Primateria Zurich was not duly proven to be a foreign
corporation; nor that a societe anonyme ("sociedad anomima") is a corporation; and that failing
such proof, the societe cannot be deemed to fall within the prescription of Section 68 of the
Corporation Law. We agree with the said court's conclusion. In fact, our corporation law
recognized the difference between sociedades anonimas and corporations.
At any rate, we do not see how the plaintiff could recover from both the principal (Primateria
Zurich) and its agents. It has been given judgment against the principal for the whole amount. It
asked for such judgment, and did not appeal from it. It clearly stated that its appeal concerned
the other three defendants.
But plaintiff alleges that the appellees as agents of Primateria Zurich are liable to it under Art.
1897 of the New Civil Code which reads as follows:
Art. 1897. The agent who acts as such is not personally liable to the party with whom he
contracts, unless he expressly binds himself or exceeds the limits of his authority without giving
such party sufficient notice of his powers.
But there is no proof that, as agents, they exceeded the limits of their authority. In fact, the
principal — Primateria Zurich — who should be the one to raise the point, never raised it,
denied its liability on the ground of excess of authority. At any rate, the article does not hold
that in cases of excess of authority, both the agent and the principal are liable to the other
contracting party.
This view of the cause dispenses with the necessity of deciding the other two issues, namely:
whether the agent of a foreign corporation doing business, but not licensed here is personally
liable for contracts made by him in the name of such corporation.1 Although, the solution
should not be difficult, since we already held that such foreign corporation may be sued here
(General Corporation vs. Union Ins., 87 Phil. 509). And obviously, liability of the agent is
necessarily premised on the inability to sue the principal or non-liability of such principal. In
the absence of express legislation, of course.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the appealed judgment is affirmed, with
costs against appellant.
29
BUS.ORG. II

4) G.R. No. 142936            April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT

CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct and separate from the persons
and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate
injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been
foreclosed and purchased at the resulting public auction by the Development Bank of the
Philippines (DBP), will not make PNB liable for the PASUMIL’s contractual debts to
respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of Appeals
(CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as follows:

"WHEREFORE, the judgment appealed from is hereby AFFIRMED."2

The Facts

The factual antecedents of the case are summarized by the Court of Appeals as follows:

30
BUS.ORG. II
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly
organized, existing, and operating under the laws of the Philippines, with office and
principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the
defendant [herein petitioner] Philippine National Bank (herein referred to as PNB), is a
semi-government corporation duly organized, existing and operating under the laws of
the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz,
Manila; whereas, the other defendant, the National Sugar Development Corporation
(NASUDECO in brief), is also a semi-government corporation and the sugar arm of the
PNB, with office and principal place of business at the 2nd Floor, Sampaguita Building,
Cubao, Quezon City; and the defendant Pampanga Sugar Mills (PASUMIL in short), is
a corporation organized, existing and operating under the 1975 laws of the Philippines,
and had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that
the plaintiff is engaged in the business of general construction for the repairs and/or
construction of different kinds of machineries and buildings; that on August 26, 1975,
the defendant PNB acquired the assets of the defendant PASUMIL that were earlier
foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that
the defendant PNB organized the defendant NASUDECO in September, 1975, to take
ownership and possession of the assets and ultimately to nationalize and consolidate its
interest in other PNB controlled sugar mills; that prior to October 29, 1971, the
defendant PASUMIL engaged the services of plaintiff for electrical rewinding and
repair, most of which were partially paid by the defendant PASUMIL, leaving several
unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the
defendant PASUMIL entered into a contract for the plaintiff to perform the following,
to wit –
‘(a) Construction of one (1) power house building;
‘(b) Construction of three (3) reinforced concrete foundation for three (3) units
350 KW diesel engine generating set[s];
‘(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW
and 1,250 KW turbo generator sets;
‘(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW
diesel engine generating set[s];
‘(e) Installation of turbine and diesel generating sets including transformer,
switchboard, electrical wirings and pipe provided those stated units are
completely supplied with their accessories;
‘(f) Relocating of 2,400 V transmission line, demolition of all existing concrete
foundation and drainage canals, excavation, and earth fillings – all for the total
amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is
hereto attached as Annex ‘A’ and made an integral part of this complaint;’
that aside from the work contract mentioned-above, the defendant PASUMIL required
the plaintiff to perform extra work, and provide electrical equipment and spare parts,
such as:
‘(a) Supply of electrical devices;
‘(b) Extra mechanical works;
‘(c) Extra fabrication works;
‘(d) Supply of materials and consumable items;
‘(e) Electrical shop repair;
‘(f) Supply of parts and related works for turbine generator;
‘(g) Supply of electrical equipment for machinery;
‘(h) Supply of diesel engine parts and other related works including fabrication
of parts.’
that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80,
as shown in the Certification of the chief accountant of the PNB, a machine copy of
which is appended as Annex ‘C’ of the complaint; that out of said unpaid balance of
P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff of
P14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23,
1974, leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and the
defendant PNB, and now the defendant NASUDECO, failed and refused to pay the
plaintiff their just, valid and demandable obligation; that the President of the
NASUDECO is also the Vice-President of the PNB, and this official holds office at the
10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the
outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB
and NASUDECO now owned and possessed the assets of the defendant PASUMIL, and
these defendants all benefited from the works, and the electrical, as well as the
engineering and repairs, performed by the plaintiff; that because of the failure and
refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff
suffered actual damages in the total amount of P513,263.80; and that in order to recover
31
BUS.ORG. II
these sums, the plaintiff was compelled to engage the professional services of counsel,
to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the
obligation due by way of attorney’s fees. Accordingly, the plaintiff prayed that
judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL,
jointly and severally to wit:
‘(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with
annual interest of 14% from the time the obligation falls due and demandable;
‘(2) Condemning the defendants to pay attorney’s fees amounting to 25% of the
amount claim;
‘(3) Ordering the defendants to pay the costs of the suit.’
"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint
chiefly on the ground that the complaint failed to state sufficient allegations to establish
a cause of action against both defendants, inasmuch as there is lack or want of privity of
contract between the plaintiff and the two defendants, the PNB and NASUDECO, said
defendants citing Article 1311 of the New Civil Code, and the case law ruling in
Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of
Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order of November 27,
1980; in the same order, that court directed the defendants to file their answer to the
complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated the grounds of its motion to
dismiss, to wit:
‘That the complaint does not state a sufficient cause of action against the
defendant NASUDECO because: (a) NASUDECO is not x x x privy to the
various electrical construction jobs being sued upon by the plaintiff under the
present complaint; (b) the taking over by NASUDECO of the assets of
defendant PASUMIL was solely for the purpose of reconditioning the sugar
central of defendant PASUMIL pursuant to martial law powers of the President
under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No.
311) authorized or commanded the PNB or its subsidiary corporation, the
NASUDECO, to assume the corporate obligations of PASUMIL as that being
involved in the present case; and, (d) all that was mentioned by the said letter
of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the
PNB, or its subsidiary corporation the NASUDECO, to make a study of, and
submit [a] recommendation on the problems concerning the same.’
"By way of counterclaim, the NASUDECO averred that by reason of the filing by the
plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant
NASUDECO was constrained to litigate and incur litigation expenses in the amount of
P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO
prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be
condemned to pay P50,000.00 in concept of attorney’s fees as well as exemplary
damages.
"In its answer, the defendant PNB likewise reiterated the grounds of its motion to
dismiss, namely: (1) the complaint states no cause of action against the defendant PNB;
(2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the
alleged services rendered by the plaintiff to the defendant PASUMIL upon which
plaintiff’s suit is erected, was rendered long before PNB took possession of the assets of
the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the assets
of the defendant PASUMIL under LOI 189-A was solely for the purpose of
reconditioning the sugar central so that PASUMIL may resume its operations in time
for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in
LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of
PASUMIL, let alone that for which the present action is brought; (4) that PNB’s
management and operation under LOI No. 311 did not refer to any asset of PASUMIL
which the PNB had to acquire and thereafter [manage], but only to those which were
foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank
of the Philippines (DBP) entered into a ‘Redemption Agreement’ whereby DBP sold,
transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP)
rights and interest in and over the foreclosed real and/or personal properties of
PASUMIL, as shown in Annex ‘C’ which is made an integral part of the answer; (6) that
again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated
October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in
favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and
interest in and under the above ‘Redemption Agreement.’ This is shown in Annex ‘D’
which is also made an integral part of the answer; [7] that as a consequence of the said
Deed of Assignment, PNB on October 21, 1975 ceased to managed and operate the
above-mentioned assets of PASUMIL, which function was now actually transferred to
NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become
moot and academic because of the execution of the said Deed of Assignment; [8] that
moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate
obligations of PASUMIL, including the alleged obligation upon which this present suit
was brought; and [9] that, at most, what was granted to PNB in this respect was the
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BUS.ORG. II
authority to ‘make a study of and submit recommendation on the problems concerning
the claims of PASUMIL creditors,’ under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate
and to incur expenses in this case, hence it is entitled to claim attorney’s fees in the
amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant
PNB the sum of P50,000.00 as attorney’s fees, aside from exemplary damages in such
amount that the court may seem just and equitable in the premises.
"Summons by publication was made via the Philippines Daily Express, a newspaper
with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant
PASUMIL, which was thereafter declared in default as shown in the August 7, 1981
Order issued by the Trial Court.
"After due proceedings, the Trial Court rendered judgment, the decretal portion of
which reads:
‘WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
the defendant Corporation, Philippine National Bank (PNB) NATIONAL
SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA
SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the
former the following:
‘1. The sum of P513,623.80 plus interest thereon at the rate of 14% per
annum as claimed from September 25, 1980 until fully paid;
‘2. The sum of P102,724.76 as attorney’s fees; and,
‘3. Costs.
‘SO ORDERED.
‘Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
‘Judge’"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and
equity for a corporation to take over and operate the business of another corporation, while
disavowing or repudiating any responsibility, obligation or liability arising therefrom.4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following errors for the Court’s consideration:
"I
The Court of Appeals gravely erred in law in holding the herein petitioners liable for
the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has
not been legally extinguished or terminated, simply because of petitioners[’] take-over
of the management and operation of PASUMIL pursuant to the mandates of LOI No.
189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the case at bench the
ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for
the unpaid debts of PASUMIL to respondent.
This Court’s Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of
the Rules of Court.7 To this rule, however, there are some exceptions enumerated in Fuentes v.
Court of Appeals.8 After a careful scrutiny of the records and the pleadings submitted by the
parties, we find that the lower courts misappreciated the evidence presented. 9 Overlooked by
the CA were certain relevant facts that would justify a conclusion different from that reached in
the assailed Decision.10
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BUS.ORG. II
Petitioners posit that they should not be held liable for the corporate debts of PASUMIL,
because their takeover of the latter’s foreclosed assets did not make them assignees. On the
other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity
and, as such, jointly and severally held liable for PASUMIL’s unpaid obligation.1âwphi1.nêt
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration
for such assets, except when any of the following circumstances is present: (1) where the
purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts
to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely
a continuation of the selling corporation, and (4) where the transaction is fraudulently entered
into in order to escape liability for those debts.11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence.12 It has a personality separate and distinct from the persons composing it, as
well as from any other legal entity to which it may be related.13 This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. 14 For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled15 only when it becomes a shield for fraud, illegality or inequity committed against third
persons.16
Hence, any application of the doctrine of piercing the corporate veil should be done with
caution.17 A court should be mindful of the milieu where it is to be applied. 18 It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. 19 The wrongdoing must be clearly and
convincingly established; it cannot be presumed.20 Otherwise, an injustice that was never
unintended may result from an erroneous application.21
This Court has pierced the corporate veil to ward off a judgment credit, 22 to avoid inclusion of
corporate assets as part of the estate of the decedent, 23 to escape liability arising from a debt,24 or
to perpetuate fraud and/or confuse legitimate issues 25 either to promote or to shield unfair
objectives26 or to cover up an otherwise blatant violation of the prohibition against forum-
shopping.27 Only in these and similar instances may the veil be pierced and disregarded.28
The question of whether a corporation is a mere alter ego is one of fact. 29 Piercing the veil of
corporate fiction may be allowed only if the following elements concur: (1) control -- not mere
stock control, but complete domination -- not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been such that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own; (2) such control
must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation
of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of
plaintiff’s legal right; and (3) the said control and breach of duty must have proximately caused
the injury or unjust loss complained of.30
We believe that the absence of the foregoing elements in the present case precludes the piercing
of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL,
there is no showing that their control over it warrants the disregard of corporate
personalities.31 Second, there is no evidence that their juridical personality was used to commit a
fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter
ego, business conduit or instrumentality of another entity or person. 32 Third, respondent was not
defrauded or injured when petitioners acquired the assets of PASUMIL.33
Being the party that asked for the piercing of the corporate veil, respondent had the burden of
presenting clear and convincing evidence to justify the setting aside of the separate corporate
personality rule.34 However, it utterly failed to discharge this burden; 35 it failed to establish by
competent evidence that petitioner’s separate corporate veil had been used to conceal fraud,
illegality or inequity.36
While we agree with respondent’s claim that the assets of the National Sugar Development
Corporation (NASUDECO) can be easily traced to PASUMIL, 37 we are not convinced that the
transfer of the latter’s assets to petitioners was fraudulently entered into in order to escape
liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the mortgage executed by
PASUMIL and acquired the assets as the highest bidder at the public auction conducted. 39 The
bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred
arrearages of more than 20 percent of the total outstanding obligation. 40 Thus, DBP had not only
a right, but also a duty under the law to foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMIL’s assets that
DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to
manage temporarily the operation of such assets either by itself or through a subsidiary
corporation.44
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to
Section 6 of Act No. 3135.45 These assets were later conveyed to PNB for a consideration, the
34
BUS.ORG. II

