Barreto vs.

La Previsora (57 Phil 649)

EN BANC
G.R. No. L-34719 December 8, 1932
ALBERTO BARRETTO, ET AL., plaintiffs-appellees, vs. LA PREVISORA FILIPINA,
defendant-appellant.

OSTRAND, J.:

DOCTRINE: The law is settled that contracts between a corporation and third
person must be made by or under the authority of its board of directors and not
by its stockholders. Hence, the action of the stockholders in such matters is only
advisory and not in any wise binding on the corporation.

FACTS: Alberto Barretto, Jose Barretto, and Jose de Amusategui were directors of La
Previsora Filipina, from its incorporation up until March 1929. But starting March 1929
they were no longer directors They wanted to recover from defendant corporation La
Previsora Filipina, a mutual building and loan association, 1 percent to each of the
plaintiffs of the net profits of said corporation for the year 1929. Note: La Previsora
Filipina was a mutual building and loan association.

They filed a case against the corporation with the CFI to recover a sum of money. The
above 1 percent of the net profits amounted to 50,727.53 pesos, in accordance with an
amendment to the by-laws of the defendant corporation made on a general meeting of
the stockholders on February 1929 where the board of directors were not present

The case was set for trial, and defendant corporation filed a motion to dismiss for lack of
cause of action by plaintiffs. Court ruled that the plaintiffs showed a cause of action, and
denied the motion to dismiss.

Plaintiffs petitioned the court to decide on the matter in accordance with the prayer of
the complaint. Court claims that since the defendants filed a motion to dismiss, they
waived the right to present evidence. They ruled in favor of plaintiffs Barretto.

Defendants filed a motion for reconsideration with the Trial Court, but it was denied. It
then filed a motion for new trial, on the ground that the decision was contrary to law and
the weight of the evidence. The same was denied. Case was brought to the SC by way
of bill of exceptions.

ISSUE Whether the amended by-laws and the obligation which arose from it are valid?

HELD: NO. The SC ruled in favor of La Previsora Filipina.

Sec. 20 of the Corporation Law limits the authority of a corporation to adopt by-laws
which are not consistent with the provisions of the law. The appellees contend that the
articled in question is merely a provision of the compensation of directors which is not
only consistent with but expressly authorized by Sec. 21 of the Corporation Law.

We cannot agree with this contention. The authority conferred upon corporations in that
section refers only to providing compensation for the future services of directors,
officers, and employees thereof after the adoption of the by-law or other provisions in
relation thereto, and cannot in any sense be held to authorize the giving, as in this case,
of continuous compensation to particular directors after their employment has
terminated for part services rendered gratuitously by them to the corporation.

To permit the transaction involved in this case would be to create an obligation unknown
to law, and to countenance a misapplication of the funds of the defendant building and
loan association to the prejudice of the substantial rights of its shareholders.

Irrespective of the above, the conclusion is the same. The article which the appellees
rely upon is merely a by-law provision adopted by the stockholders of the defendant
corporation, without any action having been takin in relation thereto by its board of
directors.

The law is settled that contracts between a corporation and third person must be made
by or under the authority of its board of directors and not by its stockholders. Hence, the
action of the stockholders in such matters is only advisory and not in any wise binding
on the corporation. There could not be a contract without mutual consent, and it
appears that the plaintiffs did not consent to the provisions of the by-law in question,
but, on the contrary, they objected to and voted against it in the stockholders’ meeting in
which it was adopted.

The amendment of the by-laws of the corporation does not create any legal obligation
on its part to pay to the persons named therein, including the plaintiffs such a life
gratuity or pension out of its net profits. Note: The 1% of net profits asked for by Barretto
is like a pension where they receive money even though they are no longer directors of
the corporation. Clearly, this is illegal.

In addition, although the corporation law allows mutual building and loan associations,
such as defendant corporation, to create by-laws, the same expressly limits such
authority to the adoption of by-laws which are consistent with the provisions of the law.
Note: Court cited Fleischer vs. Botica Nolasco, where an article in the by-laws was
considered invalid. Again, the pension-like stipulation is illegal.

Building and loan associations are founded upon principles of strict mutuality and
equality (A.K.A. Trust Companies). There is an implied contract with its members that it
shall not divert its funds or powers for purposes other than those for which it was
created. Note: This amendment in the by-laws and the pension betrays this principle