G.R. No. 96161 February 21, 1992 v. Universal Converse Rubber Products, Inc., et al, (G. R. No.
v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS
CORPORATION, respondents.
Emeterio V. Soliven & Associates for petitioners.
Narciso A. Manantan for private respondent.
MELENCIO-HERRERA, J.:
Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No.
20067, upholding the Order of the Securities and Exchange Commission, dated 2 January 1990,
in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or removal of the word
"PHILIPS" from private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the
Netherlands, although not engaged in business here, is the registered owner of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-
1674, respectively issued by the Philippine Patents Office (presently known as the Bureau of
Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips
Electrical, for brevity) and Philips Industrial Developments, Inc. (Philips Industrial, for short),
authorized users of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated
on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations belong to the
PHILIPS Group of Companies.
Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a
Certificate of Registration by respondent Commission on 19 May 1982.
On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange
Commission (SEC) asking for the cancellation of the word "PHILIPS" from Private Respondent's
corporate name in view of the prior registration with the Bureau of Patents of the trademark
"PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner, PEBV, and the
previous registration of Petitioners Philips Electrical and Philips Industrial with the SEC.
As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed
with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743) praying for the issuance of a
Writ of Preliminary Injunction, alleging, among others, that Private Respondent's use of the word
PHILIPS amounts to an infringement and clear violation of Petitioners' exclusive right to use the
same considering that both parties engage in the same business.
In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no
legal capacity to sue; that its use of its corporate name is not at all similar to Petitioners' trademark
PHILIPS when considered in its entirety; and that its products consisting of chain rollers, belts,
bearings and cutting saw are grossly different from Petitioners' electrical products.
After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on 27
September 1985, ruled against the issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling,
the latter declared that inasmuch as the SEC found no sufficient ground for the granting of
injunctive relief on the basis of the testimonial and documentary evidence presented, it cannot
order the removal or cancellation of the word "PHILIPS" from Private Respondent's corporate
name on the basis of the same evidence adopted in toto during trial on the merits. Besides, Section
18 of the Corporation Code (infra) is applicable only when the corporate names in question are
identical. Here, there is no confusing similarity between Petitioners' and Private Respondent's
corporate names as those of the Petitioners contain at least two words different from that of the
Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17 June 1987.
On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of
Petitioners and Private Respondent hardly breed confusion inasmuch as each contains at least
two different words and, therefore, rules out any possibility of confusing one for the other.
On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review on
Certiorari before this Court, which Petition was later referred to the Court of Appeals in a
Resolution dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court of
Appeals1 swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation
SCRA 154), the word PHILIPS cannot be used as part of Private Respondent's corporate name
as the same constitutes a dominant part of Petitioners' corporate names. In so holding, the
Appellate Court observed that the Converse case is not four-square with the present case
inasmuch as the contending parties in Converse are engaged in a similar business, that is, the
manufacture of rubber shoes. Upholding the SEC, the Appellate Court concluded that "private
respondents' products consisting of chain rollers, belts, bearings and cutting saw are unrelated
and non-competing with petitioners' products i.e. electrical lamps such that consumers would not
in any probability mistake one as the source or origin of the product of the other."
The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence,
this Petition which was given due course on 22 April 1991, after which the parties were required
to submit their memoranda, the latest of which was received on 2 July 1991. In December 1991,
the SEC was also required to elevate its records for the perusal of this Court, the same not having
been apparently before respondent Court of Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared
that a corporation's right to use its corporate and trade name is a property right, a right in rem,
which it may assert and protect against the world in the same manner as it may protect its tangible
property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a
property right and one which cannot be impaired or defeated by subsequent appropriation by
another corporation in the same field (Red Line Transportation Co. vs. Rural Transit Co.,
September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of a corporation (American Steel
Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R.
Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name
is one of its attributes, an element of its existence, and essential to its identity (6 Fletcher [Perm
Ed], pp. 3-4). The general rule as to corporations is that each corporation must have a name by
which it is to sue and be sued and do all legal acts. The name of a corporation in this respect
designates the corporation in the same manner as the name of an individual designates the person
(Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs.