terms of which were embodied in the Redemption Agreement. 46 PNB, as successor-in-interest,
stepped into the shoes of DBP as PASUMIL’s creditor. 47 By way of a Deed of Assignment,48 PNB
then transferred to NASUDECO all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we had the occasion to resolve a
similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque
Mining’s unpaid obligations to Remington Industrial Sales Corporation (Remington) after the
two banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington
failed to discharge its burden of proving bad faith on the part of Marinduque Mining to justify
the piercing of the corporate veil.
In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been legally
extinguished or terminated.60 Further, prior to PNB’s acquisition of the foreclosed assets,
PASUMIL had previously made partial payments to respondent for the former’s obligation in
the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and,
from January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to
respondent.61 LOI No. 11 explicitly provides that PNB shall study and submit recommendations
on the claims of PASUMIL’s creditors. 62 Clearly, the corporate separateness between PASUMIL
and PNB remains, despite respondent’s insistence to the contrary.63

In the instant case, the CA erred in affirming the trial court’s lifting of the corporate mask. 50 The WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No
CA did not point to any fact evidencing bad faith on the part of PNB and its transferee. 51 The pronouncement as to costs.
corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or
defend crime.52 None of the foregoing exceptions was shown to exist in the present case. 53 On the SO ORDERED.
contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot
allow.

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for the unpaid obligations of
PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and
PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the
operations of PASUMIL did not involve any corporate merger or consolidation, because the
latter had never lost its separate identity as a corporation.

A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined
business.54

The merger, however, does not become effective upon the mere agreement of the constituent
corporations.55 Since a merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and creditors, there must be an express
provision of law authorizing them. 56 For a valid merger or consolidation, the approval by the
Securities and Exchange Commission (SEC) of the articles of merger or consolidation is
required.57 These articles must likewise be duly approved by a majority of the respective
stockholders of the constituent corporations.58

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL
and PNB. The procedure prescribed under Title IX of the Corporation Code59 was not followed.

35
BUS.ORG. II

5) G.R. No. 144880             November 17, 2004

PASCUAL AND SANTOS, INC., petitioner,

vs.
THE MEMBERS OF THE TRAMO WAKAS NEIGHBORHOOD ASSOCIATION, INC.
represented by DOMINGA MAGNO, respondents.

DECISION
CARPIO MORALES, J.:

At bar is a petition for review on certiorari assailing the May 17, 2000 and August 8, 2000
Resolutions1 of the Court of Appeals (CA) in CA-G.R. No. 57274 which respectively, dismissed
the appeal instituted by petitioner Pascual and Santos, Inc. (petitioner) and denied its motion
for reconsideration.

The Members of Tramo Wakas Neighborhood Association, represented by Dominga Magno

(respondents), lodged before the Presidential Action Center a petition dated January 12, 1994
praying that ownership over three (3) parcels of land situated in Barangay San Dionisio,
Parañaque, Metro Manila, identified as Lot Nos. 4087, 4088 and 5003, Psu-118886, Cad. 229 with
an aggregate area of 35,195 square meters be awarded to them. In their petition, respondents
alleged that petitioner claims ownership of the subject lots which they have openly, peacefully
and continuously occupied since 1957.

The petition was referred to the Land Management Bureau (LMB) where it was docketed as
LMB Case No. 2-96, for investigation and hearing.

By Decision2 of February 21, 1996, Director Abelardo G. Palad, Jr. of the LMB found for
respondents. The dispositive portion of the decision reads, quoted verbatim:

WHEREFORE, it is ordered that the claim of Pascual and Santos, Inc., over Lot 4087, Lot
4088 and Lot 5003, situated at Brgy. San Dionisio, Parañaque, Metro Manila be, as
hereby it is, dismissed. The individual members of TRAMO WAKAS
NEIGHBORHOOD ASSOCIATION, now represented by Dominga Magno, if qualified
may file appropriate public land applications over the land they actually possessed and
36
BUS.ORG. II
occupied. An individual survey shall be conducted on the land at their own expense
and after approval of the said survey the same shall be given due course.
SO ORDERED.3
Its Motion for Reconsideration having been denied by Order of June 26, 1996, petitioner lodged
an appeal before the Office of the Department of Environment and Natural Resources (DENR)
Secretary, docketed as DENR Case No. 7816.
By Decision4 of November 25, 1997, then DENR Secretary Victor O. Ramos dismissed the appeal
for lack of merit and affirmed in toto the decision of the Director of the LMB. Petitioner's
Motion for Reconsideration of the decision having been denied by Order 5 of May 18, 1998, it
filed an appeal before the Office of the President (OP), docketed as O.P. Case No. 98-F-8459,
which was likewise dismissed for lack of merit by Decision 6 of January 20, 2000. The November
25, 1997 DENR decision was affirmed in toto.
Petitioner received a copy of the OP's dismissal of its appeal on February 1, 2000, 7 following
which or on February 16, 2000, it filed a "Petition for Time" 8 before the CA for an additional
period of fifteen days or until March 2, 2000 within which to file its petition for review.
By Resolution9 of February 21, 2000, the CA granted petitioner's Petition for Time, giving it a
non-extendible period of fifteen days from February 16, 2000 or until March 2, 2000 within
which to file the petition.
Petitioner subsequently filed its Petition for Review 10 dated March 2, 2000 with the CA, praying
that judgment be rendered (1) reversing and setting aside the January 20, 2000 OP Decision and
the November 25, 1997 DENR Decision and May 18, 1998 Order, and (2) declaring the subject
lots as no longer forming part of the public domain and have been validly acquired by
petitioner; or in the alternative, (1) allowing it to present additional evidence in support of its
claim to the subject lots, (2) reversing and setting aside the aforementioned Decisions and Order
of the OP and the DENR, and (3) declaring the subject lots as no longer forming part of the
public domain and have been validly acquired by petitioner.11
By Resolution of May 17, 2000, the CA dismissed the appeal due to infirm Verification and
Certification of non-forum shopping and belated filing.
For one, the Verification and Certification of non-forum shopping was signed merely by
Estela Lombos and Anita Pascual who allege that they are the duly authorized
representatives of petitioner corporation, without showing any proof whatsoever of
such authority.
For another, and importantly, the petition for review was filed a day after the period
petitioner corporation expressly sought. As indicated in its "Petition for Time,"
petitioner corporation asked for an additional fifteen (15) days, or until March 2, 2000,
within which to file its petition, which was granted by the Court per Resolution dated
February 21, 2000. However, despite the foregoing, petitioner corporation filed the
same only on MARCH 3, 2000 as indicated by the date stamped on the envelope which
contains the petition for review.12 (Citations omitted; underscoring supplied)
On June 14, 2000, petitioner filed a Motion for Reconsideration 13 of the CA May 17, 2000
Resolution, arguing that there was no showing that the persons acting on its behalf were not
authorized to do so and that its petition was filed within the additional 15-day period granted
by the CA. Attached to the Motion was a Secretary's Certificate 14 dated June 14, 2000 showing
that petitioner's Board of Directors approved a Resolution on February 11, 2000 appointing
Estela Lombos and Anita Pascual, incumbent directors of the corporation, as its duly authorized
representatives who may sign all papers, execute all documents, and do such other acts as may
be necessary to prosecute the petition for review that it would file with the CA assailing the
decision rendered in OP Case No. 98-G-8459.15
By Resolution of August 23, 2000, the CA denied petitioner's Motion for Reconsideration for
lack of merit.
xxx It must be stressed that any person who claims authority to sign, in behalf of
another, the Certificate of Non-Forum Shopping, as required by the rules, must show
sufficient proof thereof. Bare allegations are not proof, and the representation of one
who acts in behalf of another cannot, by itself, serve as proof of his authority to act as
agent or of the extent of his authority as agent. Thus, absent such clear proof, the Court
cannot accept at face value, such authority to sign in behalf of the corporation.
xxx
Another perusal of the registry return receipts attached to the petition for review (Nos.
182, 183 and 184) shows that copies of the Manifestation and Petition for Review were
served to private respondent's (sic) counsel, the Office of the President, and the
Department of Environment and Natural Resources, on March 2, 2000. However, it
does not indicate therein when the petition for review was filed with the Court. The
registry return receipts (No. 185, 186, 187 and 188) being referred to by petitioner shows
(sic) the date March 2, 2000 only on that numbered 188, and does (sic) not show the
dates on those numbered 185-187. In fact, said receipts do not even indicate which
pertain to the copy filed with the Court.
Moreover, the Court cannot sustain petitioner's supposition that a post office employee
might have stamped the wrong date, March 3, 2000, without any proof whatsoever of
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BUS.ORG. II
such error. The date stamped on the envelope which contained the Manifestation and
Petition for Review clearly shows that the same was filed on March 3, 2000, and
petitioner having failed to rebut the presumption of regularity in the performance of
official functions, the same must prevail.16 (Citations omitted; emphasis in the original;
underscoring supplied)
Petitioner thus filed on September 27, 2000 before this Court a "Petition For Time" to file its
petition for review.
On October 30, 2000, petitioner filed a Petition for Review on Certiorari raising the following
issues:
I For failure to comply with this mandate, Section 7 of Rule 43 provides:
WHETHER OR NOT THE PERSONS WHO EXECUTED THE VERIFICATION AND
CERTIFICATION OF NON-FORUM SHOPPING ATTACHED TO PSI'S
MANIFESTATION/PETITION FOR REVIEW FILED WITH THE COURT OF
APPEALS WERE AUTHORIZED TO DO SO.
II
WHETHER OR NOT PSI'S MANIFESTATION/PETITION FOR REVIEW WAS FILED
WITHIN THE REGLEMENTARY PERIOD.17
By Resolution18 of December 6, 2000, this Court denied the Petition for Review in view of
petitioner's failure to submit a valid affidavit of service pursuant to Section 13 of Rule 13 and
Sections 3 and 5 of Rule 45 in relation to Section 5 (d) of Rule 56 of the Rules of Court and attach
to the petition a duplicate original or certified true copy of the assailed CA resolutions pursuant
to Sections 4 (d) and 5 of Rule 45 in relation to Section 5 (d) of Rule 56 of the Rules of Court.
Petitioner filed a Motion for Reconsideration, 19 averring that it had already attached certified
true copies of the assailed resolutions of the CA in its "Petition for Time" filed before this Court
on September 27, 2000, and while it was the affidavit before the CA which was inadvertently
attached to its petition before this Court, the messengerial staff of petitioner's counsel did in fact
serve copies of the petition on counsel for respondents, the DENR, the OP and the court a quo
as evidenced by registry receipts and return cards 20 which it attached to its Motion for
Reconsideration.
By Resolution21 of March 7, 2001, this Court, finding petitioner's explanation satisfactory,
granted the Motion for Reconsideration and reinstated the petition, now the subject of this
Decision.
The petition is impressed with merit.
Section 6 (d) of Rule 43 in relation to Section 2 of Rule 42 of the Rules of Court mandates that a
petition for review shall contain a sworn certification against forum shopping in which the
petitioner shall attest that he has not commenced any other action involving the same issues in
this Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency;
if there is such other action or proceeding, he must state the status of the same; and if he should
thereafter learn that a similar action or proceeding has been filed or is pending before this
Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he
undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within
five days therefrom.
SEC. 7. Effect of failure to comply with requirements. – The failure of the petitioner to
comply with any of the foregoing requirements regarding the payment of the docket
and other lawful fees, the deposit for costs, proof of service of the petition, and the
contents of and the documents which should accompany the petition shall be sufficient
ground for the dismissal thereof.
The requirement that the petitioner should sign the certificate of non-forum shopping applies
even to corporations, considering that the mandatory directives of the Rules of Court make no
distinction between natural and juridical persons.22
In the case at bar, the CA dismissed the petition before it on the ground that Lombos and
Pascual, the signatories to the verification and certification on non-forum shopping, failed to
show proof that they were authorized by petitioner's board of directors to file such a petition.
Except for the powers which are expressly conferred on it by the Corporation Code and those
that are implied by or are incidental to its existence, a corporation has no powers. It exercises its
powers through its board of directors and/or its duly authorized officers and agents. 23 Thus, its
power to sue and be sued in any court is lodged with the board of directors that exercises its
corporate powers.24 Physical acts, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the
board of directors.25
It is undisputed that when the petition for certiorari was filed with the CA, there was no proof
attached thereto that Lombos and Pascual were authorized to sign the verification and non-
forum shopping certification. Subsequent to the CA's dismissal of the petition, however,
petitioner filed a motion for reconsideration to which it attached a certificate issued by its board
38
BUS.ORG. II
secretary stating that on February 11, 2000 or prior to the filing of the petition, Lombos and
Pascual had been authorized by petitioner's board of directors to file the petition before the CA.
This Court has ruled that the subsequent submission of proof of authority to act on behalf of a
petitioner corporation justifies the relaxation of the Rules for the purpose of allowing its petition
to be given due course.26
Thus, in Shipside Incorporated v. Court of Appeals,27 this Court held:
xxx Moreover, in Loyola, Roadway and Uy, the Court excused non-compliance with the
requirement as to the certificate of non-forum shopping. With more reason should we
allow the instant petition since petitioner herein did submit a certification on non-
forum shopping, failing only to show proof that the signatory was authorized to do so.
That petitioner subsequently submitted a secretary's certificate attesting that Balbin was
authorized to file an action on behalf of petitioner likewise mitigates this oversight.
It must also be kept in mind that while the requirement of the certificate of non-forum shopping
is mandatory, nonetheless the requirements must not be interpreted too literally and thus defeat
the objective of preventing the undesirable practice of forum shopping.28
As for the timeliness of the filing of its petition for review before the CA, petitioner maintains in
the affirmative.
Sections 3 and 12 of Rule 13 of the Rules of Court provide:
SEC. 3. Manner of filing. – The filing of pleadings, appearances, motions, notices,
orders, judgments and all other papers shall be made by presenting the original copies
thereof, plainly indicated as such, personally to the clerk of court or by sending them by
registered mail. In the first case, the clerk of court shall endorse on the pleading the date
and hour of filing. In the second case, the date of the mailing of motions, pleadings, or
any other papers or payments or deposits, as shown by the post office stamp on the
envelope or the registry receipt, shall be considered as the date of their filing, payment,
or deposit in court. The envelope shall be attached to the record of the case.
SEC. 12. Proof of filing. – The filing of a pleading or paper shall be proved by its
existence in the record of the case. If it is not in the record, but is claimed to have been
filed personally, the filing shall be proved by the written or stamped acknowledgment
of its filing by the clerk of court on a copy of the same; if filed by registered mail, by the
registry receipt and by the affidavit of the person who did the mailing, containing a full
statement of the date and place of depositing the mail in the post office in a sealed
envelope addressed to the court, with postage fully prepaid, and with instructions to
the postmaster to return the mail to the sender after ten (10) days if not delivered.
Registry Receipt Nos. 185-188 covering the envelopes bearing the copies of the petition which
were sent to the CA indicate that such copies were filed by registered mail at the Domestic
Airport Post Office (DAPO) on March 2, 2000.29
The Affidavit of Service30 filed by the person who did the mailing of the petition in behalf of
petitioner states that such petition was filed by registered mail by depositing seven copies
thereof in four separate sealed envelopes and mailing the same to the Clerk of Court of the CA
through the DAPO on March 2, 2000. The affidavit likewise states that on even date, the petition
was served on counsel for respondents, the DENR and the OP by depositing copies of the same
in sealed envelopes and mailing them to said parties' respective addresses through the DAPO.
And in the Certification31 dated October 26, 2000 issued by Postmaster Cesar A. Felicitas of the
DAPO, he states that the registered mail matter covered by Registry Receipt Nos. 185-188
addressed to the Clerk of Court of the CA was posted at their office for mailing on March 2,
2000, but that it was "dispatched to the CMEC on March 3, 2000 for proper disposition." This
could very well explain why the latter date was stamped on the envelope received by the CA
containing the petition.
At all events, strict adherence to rules of procedure must give way to considerations of equity
and substantial justice where, as in this case, there is evidence showing that the appeal was filed
on time.32
WHEREFORE, the petition is GRANTED. The Resolutions dated May 17, 2000 and August 23,
2000 of the Court of Appeals are SET ASIDE. The case, CA-G.R. SP No. 57274, is REMANDED
to the appellate court which is hereby directed to give due course to the appeal of petitioner.
No costs.
SO ORDERED.
39
BUS.ORG. II

6) G.R. No. L-23145      November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.

TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County
Trust Company of New York, United States of America, of the estate of the deceased Idonah
Slade Perkins, who died in New York City on March 27, 1960, to surrender to the ancillary
administrator in the Philippines the stock certificates owned by her in a Philippine corporation,
Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court,
then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order
of this tenor: "After considering the motion of the ancillary administrator, dated February 11,
1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1)
considers as lost for all purposes in connection with the administration and liquidation of the
Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said
certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the
same to be delivered by said corporation to either the incumbent ancillary administrator or to
the Probate Division of this Court."1

From such an order, an appeal was taken to this Court not by the domiciliary administrator, the
County Trust Company of New York, but by the Philippine corporation, the Benguet
Consolidated, Inc. The appeal cannot possibly prosper. The challenged order represents a
response and expresses a policy, to paraphrase Frankfurter, arising out of a specific problem,
addressed to the attainment of specific ends by the use of specific remedies, with full and ample
support from legal doctrines of weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc.,
Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among others, two
stock certificates covering 33,002 shares of appellant, the certificates being in the possession of
the County Trust Company of New York, which as noted, is the domiciliary administrator of
the estate of the deceased.2 Then came this portion of the appellant's brief: "On August 12, 1960,
Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance
of Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January 22, 1963,
he was substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary
administrator in New York and the ancillary administrator in the Philippines as to which of
40
BUS.ORG. II
them was entitled to the possession of the stock certificates in question. On January 27, 1964, the
Court of First Instance of Manila ordered the domiciliary administrator, County Trust
Company, to "produce and deposit" them with the ancillary administrator or with the Clerk of
Court. The domiciliary administrator did not comply with the order, and on February 11, 1964,
the ancillary administrator petitioned the court to "issue an order declaring the certificate or
certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by
Benguet Consolidated, Inc., be declared [or] considered as lost."3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial"
as far as it is concerned as to "who is entitled to the possession of the stock certificates in
question; appellant opposed the petition of the ancillary administrator because the said stock
certificates are in existence, they are today in the possession of the domiciliary administrator,
the County Trust Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or
considered as lost. Moreover, it would allege that there was a failure to observe certain
requirements of its by-laws before new stock certificates could be issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order
constitutes an emphatic affirmation of judicial authority sought to be emasculated by the wilful
conduct of the domiciliary administrator in refusing to accord obedience to a court decree.
How, then, can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a response was called for by the
realities of the situation. What cannot be ignored is that conduct bordering on wilful defiance, if
it had not actually reached it, cannot without undue loss of judicial prestige, be condoned or
tolerated. For the law is not so lacking in flexibility and resourcefulness as to preclude such a
solution, the more so as deeper reflection would make clear its being buttressed by indisputable
principles and supported by the strongest policy considerations.
It can truly be said then that the result arrived at upheld and vindicated the honor of the
judiciary no less than that of the country. Through this challenged order, there is thus dispelled
the atmosphere of contingent frustration brought about by the persistence of the domiciliary
administrator to hold on to the stock certificates after it had, as admitted, voluntarily submitted
itself to the jurisdiction of the lower court by entering its appearance through counsel on June
27, 1963, and filing a petition for relief from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what
was decreed. For without it, what it had been decided would be set at naught and nullified.
Unless such a blatant disregard by the domiciliary administrator, with residence abroad, of
what was previously ordained by a court order could be thus remedied, it would have entailed,
insofar as this matter was concerned, not a partial but a well-nigh complete paralysis of judicial
authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary
administrator to gain control and possession of all assets of the decedent within the jurisdiction
of the Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and
satisfy the claims of local creditors. 5 As Justice Tuason speaking for this Court made clear, it is a
"general rule universally recognized" that administration, whether principal or ancillary,
certainly "extends to the assets of a decedent found within the state or country where it was
granted," the corollary being "that an administrator appointed in one state or country has no
power over property in another state or country."6
It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case,
set forth by Justice Malcolm. Thus: "It is often necessary to have more than one administration
of an estate. When a person dies intestate owning property in the country of his domicile as
well as in a foreign country, administration is had in both countries. That which is granted in
the jurisdiction of decedent's last domicile is termed the principal administration, while any
other administration is termed the ancillary administration. The reason for the latter is because
a grant of administration does not ex proprio vigore have any effect beyond the limits of the
country in which it is granted. Hence, an administrator appointed in a foreign state has no
authority in the [Philippines]. The ancillary administration is proper, whenever a person dies,
leaving in a country other than that of his last domicile, property to be administered in the
nature of assets of the deceased liable for his individual debts or to be distributed among his
heirs."7
It would follow then that the authority of the probate court to require that ancillary
administrator's right to "the stock certificates covering the 33,002 shares ... standing in her name
in the books of [appellant] Benguet Consolidated, Inc...." be respected is equally beyond
question. For appellant is a Philippine corporation owing full allegiance and subject to the
unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any
wise as immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue 8 finds application.
"In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation
being domiciled [here]." To the force of the above undeniable proposition, not even appellant is
insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the
legality of the challenged order, how does appellant, Benguet Consolidated, Inc. propose to
carry the extremely heavy burden of persuasion of precisely demonstrating the contrary? It
would assign as the basic error allegedly committed by the lower court its "considering as lost
the stock certificates covering 33,002 shares of Benguet belonging to the deceased Idonah Slade
41
BUS.ORG. II
Perkins, ..."9 More specifically, appellant would stress that the "lower court could not "consider
as lost" the stock certificates in question when, as a matter of fact, his Honor the trial Judge
knew, and does know, and it is admitted by the appellee, that the said stock certificates are in
existence and are today in the possession of the domiciliary administrator in New York."10
There may be an element of fiction in the above view of the lower court. That certainly does not
suffice to call for the reversal of the appealed order. Since there is a refusal, persistently adhered
to by the domiciliary administrator in New York, to deliver the shares of stocks of appellant
corporation owned by the decedent to the ancillary administrator in the Philippines, there was
nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to
issue new certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary
administrator could be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made to depend
on the uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus
far has shown the utmost persistence in refusing to yield obedience. Certainly, appellant would
not be heard to contend in all seriousness that a judicial decree could be treated as a mere scrap
of paper, the court issuing it being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did not
correspond exactly with the facts. To be more blunt, the quality of truth may be lacking in such
a conclusion arrived at. It is to be remembered however, again to borrow from Frankfurter,
"that fictions which the law may rely upon in the pursuit of legitimate ends have played an
important part in its development."11
Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to
advance the ends of justice, [even if] clumsy and at times offensive." 12 Some of them have
persisted even to the present, that eminent jurist, noting "the quasi contract, the adopted child,
the constructive trust, all of flourishing vitality, to attest the empire of "as if" today." 13 He
likewise noted "a class of fictions of another order, the fiction which is a working tool of
thought, but which at times hides itself from view till reflection and analysis have brought it to
the light."14
What cannot be disputed, therefore, is the at times indispensable role that fictions as such
played in the law. There should be then on the part of the appellant a further refinement in the
catholicity of its condemnation of such judicial technique. If ever an occasion did call for the
employment of a legal fiction to put an end to the anomalous situation of a valid judicial order
being disregarded with apparent impunity, this is it. What is thus most obvious is that this
particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its
invoking one of the provisions of its by-laws which would set forth the procedure to be
followed in case of a lost, stolen or destroyed stock certificate; it would stress that in the event
of a contest or the pendency of an action regarding ownership of such certificate or certificates
of stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would
await the "final decision by [a] court regarding the ownership [thereof]." 15
Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is
admitted that the foreign domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of appellant that as far as it is
concerned, "it is immaterial ... who is entitled to the possession of the stock certificates ..." Even
if such were not the case, it would be a legal absurdity to impart to such a provision
conclusiveness and finality. Assuming that a contrariety exists between the above by-law and
the command of a court decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which,
however, the judiciary must yield deference, when appropriately invoked and deemed
applicable. It would be most highly unorthodox, however, if a corporate by-law would be
accorded such a high estate in the jural order that a court must not only take note of it but yield
to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled unless the
appealed order be set aside for its inconsistency with one of its by-laws does not impress us. Its
obedience to a lawful court order certainly constitutes a valid defense, assuming that such
apprehension of a possible court action against it could possibly materialize. Thus far, nothing
in the circumstances as they have developed gives substance to such a fear. Gossamer
possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise of
judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with
implications at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being created by
operation of law...."16 It owes its life to the state, its birth being purely dependent on its will. As
Berle so aptly stated: "Classically, a corporation was conceived as an artificial person, owing its
existence through creation by a sovereign power." 17 As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the Dartmouth College decision defined
a corporation precisely as "an artificial being, invisible, intangible, and existing only in
contemplation of law."18
The well-known authority Fletcher could summarize the matter thus: "A corporation is not in
fact and in reality a person, but the law treats it as though it were a person by process of fiction,
or by regarding it as an artificial person distinct and separate from its individual stockholders....
It owes its existence to law. It is an artificial person created by law for certain specific purposes,
42
BUS.ORG. II
the extent of whose existence, powers and liberties is fixed by its charter." 19 Dean Pound's terse
summary, a juristic person, resulting from an association of human beings granted legal
personality by the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from
Friedmann, "is the reality of the group as a social and legal entity, independent of state
recognition and concession."21 A corporation as known to Philippine jurisprudence is a creature
without any existence until it has received the imprimatur of the state according to law. It is
logically inconceivable therefore that it will have rights and privileges of a higher priority than
that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its
state organs, certainly not excluding the judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following American law still of
persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than
the other two coordinate branches. It institutes the appropriate court action to enforce its right.
Correlatively, it is not immune from judicial control in those instances, where a duty under the
law as ascertained in an appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to disregard is to confer
upon it not autonomy which may be conceded but license which cannot be tolerated. It is to
argue that it may, when so minded, overrule the state, the source of its very existence; it is to
contend that what any of its governmental organs may lawfully require could be ignored at
will. So extravagant a claim cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it was shown that in a
guardianship proceedings then pending in a lower court, the United States Veterans
Administration filed a motion for the refund of a certain sum of money paid to the minor under
guardianship, alleging that the lower court had previously granted its petition to consider the
deceased father as not entitled to guerilla benefits according to a determination arrived at by its
main office in the United States. The motion was denied. In seeking a reconsideration of such
order, the Administrator relied on an American federal statute making his decisions "final and
conclusive on all questions of law or fact" precluding any other American official to examine the
matter anew, "except a judge or judges of the United States court." 23 Reconsideration was
denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the opinion
that the appeal should be rejected. The provisions of the U.S. Code, invoked by the appellant,
make the decisions of the U.S. Veterans' Administrator final and conclusive when made on
claims property submitted to him for resolution; but they are not applicable to the present case,
where the Administrator is not acting as a judge but as a litigant. There is a great difference
between actions against the Administrator (which must be filed strictly in accordance with the
conditions that are imposed by the Veterans' Act, including the exclusive review by United
States courts), and those actions where the Veterans' Administrator seeks a remedy from our
courts and submits to their jurisdiction by filing actions therein. Our attention has not been
called to any law or treaty that would make the findings of the Veterans' Administrator, in
actions where he is a party, conclusive on our courts. That, in effect, would deprive our
tribunals of judicial discretion and render them mere subordinate instrumentalities of the
Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary to accept as final and
conclusive, determinations made by foreign governmental agencies. It is infinitely worse if
through the absence of any coercive power by our courts over juridical persons within our
jurisdiction, the force and effectivity of their orders could be made to depend on the whim or
caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of
the bench or the honor of the country.
Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet
Consolidated seems to be firmly committed as shown by its failure to accept the validity of the
order complained of; it seeks its reversal. Certainly we must at all pains see to it that it does not
succeed. The deplorable consequences attendant on appellant prevailing attest to the necessity
of negative response from us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always
easy to conjure extreme and even oppressive possibilities. That is not decisive. It does not settle
the issue. What carries weight and conviction is the result arrived at, the just solution obtained,
grounded in the soundest of legal doctrines and distinguished by its correspondence with what
a sense of realism requires. For through the appealed order, the imperative requirement of
justice according to law is satisfied and national dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of
First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet
Consolidated, Inc.
43
BUS.ORG. II
7) G.R. No. L-17295             July 30, 1962
ANG PUE & COMPANY, ET AL., plaintiffs-appellants,
vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.
DIZON, J.:
Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue & Company,
Ang Pue and Tan Siong against the Secretary of Commerce and Industry to secure judgment
"declaring that plaintiffs could extend for five years the term of the partnership pursuant to the
provisions of plaintiffs' Amendment to the Article of Co-partnership."
The answer filed by the defendant alleged, in substance, that the extension for another five
years of the term of the plaintiffs' partnership would be in violation of the provisions of
Republic Act No. 1180.
It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens, organized the
partnership Ang Pue & Company for a term of five years from May 1, 1953, extendible by their
mutual consent. The purpose of the partnership was "to maintain the business of general
merchandising, buying and selling at wholesale and retail, particularly of lumber, hardware
and other construction materials for commerce, either native or foreign." The corresponding
articles of partnership (Exhibit B) were registered in the Office of the Securities & Exchange
Commission on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It provided,
among other things, that, after its enactment, a partnership not wholly formed by Filipinos
could continue to engage in the retail business until the expiration of its term.
On April 15, 1958 — prior to the expiration of the five-year term of the partnership Ang Pue &
Company, but after the enactment of the Republic Act 1180, the partners already mentioned
amended the original articles of part ownership (Exhibit B) so as to extend the term of life of the
partnership to another five years. When the amended articles were presented for registration in
the Office of the Securities & Exchange Commission on April 16, 1958, registration was refused
upon the ground that the extension was in violation of the aforesaid Act.
From the decision of the lower court dismissing the action, with costs, the plaintiffs interposed
this appeal.
The question before us is too clear to require an extended discussion. To organize a corporation
or a partnership that could claim a juridical personality of its own and transact business as such,
is not a matter of absolute right but a privilege which may be enjoyed only under such terms as
the State may deem necessary to impose. That the State, through Congress, and in the manner
provided by law, had the right to enact Republic Act No. 1180 and to provide therein that only
Filipinos and concerns wholly owned by Filipinos may engage in the retail business can not be
seriously disputed. That this provision was clearly intended to apply to partnership already
44
BUS.ORG. II
existing at the time of the enactment of the law is clearly showing by its provision giving them
the right to continue engaging in their retail business until the expiration of their term or life.
To argue that because the original articles of partnership provided that the partners could
extend the term of the partnership, the provisions of Republic Act 1180 cannot be adversely
affect appellants herein, is to erroneously assume that the aforesaid provision constitute a
property right of which the partners can not be deprived without due process or without their
consent. The agreement contain therein must be deemed subject to the law existing at the time
when the partners came to agree regarding the extension. In the present case, as already stated,
when the partners amended the articles of partnership, the provisions of Republic Act 1180
were already in force, and there can be not the slightest doubt that the right claimed by
appellants to extend the original term of their partnership to another five years would be in
violation of the clear intent and purpose of the law aforesaid.
WHEREFORE, the judgment appealed from is affirmed, with costs.
8) G.R. No. 119002               October 19, 2000
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel
agency to the latter.1 The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as well as various other trips to the People's
Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the
tickets received, the Federation made two partial payments, both in September of 1989, in the
total amount of P176,467.50.2
On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand
letter requesting for the amount of P265,894.33. 3 On 30 October 1989, the Federation, through
the Project Gintong Alay, paid the amount of P31,603.00.4
On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation.5 Thereafter, no further payments were
made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner
sued 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
Henri Kahn filed his answer with counterclaim. While not denying the allegation that the
Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets,
he averred that the 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 did not
guarantee payment but merely acted as an agent of the Federation which has a separate and
distinct juridical personality.7
On the other hand, the Federation failed to file its answer, hence, was declared in default by the
trial court.8
45
BUS.ORG. II
In due course, the trial court rendered judgment and ruled in favor of the petitioner and
declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at
the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly established
that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor
the defendant Henri Kahn has adduced any evidence proving the corporate existence of the
defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant
Philippine Football Federation is a sports association xxx." This has not been denied by
defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate
existence is within the personal knowledge of defendant Henri Kahn. He could have easily
denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a
domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no power to enter into,
or 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:
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.
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:
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:
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 A 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 AND 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
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BUS.ORG. II
EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR
THE OBLIGATION.
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.
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:
SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall
have the following functions, powers and duties:
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;
xxx
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:
SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government
which shall be submitted to the Department and any amendment thereto 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;
xxx
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.
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:
SEC. 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.
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BUS.ORG. II

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.
Section 7 of P.D. 604, similarly provides:
SEC. 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.
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.
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 liability 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.