Starbird. 10 NH 123); and the right to use its corporate name is as much a part of the corporate
franchise as any other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375,
276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name identical with or similar to
one already appropriated by a senior corporation while an individual's name is thrust upon him
(See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A
corporation can no more use a corporate name in violation of the rights of others than an individual
can use his name legally acquired so as to mislead the public and injure another (Armington vs.
Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18, expressly provides that:
No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing
law. Where a change in a corporate name is approved, the commission shall
issue an amended certificate of incorporation under the amended name.
(Emphasis supplied)
The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be
proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate name;
and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom from infringement by similarity is
determined by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq.
63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard,
there is no doubt with respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its
corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated on 29
August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was issued a
Certificate of Registration on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner
PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and their accessories
since 30 September 1922, as evidenced by Certificate of Registration No. 1651.
The second requisite no less exists in this case. In determining the existence of confusing similarity
in corporate names, the test is whether the similarity is such as to mislead a person, using ordinary
care and discrimination. In so doing, the Court must look to the record as well as the names
themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the corporate
names of Petitioners and Private Respondent are not identical, a reading of Petitioner's corporate
names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed,
the dominant word in that all the companies affiliated or associated with the principal corporation,
PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies.
Respondents maintain, however, that Petitioners did not present an iota of proof of actual
confusion or deception of the public much less a single purchaser of their product who has been
deceived or confused or showed any likelihood of confusion. It is settled, however, that proof of
actual confusion need not be shown. It suffices that confusion is probably or likely to occur (6
Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).
It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the
like, while petitioners deal principally with electrical products. It is significant to note, however, that
even the Director of Patents had denied Private Respondent's application for registration of the
trademarks "Standard Philips & Device" for chain, rollers, belts, bearings and cutting saw. That
office held that PEBV, "had shipped to its subsidiaries in the Philippines equipment, machines and
their parts which fall under international class where "chains, rollers, belts, bearings and cutting
saw," the goods in connection with which Respondent is seeking to register 'STANDARD PHILIPS'
. . . also belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).
Furthermore, the records show that among Private Respondent's primary purposes in its Articles
of Incorporation (Annex D, Petition p. 37, Rollo) are the following:
To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire,
dispose of, and deal in and deal with any kind of goods, wares, and
merchandise such as but not limited to plastics, carbon products, office
stationery and supplies, hardware parts, electrical wiring devices, electrical
component parts, and/or complement of industrial, agricultural or commercial
machineries, constructive supplies, electrical supplies and other merchandise
which are or may become articles of commerce except food, drugs and
cosmetics and to carry on such business as manufacturer, distributor, dealer,
indentor, factor, manufacturer's representative capacity for domestic or
foreign companies. (emphasis ours)
For its part, Philips Electrical also includes, among its primary purposes, the following:
To develop manufacture and deal in electrical products, including electronic,
mechanical and other similar products . . . (p. 30, Record of SEC Case No.
2743)
Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from
dealing in the same line of business of electrical devices, products or supplies which fall under its
primary purposes. Besides, there is showing that Private Respondent not only manufactured and
sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised
the same as, among others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42,
June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's
choice of "PHILIPS" as part of its corporate name [STANDARD PHILIPS CORPORATION] . . .
tends to show said respondent's intention to ride on the popularity and established goodwill of said
petitioner's business throughout the world" (Rollo, p. 137). The subsequent appropriator of the
name or one confusingly similar thereto usually seeks an unfair advantage, a free ride of another's
goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC
269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the SEC maintains that
the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the corporate
name of respondent STANDARD PHILIPS CORPORATION, which words will readily identify
Private Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by
the SEC, the proposed name "should not be similar to one already used by another corporation
or partnership. If the proposed name contains a word already used as part of the firm name or
style of a registered company; the proposed name must contain two other words different from
the company already registered" (Emphasis ours). It is then pointed out that Petitioners Philips
Electrical and Philips Industrial have two words different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered
as far back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free
from any infringement by similarity. A corporation has an exclusive right to the use of its name,
which may be protected by injunction upon a principle similar to that upon which persons are
protected in the use of trademarks and tradenames (18 C.J.S. 574). Such principle proceeds upon
the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps
carried on its business thereunder, that another should attempt to use the same name, or the
same name with a slight variation in such a way as to induce persons to deal with it in the belief
that they are dealing with the corporation which has given a reputation to the name (6 Fletcher
[Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510).