The Department shall give the recognition applied for if it is satisfied that the national sports SO ORDERED.
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

48
BUS.ORG. II

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON,

JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D.
PABALAN, petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY
& DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T.
CARLOS, MA. LUISA T. MORALES and DANTE D. MORALES, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court,
petitioners seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748
dated 23 May 1994 and its subsequent resolution dated 10 May 1995 denying petitioners'
motion for reconsideration.

The present case involves two separate but interrelated conflicts. The facts leading to the
first controversy are as follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of
Tormil Realty & Development Corporation while private respondents who are the children
of Judge Torres' deceased brother Antonio A. Torres, constituted the minority stockholders.
In particular, their respective shareholdings and positions in the corporation were as follows:

Name of Stockholder Number of Percentage Position(s)

Shares

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair

Milagros P. Torres 33,430 19.10 Dir./Treasurer
Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
Antonio P. Torres, Jr. 8,290 4.73 Director
Ma. Jacinta P. Torres 8,290 4.73 Director
Ma. Luisa T. Morales 7,790 4.45 Director
Dante D. Morales 500 .28 Director1

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate
planning" scheme under which he assigned to Tormil Realty & Development Corporation
(Tormil for brevity) various real properties he owned and his shares of stock in other
9) G.R. No. 120138 September 5, 1997

49
BUS.ORG. II

corporations in exchange for 225,972 Tormil Realty shares. Hence, on various dates in July and At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares
August of 1984, ten (10) deeds of assignment were executed by the late Judge Torres: remained unsubscribed, all of which were duly issued to and received by Judge Torres (as
evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).3
ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BE
ISSUED Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal
of private respondents to approve the needed increase in the corporation's authorized capital
1. July 13, 1984 TCT 81834 Quezon City 13,252 stock (to cover the shortage of 972 shares due to Judge Torres under the "estate planning"
TCT 144240 Quezon City scheme), on 11 September 1986, Judge Torres revoked the two (2) deeds of assignment covering
the properties in Makati and Pasay City.4
2. July 13, 1984 TCT 77008 Manila
TCT 65689 Manila 78,493 Noting the disappearance of the Makati and Pasay City properties from the corporation's
TCT 109200 Manila inventory of assets and financial records private respondents, on 31 March 1987, were
constrained to file a complaint with the Securities and Exchange Commission (SEC) docketed as
3. July 13, 1984 TCT 374079 Makati 8,307 SEC Case No. 3153 to compel Judge Torres to deliver to Tormil corporation the two (2) deeds of
assignment covering the aforementioned Makati and Pasay City properties which he had
unilaterally revoked and to cause the registration of the corresponding titles in the name of
4. July 24, 1984 TCT 41527 Pasay
Tormil. Private respondents alleged that following the disappearance of the properties from the
TCT 41528 Pasay 9,855
corporation's inventory of assets, they found that on October 24, 1986, Judge Torres, together
TCT 41529 Pasay
with Edgardo Pabalan and Graciano Tobias, then General Manager and legal counsel,
respectively, of Tormil, formed and organized a corporation named "Torres-Pabalan Realty and
5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000 Development Corporation" and that as part of Judge Torres' contribution to the new
corporation, he executed in its favor a Deed of Assignment conveying the same Makati and
6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737 Pasay City properties he had earlier transferred to Tormil.

7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283
8. Aug. 07, 1984 China banking Corp. Stocks 6,300
9. Aug. 20, 1984 Ayala Corp. Stocks 7,468
The second controversy — involving the same parties — concerned the election of the 1987
corporate board of directors.
The 1987 annual stockholders meeting and election of directors of Tormil corporation was
scheduled on 25 March 1987 in compliance with the provisions of its by-laws.

10. Aug. 29, 1984 Ayala Fund Stocks 1,322 Pursuant thereto, Judge Torres assigned from his own shares, one (l) share each to petitioners
Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of
——— "qualifying shares," for the sole purpose of meeting the legal requirement to be able to elect
225,9722 them (Tobias and company) to the Board of Directors as Torres' nominees.

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil
Realty and the revenues generated by the said properties were correspondingly entered in the
corporation's books of account and financial records.
Likewise, all the assigned parcels of land were duly registered with the respective Register of
Deeds in the name of Tormil Realty, except for the ones located in Makati and Pasay City.
The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029,
028, 027, 026 and at the back of each certificate the following inscription is found:
The present certificate and/or the one share it represents, conformably to the
purpose and intention of the Deed of Assignment dated March 6, 1987, is not
held by me under any claim of ownership and I acknowledge that I hold the

50
BUS.ORG. II
same merely as trustee of Judge Manuel A. Torres, Jr. and for the sole purpose
of qualifying me as Director;
(Signature of Assignee)5
The reason behind the aforestated action was to remedy the "inequitable lopsided set-up
obtaining in the corporation, where, notwithstanding his controlling interest in the corporation,
the late Judge held only a single seat in the nine-member Board of Directors and was, therefore,
at the mercy of the minority, a combination of any two (2) of whom would suffice to overrule
the majority stockholder in the Board's decision making functions." 6
On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired
therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes, the official
representatives dispatched by the SEC to observe the proceedings (upon request of the late
Judge Torres) in their report dated 27 March 1987:
xxx xxx xxx
The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential
bungalow in Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina
Torres introduced us to the stockholders namely: Milagros Torres, Antonio
Torres, Jr., Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres.
Antonio Torres, Jr. questioned our authority and personality to appear in the
meeting claiming subject corporation is a family and private firm. We
explained that our appearance there was merely in response to the request of
Manuel Torres, Jr. and that SEC has jurisdiction over all registered
corporations. Manuel Torres, Jr., a septuagenarian, argued that as holder of the
major and controlling shares, he approved of our attendance in the meeting.
At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano
Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty.
Augustus Cesar Azura arrived. Atty. Azura told the body that they came as
counsels of Manuel Torres, Jr. and as stockholders having assigned qualifying shares by
Manuel Torres, Jr.
The stockholders' meeting started at 2:45 p.m. with Mr. Pabalan presiding after
verbally authorized by Manuel Torres, Jr., the President and Chairman of the
Board. The secretary when asked about the quorum, said that there was more than a
quorum. Mr. Pabalan distributed copies of the president's report and the
financial statements. Antonio Torres, Jr. requested time to study the said reports and
brought out the question of auditing the finances of the corporation which he claimed
was approved previously by the board. Heated arguments ensued which also
touched on family matters. Antonio Torres, Jr. moved for the suspension of the
meeting but Manuel Torres, Jr. voted for the continuation of the proceedings.
Mr. Pabalan suggested that the opinion of the SEC representatives be asked on
the propriety of suspending the meeting but Antonio Torres, Jr. objected
reasoning out that we were just observers.
When the Chairman called for the election of directors, the Secretary refused to
write down the names of nominees prompting Atty. Azura to initiate the
appointment of Atty. Jocson, Jr. as Acting Secretary.
Antonio Torres, Jr. nominated the present members of the Board. At this juncture,
Milagros Torres cried out and told the group of Manuel Torres, Jr. to leave the
house.
Manuel Torres, Jr., together with his lawyers-stockholders went to the
residence of Ma. Jacinta Torres in San Miguel Village, Makati, Metro Manila.
The undersigned joined them since the group with Manuel Torres, Jr. the one
who requested for S.E.C. observers, represented the majority of the outstanding
capital stock and still constituted a quorum.
At the resumption of the meeting, the following were nominated and elected as
directors for the year 1987-1988:
1. Manuel Torres, Jr.
2. Ma. Jacinta Torres
3. Edgardo Pabalan
4. Graciano Tobias
5. Rodolfo Jocson, Jr.
6. Melvin Jurisprudencia
7. Augustus Cesar Azura
8. Josefina Torres
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BUS.ORG. II
9. Dante Morales
After the election, it was resolved that after the meeting, the new board of
directors shall convene for the election of officers.
xxx xxx xxx7
Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC
Case No. 3161) praying in the main, that the election of petitioners to the Board of Directors be
annulled.
Private respondents alleged that the petitioners-nominees were not legitimate stockholders of
Tormil because the assignment of shares to them violated the minority stockholders' right of
pre-emption as provided in the corporation's articles and by-laws.
Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing
and adjudication.
On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of
private respondents. The dispositive portion thereof states, thus:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering and directing the respondents, particularly respondent Manuel A.
Torres, Jr., to turn over and deliver to TORMIL through its Corporate Secretary,
Ma. Cristina T. Carlos: (a) the originals of the Deeds of Assignment dated July
13 and 24, 1984 together with the owner's duplicates of Transfer Certificates of
Title Nos. 374079 of the Registry of Deeds for Makati, and 41527, 41528 and
41529 of the Registry of Deeds for Pasay City and/or to cause the formal
registration and transfer of title in and over such real properties in favor of
TORMIL with the proper government agency; (b) all corporate books of
account, records and papers as may be necessary for the conduct of a
comprehensive audit examination, and to allow the examination and inspection
of such accounting books, papers and records by any or all of the corporate
directors, officers and stockholders and/or their duly authorized
representatives or auditors;
2. Declaring as permanent and final the writ of preliminary injunction issued by
the Hearing Panel on February 13, 1989;
3. Declaring as null and void the election and appointment of respondents to
the Board of Directors and executive positions of TORMIL held on March 25,
1987, and all their acts and resolutions made for and in behalf of TORMIL by
authority of and pursuant to such invalid appointment & election held on
March 25, 1987;
4. Ordering the respondents jointly and severally, to pay the complainants the
sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) as and by way of
attorney's fees.8
Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter, on
3 April 1991, during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died.
However, notice thereof was brought to the attention of the SEC not by petitioners' counsel but
by private respondents in a Manifestation dated 24 April 1991.9
On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no
administrator or legal representative of the late Judge Torres' estate has yet been appointed by
the Regional Trial Court of Makati where Sp. Proc. No. M-1768 ("In Matter of the Issuance of the
Last Will and Testament of Manuel A Torres, Jr.") was pending. Two similar motions for
suspension were filed by petitioners on 28 June 1993 and 9 July 1993.
On 19 July 1993, the SEC en banc issued an Order denying petitioners' aforecited motions on the
following ground:
Before the filing of these motions, the Commission en banc had already
completed all proceedings and had likewise ruled on the merits of the appealed
cases. Viewed in this light, we thus feel that there is nothing left to be done
except to deny these motions to suspend proceedings. 10
On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads,
thus:
WHEREFORE, premises considered, the appealed decision of the hearing panel
is hereby affirmed and all motions pending before us incident to this appealed
case are necessarily DISMISSED.
SO ORDERED. 11
Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals
by way of a petition for review (docketed as CA-G.R. SP No. 31748).
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BUS.ORG. II
On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which
states:
WHEREFORE, the petition for review is DISMISSED and the appealed decision
is accordingly affirmed.
SO ORDERED. 12
From the said decision, petitioners filed a motion for reconsideration which was denied in a
resolution issued by the Court of Appeals dated 10 May 1995. 13
Insisting on their cause, petitioners filed the present petition for review alleging that the Court
of Appeals committed the following errors in its decision:
(1)
WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL
LENGTH DECISION, WITHOUT THE EVIDENCE AND THE ORIGINAL
RECORD OF S.E.C. — AC NO. 339 BEING PROPERLY BROUGHT BEFORE IT
FOR REVIEW AND RE-EXAMINATION, AN OMISSION RESULTING IN A
CLEAR TRANSGRESSION OR CURTAILMENT OF THE RIGHTS OF THE
HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS;
(2)
WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE
RESPONDENT S.E.C., WHICH IS VOID FOR HAVING BEEN RENDERED
WITHOUT THE PROPER SUBSTITUTION OF THE DECEASED PRINCIPAL
PARTY-RESPONDENT IN S.E.C.-AC NO. 339 AND CONSEQUENTLY, FOR
WANT OF JURISDICTION OVER THE SAID DECEASED'S TESTATE
ESTATE, AND MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-
SUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW CONCEPT OF
NEGOTIORUM GESTIO;
(3)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND
THE ORIGINAL RECORD OF S.E.C. — AC NO. 339 NOT HAVING
ACTUALLY BEEN RE-EXAMINED, THAT S.E.C. CASE NO. 3153 INVOLVED
A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE (AS
CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS
NOT A MERE CASE OF LESION OR INADEQUACY OF CAUSE (UNDER
ARTICLE 1355 OF THE CIVIL CODE) AS SO ERRONEOUSLY
CHARACTERIZED BY THE RESPONDENT S.E.C.; and,
(4)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND
THE ORIGINAL RECORD OF S.E.C. — AC NO. 339 NOT HAVING
ACTUALLY BEEN EXAMINED, THAT THE RECORDING BY THE LATE
JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED ASSIGNMENT OF
QUALIFYING SHARES TO HIS NOMINEES, WAS AFFIRMED IN THE
STOCK AND TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY
AND MOREOVER, THAT ACTUAL NOTICE OF SAID ASSIGNMENT WAS
TIMELY MADE TO THE OTHER STOCKHOLDERS. 14
We shall resolve the issues in seriatim.
I
Petitioners insist that the failure to transmit the original records to the Court of Appeals
deprived them of procedural due process. Without the evidence and the original records of the
proceedings before the SEC, the Court of Appeals, petitioners adamantly state, could not have
possibly made a proper appreciation and correct determination of the issues, particularly the
factual issues, they had raised on appeal. Petitioners also assert that since the Court of Appeals
allegedly gave due course to their petition, the original records should have been forwarded to
said court.
Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February 1991)
which provides that:
8. WHEN PETITION GIVEN DUE COURSE. — The Court of Appeals shall give
due course to the petition only when it shows prima facie that the court,
commission, board, office or agency concerned has committed errors of fact or
law that would warrant reversal or modification of the order, ruling or decision
sought to be reviewed. The findings of fact of the court commission, board,
office or agency concerned when supported by substantial evidence shall be
final.
xxx xxx xxx
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BUS.ORG. II
11. TRANSMITTAL OF RECORD. — Within fifteen (15) days from notice that
the petition has been given due course, the court, commission, board, office or
agency concerned shall transmit to the Court of Appeals the original or a
certified copy of the entire record of the proceeding under review. The record
to be transmitted may be abridged by agreement of all parties to the
proceeding. The Court of Appeals may require or permit subsequent correction
or addition to the record.
Petitioners contend that the Court of Appeals had given due course to their petition as allegedly
indicated by the following acts:
a) it granted the restraining order applied for by the herein
petitioners, and after hearing, also the writ of preliminary
injunction sought by them; under the original SC Circular No.
1-91, a petition for review may be given due course at the onset
(paragraph 8) upon a mere prima facie finding of errors of fact
or law having been committed, and such prima facie finding is
but consistent with the grant of the extra-ordinary writ of
preliminary injunction;
b) it required the parties to submit "simultaneous memoranda"
in its resolution dated October 15, 1993 (this is in addition to
the comment required to be filed by the respondents) and
furthermore declared in the same resolution that the petition
will be decided "on the merits," instead of outrightly
dismissing the same;
c) it rendered a full length decision, wherein: (aa) it expressly
declared the respondent S.E.C. as having erred in denying the
pertinent motions to suspend proceedings; (bb) it declared the
supposed error as having become a non-issue when the
respondent C.A. "proceeded to hear (the) appeal"; (cc) it
formulated and applied its own theory of negotiorum gestio in
justifying the non-substitution of the deceased principal party
in S.E.C. — AC No. 339 and moreover, its theory of di minimis
non curat lex (this, without first determining the true extent of
and the correct legal characterization of the so-called "shortage"
of Tormil shares;
and, (dd) it expressly affirmed the assailed decision of
respondent S.E.C. 15
Petitioners' contention is unmeritorious.
There is nothing on record to show that the Court of Appeals gave due course to the petition.
The fact alone that the Court of Appeals issued a restraining order and a writ of preliminary
injunction and required the parties to submit their respective memoranda does not indicate that
the petition was given due course. The office of an injunction is merely to preserve the status
quo pending the disposition of the case. The court can require the submission of memoranda in
support of the respective claims and positions of the parties without necessarily giving due
course to the petition. The matter of whether or not to give due course to a petition lies in the
discretion of the court.
It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative
Circular No. 1-95 (which took effect on 1 June 1995) wherein the procedure for appeals from
quasi-judicial agencies to the Court of Appeals was clarified thus:
10. Due course. — If upon the filing of the comment or such other pleadings or
documents as may be required or allowed by the Court of Appeals or upon the
expiration of the period for the filing thereof, and on the bases of the petition or
the record the Court of Appeals finds prima facie that the court or agency
concerned has committed errors of fact or law that would warrant reversal or
modification of the award, judgment, final order or resolution sought to be
reviewed, it may give due course to the petition; otherwise, it shall dismiss the
same. The findings of fact of the court or agency concerned, when supported by
substantial evidence, shall be binding on the Court of Appeals.
11. Transmittal of record. — Within fifteen (15) days from notice that the petition has
been given due course, the Court of Appeals may require the court or agency concerned
to transmit the original or a legible certified true copy of the entire record of the
proceeding under review. The record to be transmitted may be abridged by
agreement of all parties to the proceeding. The Court of Appeals may require or
permit subsequent correction of or addition to the record. (Emphasis ours.)
The aforecited circular now formalizes the correct practice and clearly states that in resolving
appeals from quasi judicial agencies, it is within the discretion of the Court of Appeals to have
the original records of the proceedings under review be transmitted to it. In this connection
petitioners' claim that the Court of Appeals could not have decided the case on the merits
without the records being brought before it is patently lame. Indubitably, the Court of Appeals
decided the case on the basis of the uncontroverted facts and admissions contained in the
pleadings, that is, the petition, comment, reply, rejoinder, memoranda, etc. filed by the parties.
II
Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for
being rendered without the necessary substitution of parties (for the deceased petitioner
54
BUS.ORG. II
Manuel A. Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which
provides as follows:
Sec. 17. Death of party. — After a party dies and the claim is not thereby
extinguished, the court shall order, upon proper notice, the legal representative
of the deceased to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be granted. If the legal
representative fails to appear within said time, the court may order the
opposing party to procure the appointment of a legal representative of the
deceased within a time to be specified by the court, and the representative shall
immediately appear for and on behalf of the interest of the deceased. The court
charges involved in procuring such appointment, if defrayed by the opposing
party, may be recovered as costs. The heirs of the deceased may be allowed to
be substituted for the deceased, without requiring the appointment of an
executor or administrator and the court may appoint guardian ad litem for the
minor heirs.
Petitioners insist that the SEC en banc should have granted the motions to suspend they filed
based as they were on the ground that the Regional Trial Court of Makati, where the probate of
the late Judge Torres' will was pending, had yet to appoint an administrator or legal
representative of his estate.
We are not unaware of the principle underlying the aforequoted provision:
It has been held that when a party dies in an action that survives, and no order
is issued by the Court for the appearance of the legal representative or of the
heirs of the deceased to be substituted for the deceased, and as a matter of fact
no such substitution has ever been effected, the trial held by the court without
such legal representative or heirs, and the judgment rendered after such trial,
are null and void because the court acquired no jurisdiction over the persons of
the legal representative or of the heirs upon whom the trial and the judgment
are not binding. 16
As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the
Regional Trial Court of Makati for the ante-mortem probate of his holographic will which he
had executed on 31 October 1986. Testifying in the said proceedings, Judge Torres confirmed
his appointment of petitioner Edgardo D. Pabalan as the sole executor of his will and
administrator of his estate. The proceedings, however, were opposed by the same parties,
herein private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T.
Carlos, 17 who are nephew and nieces of Judge Torres, being the children of his late brother
Antonio A. Torres.
It can readily be observed therefore that the parties involved in the present controversy are
virtually the same parties fighting over the representation of the late Judge Torres' estate. It
should be recalled that the purpose behind the rule on substitution of parties is the protection of
the right of every party to due process. It is to ensure that the deceased party would continue to
be properly represented in the suit through the duly appointed legal representative of his
estate. In the present case, this purpose has been substantially fulfilled (despite the lack of
formal substitution) in view of the peculiar fact that both proceedings involve practically the
same parties. Both parties have been fiercely fighting in the probate proceedings of Judge
Torres' holographic will for appointment as legal representative of his estate. Since both parties
claim interests over the estate, the rights of the estate were expected to be fully protected in the
proceedings before the SEC en banc and the Court of Appeals. In either case, whoever shall be
appointed legal representative of Judge Torres' estate (petitioner Pabalan or private
respondents) would no longer be a stranger to the present case, the said parties having
voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and having
thoroughly participated in the proceedings.
The foregoing rationate finds support in the recent case of Vda. de Salazar v. CA, 18 wherein the
Court expounded thus:
The need for substitution of heirs is based on the right to due process accruing
to every party in any proceeding. The rationale underlying this requirement in
case a party dies during the pendency of proceedings of a nature not
extinguished by such death, is that . . . the exercise of judicial power to hear and
determine a cause implicitly presupposes in the trial court, amongst other
essentials, jurisdiction over the persons of the parties. That jurisdiction was
inevitably impaired upon the death of the protestee pending the proceedings
below such that unless and until a legal representative is for him duly named
and within the jurisdiction of the trial court, no adjudication in the cause could
have been accorded any validity or binding effect upon any party, in
representation of the deceased, without trenching upon the fundamental right
to a day in court which is the very essence of the constitutionally enshrined
guarantee of due process.
We are not unaware of several cases where we have ruled that a party having
died in an action that survives, the trial held by the court without appearance of
the deceased's legal representative or substitution of heirs and the judgment
rendered after such trial, are null and void because the court acquired no
jurisdiction over the persons of the legal representatives or of the heirs upon
whom the trial and the judgment would be binding. This general rule
notwithstanding, in denying petitioner's motion for reconsideration, the Court
of Appeals correctly ruled that formal substitution of heirs is not necessary
when the heirs themselves voluntarily appeared, participated in the case and
55
BUS.ORG. II
presented evidence in defense of deceased defendant. Attending the case at
bench, after all, are these particular circumstances which negate petitioner's
belated and seemingly ostensible claim of violation of her rights to due process.
We should not lose sight of the principle underlying the general rule that
formal substitution of heirs must be effectuated for them to be bound by a
subsequent judgment. Such had been the general rule established not because
the rule on substitution of heirs and that on appointment of a legal
representative are jurisdictional requirements per se but because non-
compliance therewith results in the undeniable violation of the right to due
process of those who, though not duly notified of the proceedings, are
substantially affected by the decision rendered therein . . . .
It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC  en
banc had already fully heard the parties and what remained was the evaluation of the evidence
and rendition of the judgment.
Further, petitioners filed their motions to suspend proceedings only after more than two (2)
years from the death of Judge Torres. Petitioners' counsel was even remiss in his duty under
Sec. 16, Rule 3 of the Revised Rules of Court. 19 Instead, it was private respondents who
informed the SEC of Judge Torres' death through a manifestation dated 24 April 1991.
For the SEC en banc to have suspended the proceedings to await the appointment of the legal
representative by the estate was impractical and would have caused undue delay in the
proceedings and a denial of justice. There is no telling when the probate court will decide the
issue, which may still be appealed to the higher courts.
In any case, there has been no final disposition of the properties of the late Judge Torres before
the SEC. On the contrary, the decision of the SEC en banc as affirmed by the Court of Appeals
served to protect and preserve his estate. Consequently, the rule that when a party dies, he
should be substituted by his legal representative to protect the interests of his estate in
observance of due process was not violated in this case in view of its peculiar situation where
the estate was fully protected by the presence of the parties who claim interests therein either as
directors, stockholders or heirs.
Finally, we agree with petitioners' contention that the principle of negotiorum gestio 20 does not
apply in the present case. Said principle explicitly covers abandoned or neglected property or
business.
III
Petitioners find legal basis for Judge Torres' act of revoking the assignment of his properties in
Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the Civil Code which
provides that:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law.
Petitioners' contentions cannot be sustained. We see no justifiable reason to disturb the findings
of SEC, as affirmed by the Court of Appeals:
We sustain the ruling of respondent SEC in the decision appealed from (Rollo,
pp. 45-46) that —
. . . the shortage of 972 shares would not be valid ground for
respondent Torres to unilaterally revoke the deeds of
assignment he had executed on July 13, 1984 and July 24, 1984
wherein he voluntarily assigned to TORMIL real properties
covered by TCT No. 374079 (Makati) and TCT No. 41527, 41528
and 41529 (Pasay) respectively.
A comparison of the number of shares that respondent Torres
received from TORMIL by virtue of the "deeds of assignment"
and the stock certificates issued by the latter to the former
readily shows that TORMIL had substantially performed what
was expected of it. In fact, the first two issuances were in
satisfaction to the properties being revoked by respondent
Torres. Hence, the shortage of 972 shares would never be a
valid ground for the revocation of the deeds covering Pasay
and Quezon City properties.
56
BUS.ORG. II

In Universal Food Corp. vs. CA, the Supreme Court held: 5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th

The general rule is that rescission of a contract
will not be permitted for a slight or carnal
breach, but only for such substantial and
fundamental breach as would defeat the very
object of the parties in making the agreement.
6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th
7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th
8. August 7, 1984 China Banking Corp. Stocks 6,300 6th

The shortage of 972 shares definitely is not substantial and 9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th
fundamental breach as would defeat the very object of the
parties in entering into contract. Art. 1355 of the Civil Code
10. August 29, 1984 Ayala Fund Stocks 1,322.1)
also provides: "Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract, unless there
has been fraud, mistake or undue influences." There being no —————
fraud, mistake or undue influence exerted on respondent TOTAL 225,972.3
Torres by TORMIL and the latter having already issued to the
former of its 225,000 unissued shares, the most logical course of *Order of stock certificate issuances by TORMIL to respondent Torres relative
action is to declare as null and void the deed of revocation to the Deeds of Assignment he executed sometime in July and August,
executed by respondent Torres. (Rollo, pp. 45-46.) 21 1984. 22 (Emphasis ours.)

The aforequoted Civil Code provision does not apply in this particular situation for the obvious Moreover, we agree with the contention of the Solicitor General that the shortage of shares
reason that a specific number of shares of stock (as evidenced by stock certificates) had already should not have affected the assignment of the Makati and Pasay City properties which were
been issued to the late Judge Torres in exchange for his Makati and Pasay City properties. The executed in 13 and 24 July 1984 and the consideration for which have been duly paid or fulfilled
records thus disclose: but should have been applied logically to the last assignment of property — Judge Torres'
Ayala Fund shares — which was executed on 29 August 1984. 23
DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF
ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE* IV

1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd Petitioners insist that the assignment of "qualifying shares" to the nominees of the late Judge
TCT 144240 Quezon City) Torres (herein petitioners) does not partake of the real nature of a transfer or conveyance of
shares of stock as would call for the "imposition of stringent requirements (with respect to the)
2. July 13, 1984 TCT 77008 Manila) recording of the transfer of said shares." Anyway, petitioners add, there was substantial
TCT 65689 Manila) 78,493 2nd compliance with the above-stated requirement since said assignments were entered by the late
TCT 102200 Manila) Judge Torres himself in the corporation's stock and transfer book on 6 March 1987, prior to the
25 March 1987 annual stockholders meeting and which entries were confirmed on 8 March 1987
by petitioner Azura who was appointed Assistant Corporate Secretary by Judge Torres.
3. July 13, 1984 TCT 374079 Makati 8,307 1st
Petitioners further argue that:
4. July 24, 1984 TCT 41527 Pasay
TCT 41528 Pasay) 9,855 4th
TCT 41529 Pasay) 10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to
penalize the late Judge Torres by invalidating the questioned entries in the
stock and transfer book, simply because he initially made those entries (they
57
BUS.ORG. II
were later affirmed by an acting corporate secretary) and because the stock and
transfer book was in his possession instead of the elected corporate secretary, if
the background facts herein-before narrated and the serious animosities that
then reigned between the deceased Judge and his relatives are to be taken into
account;
xxx xxx xxx
10.12. Indeed it was a practice in the corporate respondent, a family corporation
with only a measly number of stockholders, for the late judge to have personal
custody of corporate records; as president, chairman and majority stockholder,
he had the prerogative of designating an acting corporate secretary or to
himself make the needed entries, in instances where the regular secretary, who
is a mere subordinate, is unavailable or intentionally defaults, which was the
situation that obtained immediately prior to the 1987 annual stockholders
meeting of Tormil, as the late Judge Torres had so indicated in the stock and
transfer book in the form of the entries now in question;
10.13. Surely, it would have been futile nay foolish for him to have insisted
under those circumstances, for the regular secretary, who was then part of a
group ranged against him, to make the entries of the assignments in favor of his
nominees; 24
Petitioners' contentions lack merit.
It is precisely the brewing family discord between Judge Torres and private respondents — his
nephew and nieces that should have placed Judge Torres on his guard. He should have been
more careful in ensuring that his actions (particularly the assignment of qualifying shares to his
nominees) comply with the requirements of the law. Petitioners cannot use the flimsy excuse
that it would have been a vain attempt to force the incumbent corporate secretary to register the
aforestated assignments in the stock and transfer book because the latter belonged to the
opposite faction. It is the corporate secretary's duty and obligation to register valid transfers of
stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully
bring suit to compel performance. 25 In other words, there are remedies within the law that
petitioners could have availed of, instead of taking the law in their own hands, as the cliche
goes.
Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:
We likewise sustain respondent SEC when it ruled, interpreting Section 74 of
the Corporation Code, as follows (Rollo, p. 45):
In the absence of (any) provision to the contrary, the corporate
secretary is the custodian of corporate records. Corollarily, he
keeps the stock and transfer book and makes proper and
necessary entries therein.
Contrary to the generally accepted corporate practice, the stock
and transfer book of TORMIL was not kept by Ms. Maria
Cristina T. Carlos, the corporate secretary but by respondent
Torres, the President and Chairman of the Board of Directors of
TORMIL. In contravention to the above cited provision, the
stock and transfer book was not kept at the principal office of
the corporation either but at the place of respondent Torres.
These being the obtaining circumstances, any entries made in
the stock and transfer book on March 8, 1987 by respondent
Torres of an alleged transfer of nominal shares to Pabalan and
Co. cannot therefore be given any valid effect. Where the
entries made are not valid, Pabalan and Co. cannot therefore be
considered stockholders of record of TORMIL. Because they
are not stockholders, they cannot therefore be elected as
directors of TORMIL. To rule otherwise would not only
encourage violation of clear mandate of Sec. 74 of the
Corporation Code that stock and transfer book shall be kept in
the principal office of the corporation but would likewise open
the flood gates of confusion in the corporation as to who has
the proper custody of the stock and transfer book and who are
the real stockholders of records of a certain corporation as any
holder of the stock and transfer book, though not the corporate
secretary, at pleasure would make entries therein.
The fact that respondent Torres holds 81.28% of the
outstanding capital stock of TORMIL is of no moment and is
not a license for him to arrogate unto himself a duty lodged to
(sic) the corporate secretary. 26
All corporations, big or small, must abide by the provisions of the Corporation Code. Being a
simple family corporation is not an exemption. Such corporations cannot have rules and
practices other than those established by law.
WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED.
58
BUS.ORG. II

SO ORDERED. functions, and one of the most important, is the supervision of all corporations, partnerships or
associations, who are grantees of primary franchise and/or a license or permit issued by the
government to operate in the Philippines. 2 Just how far this regulatory authority extends,
particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case
at bar.

In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court
of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private
respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the
public offering of PALI's shares.

The facts of the case are undisputed, and are hereby restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its
shares to the public in order to raise funds allegedly to develop its properties and pay its loans
with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its shares to
the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its shares through the Philippine
Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an
application to list its shares, with supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application,
recommended to the PSE's Board of Governors the approval of PALI's listing application.

On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the
PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President
Marcos was the legal and beneficial owner of certain properties forming part of the Puerto Azul
Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate
Development Corporation, which is among the stockholders of PALI, likewise appears to have
10) G.R. No. 125469 October 27, 1997 been held and continue to be held in trust by one Rebecco Panlilio for then President Marcos
and now, effectively for his estate, and requested PALI's application to be deferred. PALI was
PHILIPPINE STOCK EXCHANGE, INC., petitioner, requested to comment upon the said letter.
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and
and PUERTO AZUL LAND, INC., respondents Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is actually
owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from
TORRES, JR., J.: PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The
Marcoses responded that their claim is not confined to the facilities forming part of the Puerto
The Securities and Exchange Commission is the government agency, under the direct general Azul Hotel and Resort Complex, thereby implying that they are also asserting legal and
supervision of the Office of the President, 1 with the immense task of enforcing the Revised beneficial ownership of other properties titled under the name of PALI.
Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable
59
BUS.ORG. II

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential
Commission on Good Government (PCGG) requesting for comments on the letters of the PALI
and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining the Marcoses from, among others,
"further impeding, obstructing, delaying or interfering in any manner by or any means with the
consideration, processing and approval by the PSE of the initial public offering of PALI." The
TRO was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil
Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its
decision to reject PALI's application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that adversely affect the suitability
of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman,
Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the
application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the
exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of
P.D. No. 902-A, review the PSE's action on PALI's listing application and institute such
measures as are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of
PALI and directing the PSE to file its comments thereto within five days from its receipt and for
its authorized representative to appear for an "inquiry" on the matter. On April 22, 1996, the
PSE submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however
denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no compelling
reason to reconsider its order dated April 24, 1996, and in the light of recent
developments on the adverse claim against the PALI properties, PSE should
require PALI to submit full disclosure of material facts and information to
protect the investing public. In this regard, PALI is hereby ordered to amend its
registration statements filed with the Commission to incorporate the full
disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition
for Review (with Application for Writ of Preliminary Injunction and Temporary Restraining
Order), assailing the above mentioned orders of the SEC, submitting the following as errors of
the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE
OF DISCRETION IN ISSUING THE ASSAILED ORDERS
WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC
HAS NO POWER TO ORDER THE LISTING AND SALE OF
SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED
AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE
ON LISTING APPLICATIONS;

On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE
portion of the said order reads: OF DISCRETION IN FINDING THAT PSE ACTED IN AN
ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING
WHEREFORE, premises considered, and invoking the Commissioner's PALI'S LISTING APPLICATION;
authority and jurisdiction under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-A, the III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND
decision of the Board of Governors of the Philippine Stock Exchange denying VOID FOR ALLOWING FURTHER DISPOSITION OF
the listing of shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM
is hereby ordered to immediately cause the listing of the PALI shares in the PART OF NAVAL/MILITARY RESERVATION; AND
Exchange, without prejudice to its authority to require PALI to disclose such
other material information it deems necessary for the protection of the IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
investigating public. PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE
This Order shall take effect immediately. PROCESS CLAUSE OF THE CONSTITUTION.

60
BUS.ORG. II
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition
for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into the
decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in relation to
Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b)5 of the Revised Securities Act, and
for the purpose of ensuring fair administration of the exchange. Both as a corporation and as a
stock exchange, the petitioner is subject to public respondent's jurisdiction, regulation and
control. Accepting the argument that the public respondent has the authority merely to
supervise or regulate, would amount to serious consequences, considering that the petitioner is
a stock exchange whose business is impressed with public interest. Abuse is not remote if the
public respondent is left without any system of control. If the securities act vested the public
respondent with jurisdiction and control over all corporations; the power to authorize the
establishment of stock exchanges; the right to supervise and regulate the same; and the power
to alter and supplement rules of the exchange in the listing or delisting of securities, then the
law certainly granted to the public respondent the plenary authority over the petitioner; and the
power of review necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner
in disapproving the application of PALI for listing of its shares in the face of the
following considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full
disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of
shares, PSE has failed to justify why it acted differently on the application of
PALI, as compared to the IPOs of other companies similarly situated that were
allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were
even less serious than the claims against the assets of the other companies in
that, the assertions of the Marcoses that they are owners of the disputed
properties were not substantiated enough to overcome the strength of a title to
properties issued under the Torrens System as evidence of ownership thereof;
4. No action has been filed in any court of competent jurisdiction seeking to
nullify PALI's ownership over the disputed properties, neither has the
government instituted recovery proceedings against these properties. Yet the
import of PSE's decision in denying PALI's application is that it would be PALI,
not the Marcoses, that must go to court to prove the legality of its ownership on
these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation
does not inspire belief. The point is, the PALI properties are now titled. A property losses its
public character the moment it is covered by a title. As a matter of fact, the titles have long been
settled by a final judgment; and the final decree having been registered, they can no longer be
re-opened considering that the one year period has already passed. Lastly, the determination of
what standard to apply in allowing PALI's application for listing, whether the discretion
method or the system of public disclosure adhered to by the SEC, should be addressed to the
Securities Commission, it being the government agency that exercises both supervisory and
regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for
Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals.
Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date, the
PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the
PCGG's Petition for Intervention on October 21, 1996. A supplemental Comment was filed by
PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and the
Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGG's
motion for leave to file petition for intervention, PALI filed its Comment thereto on January 17,
1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI
(October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed
its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the
PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the
powers of the SEC over stock exchanges are more limited as compared to its authority over
ordinary corporations. In connection with this, the powers of the SEC over stock exchanges
under the Revised Securities Act are specifically enumerated, and these do not include the
power to reverse the decisions of the stock exchange. Authorities are in abundance even in the
United States, from which the country's security policies are patterned, to the effect of giving
the Securities Commission less control over stock exchanges, which in turn are given more lee-
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way in making the decision whether or not to allow corporations to offer their stock to the
public through the stock exchange. This is in accord with the "business judgment rule" whereby
the SEC and the courts are barred from intruding into business judgments of corporations,
when the same are made in good faith. the said rule precludes the reversal of the decision of the
PSE to deny PALI's listing application, absent a showing of bad faith on the part of the PSE.
Under the listing rules of the PSE, to which PALI had previously agreed to comply, the PSE
retains the discretion to accept or reject applications for listing. Thus, even if an issuer has
complied with the PSE listing rules and requirements, PSE retains the discretion to accept or
reject the issuer's listing application if the PSE determines that the listing shall not serve the
interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with
corporations whose properties are under sequestration. A reading of Republic of the Philippines
vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI,
which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol
Development Corporation (MSDC). are under sequestration by the PCGG, and subject of
forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the "law of the case"
between the Republic and TDC and MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its
properties can no longer be questioned, since certificates of title have been issued to PALI and
more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on
land titles. That a certificate of title issued under the Torrens System is a conclusive evidence of
ownership is not an absolute rule and admits certain exceptions. It is fundamental that forest
lands or military reservations are non-alienable. Thus, when a title covers a forest reserve or a
government reservation, such title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of "full
disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear
mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI
did not comply with the listing rules and disclosure requirements. In fact, PALI's documents
supporting its application contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALI's properties and the fact
that the same form part of military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is
clothed with the markings of a corporate entity, it functions as the primary channel through
which the vessels of capital trade ply. The PSE's relevance to the continued operation and
filtration of the securities transactions in the country gives it a distinct color of importance such
that government intervention in its affairs becomes justified, if not necessarily. Indeed, as the
only operational stock exchange in the country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give
special treatment to the administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of supervision
and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate
to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the
investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's
challenged control authority over the petitioner PSE even as it provides that "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. . ." The SEC's regulatory authority over private
corporations encompasses a wide margin of areas, touching nearly all of a corporation's
concerns. This authority springs from the fact that a corporation owes its existence to the
concession of its corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out of the SEC's express power to insure
fair dealing in securities traded upon a stock exchange or to ensure the fair administration of
such exchange. 7 It is, likewise, observed that 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 for the
promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the
PSE to deny the application for listing in the stock exchange of the private respondent PALI.
The SEC's action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange. This is in
line with the SEC's mission to ensure proper compliance with the laws, such as the Revised
Securities Act and to regulate the sale and disposition of securities in the country. 9 As the
appellate court explains:
Paramount policy also supports the authority of the public respondent to
review petitioner's denial of the listing. Being a stock exchange, the petitioner
performs a function that is vital to the national economy, as the business is
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affected with public interest. As a matter of fact, it has often been said that the
economy moves on the basis of the rise and fall of stocks being traded. By its
economic power, the petitioner certainly can dictate which and how many
users are allowed to sell securities thru the facilities of a stock exchange, if
allowed to interpret its own rules liberally as it may please. Petitioner can either
allow or deny the entry to the market of securities. To repeat, the monopoly,
unless accompanied by control, becomes subject to abuse; hence, considering
public interest, then it should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through the
Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted
to it the serious responsibility of enforcing all laws affecting corporations and other forms of
associations not otherwise vested in some other government office. 10
This is not to say, however, that the PSE's management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the PSE's main concerns, as such, is
still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining
to corporations, including the right to sue and be sued, to hold property in its own name, to
enter (or not to enter) into contracts with third persons, and to perform all other legal acts
within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective body, it
waives no constitutional immunities and perquisites appropriate to such a body. 11 As to its
corporate and management decisions, therefore, the state will generally not interfere with the
same. Questions of policy and of management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for
the judgment of the board of directors. The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant
authority to reverse the PSE's decision in matters of application for listing in the market, the
SEC may exercise such power only if the PSE's judgment is attended by bad faith. In Board of
Liquidators vs. Kalaw,13 it was held that bad faith does not simply connote bad judgment or
negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of
wrong. It means a breach of a known duty through some motive or interest of ill will, partaking
of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which, in the general scheme, brings to serious question the qualification of
PALI to sell its shares to the public through the stock exchange. During the time for receiving
objections to the application, the PSE heard from the representative of the late President
Ferdinand E. Marcos and his family who claim the properties of the private respondent to be
part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI, and suit for reconveyance to the
state has been filed in the Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and
to the private respondent PALI, in only a short span of time, are not yet explained to the Court,
but it is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a
stock issuer. The petitioner was in the right when it refused application of PALI, for a contrary
ruling was not to the best interest of the general public. The purpose of the Revised Securities
Act, after all, is to give adequate and effective protection to the investing public against
fraudulent representations, or false promises, and the imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was
designed not only to provide investors with adequate information upon which
to base their decisions to buy and sell securities, but also to protect legitimate
business seeking to obtain capital through honest presentation against
competition from crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p.
14).
As has been pointed out, the effects of such an act are chiefly (1) prevention of
excesses and fraudulent transactions, merely by requirement of that their
details be revealed; (2) placing the market during the early stages of the
offering of a security a body of information, which operating indirectly through
investment services and expert investors, will tend to produce a more accurate
appraisal of a security, . . . Thus, the Commission may refuse to permit a
registration statement to become effective if it appears on its face to be
incomplete or inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the effectiveness of any
registration statement which is found to include any untrue statement of a
material fact or to omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill, and it
has the right to protect such goodwill by maintaining a reasonable standard of propriety in the
entities who choose to transact through its facilities. It was reasonable for the PSE, therefore, to
exercise its judgment in the manner it deems appropriate for its business identity, as long as no
rights are trampled upon, and public welfare is safeguarded.
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In this connection, it is proper to observe that the concept of government absolutism is a thing
of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer be
assailed is of no moment. At this juncture, there is the claim that the properties were owned by
TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco Panlilio
and later on to PALI, besides the claim of the Marcoses that such properties belong to the
Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by the
petitioner that these properties belong to naval and forest reserves, and therefore beyond
private dominion. If any of these claims is established to be true, the certificates of title over the
subject properties now held by PALI map be disregarded, as it is an established rule that a
registration of a certificate of title does not confer ownership over the properties described
therein to the person named as owner. The inscription in the registry, to be effective, must be
made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a
transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be determined as an
absolute fact. What is material is that the uncertainty of the properties' ownership and
alienability exists, and this puts to question the qualification of PALI's public offering. In sum,
the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of
approving the application for listing in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a corporation entity, whose business
judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and
sale of securities in the SEC is not for the Court to determine, but is left to the sound discretion
of the Securities and Exchange Commission. In mandating the SEC to administer the Revised
Securities Act, and in performing its other functions under pertinent laws, the Revised
Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and
regulations as it may consider appropriate in the public interest for the enforcement of the said
laws. The second paragraph of Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any other
manner conveyed to the public, unless registered in accordance with the rules and regulations
that shall be promulgated in the public interest and for the protection of investors by the
Commission. Presidential Decree No. 902-A, on the other hand, provides that the SEC, as
regulatory agency, has supervision and control over all corporations and over the securities
market as a whole, and as such, is given ample authority in determining appropriate policies.
Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of
"full material disclosure" where all companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information about themselves and the securities
they sell, for the protection of the investing public, and under pain of administrative, criminal
and civil sanctions. In connection with this, a fact is deemed material if it tends to induce or
otherwise effect the sale or purchase of its securities. 15 While the employment of this policy is
recognized and sanctioned by the laws, nonetheless, the Revised Securities Act sets substantial
and procedural standards which a proposed issuer of securities must satisfy. 16 Pertinently,
Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of the
registration of a security:
— The Commission may reject a registration statement and refuse to issue a
permit to sell the securities included in such registration statement if it finds
that —
(1) The registration statement is on its face incomplete or inaccurate in any material
respect or includes any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein not
misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of this
Act, or the rules promulgated pursuant thereto, or any order of
the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in the
public interest and for the protection of investors, impose
before the security can be registered;
(iv) has been engaged or is engaged or is about to engage in
fraudulent transaction;
(v) is in any way dishonest or is not of good repute; or
(vi) does not conduct its business in accordance with law or is
engaged in a business that is illegal or contrary to government
rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or to be
based on sound business principles;
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(4) An officer, member of the board of directors, or principal stockholder of the

issuer is disqualified to be such officer, director or principal stockholder; or

(5) The issuer or registrant has not shown to the satisfaction of the Commission that
the sale of its security would not work to the prejudice of the public interest or as a
fraud upon the purchasers or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is, therefore, untenable. As it is, the Court
finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to
support the propriety of the issue of its shares with unfailing clarity, thereby lending support to
the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock exchange.
This does not discount the effectivity of whatever method the SEC, in the exercise of its vested
authority, chooses in setting the standard for public offerings of corporations wishing to do so.
However, the SEC must recognize and implement the mandate of the law, particularly the
Revised Securities Act, the provisions of which cannot be amended or supplanted by mere
administrative issuance.

In resume, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review on Certiorari. The Decisions of the Court of Appeals and the Securities and
Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision
of the Philippine Stock Exchange to deny the application for listing of the private respondent
Puerto Azul Land, Inc.

SO ORDERED.

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