Notably, too, Private Respondent's name actually contains only a single word, that is,
"STANDARD", different from that of Petitioners inasmuch as the inclusion of the term
"Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from
partnerships and other business organizations.
The fact that there are other companies engaged in other lines of business using the word
"PHILIPS" as part of their corporate names is no defense and does not warrant the use by Private
Respondent of such word which constitutes an essential feature of Petitioners' corporate name
previously adopted and registered and-having acquired the status of a well-known mark in the
Philippines and internationally as well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988,
SEC Records).
In support of its application for the registration of its Articles of Incorporation with the SEC, Private
Respondent had submitted an undertaking "manifesting its willingness to change its corporate
name in the event another person, firm or entity has acquired a prior right to the use of the said
firm name or one deceptively or confusingly similar to it." Private respondent must now be held to
its undertaking.
As a general rule, parties organizing a corporation must choose a name at
their peril; and the use of a name similar to one adopted by another
corporation, whether a business or a nonbusiness or non-profit organization
if misleading and likely to injure it in the exercise in its corporate functions,
regardless of intent, may be prevented by the corporation having the prior
right, by a suit for injunction against the new corporation to prevent the use of
the name (American Gold Star Mothers, Inc. v. National Gold Star Mothers,
Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948).
WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated
20 November 1990, are SET ASIDE and a new one entered ENJOINING private respondent from
using "PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange
Commission to amend private respondent's Articles of Incorporation by deleting the word PHILIPS
from the corporate name of private respondent.
No costs.
SO ORDERED.
Paras, Padilla, Regalado and Nocon, JJ., concur.
G.R. No. 175278, September 23, 2015
GSIS FAMILY BANK - THRIFT BANK [FORMERLY COMSAVINGS BANK, INC.], Petitioner, v.
BPI FAMILY BANK, Respondent.
DECISION
JARDELEZA, J.:
This is a Petition for Review on Certiorari filed by GSIS Family Bank Thrift Bank1 assailing the
Court of Appeals Decision2 dated March 29, 2006 (Decision) and Resolution3 dated October 23,
2006 which denied petitioner's petition for review of the Securities and Exchange Commission
Decision dated February 22, 2005 (SEC En Banc Decision). The SEC En Banc Decision4
prohibited petitioner from using the word "Family" as part of its corporate name and ordered
petitioner to delete the word from its name.5
Facts
Petitioner was originally organized as Royal Savings Bank and started operations in 1971.
Beginning 1983 and 1984, petitioner encountered liquidity problems. On July 9, 1984, it was
placed under receivership and later temporarily closed by the Central Bank of the Philippines. Two
(2) months after its closure, petitioner reopened and was renamed Comsavings Bank, Inc. under
the management of the Commercial Bank of Manila.6
In 1987, the Government Service Insurance System (GSIS) acquired petitioner from the
Commercial Bank of Manila. Petitioner's management and control was thus transferred to GSIS. 7
To improve its marketability to the public, especially to the members of the GSIS, petitioner sought
Securities and Exchange Commission (SEC) approval to change its corporate name to "GSIS
Family Bank, a Thrift Bank."8 Petitioner likewise applied with the Department of Trade and Industry
(DTI) and Bangko Sentral ng Pilpinas (BSP) for authority to use "GSIS Family Bank, a Thrift Bank"
as its business name. The DTI and the BSP approved the applications.9 Thus, petitioner operates
under the corporate name "GSIS Family Bank - a Thrift Bank," pursuant to the DTI Certificate of
Registration No. 741375 and the Monetary Board Circular approval. 10
Respondent BPI Family Bank was a product of the merger between the Family Bank and Trust
Company (FBTC) and the Bank of the Philippine Islands (BPI).11 On June 27, 1969, the Gotianum
family registered with the SEC the corporate name "Family First Savings Bank," which was
amended to "Family Savings Bank," and then later to "Family Bank and Trust Company." 12 Since
its incorporation, the bank has been commonly known as "Family Bank." In 1985, Family Bank
merged with BPI, and the latter acquired all the rights, privileges, properties, and interests of
Family Bank, including the right to use names, such as "Family First Savings Bank," "Family Bank,"
and "Family Bank and Trust Company." BPI Family Savings Bank was registered with the SEC as
a wholly-owned subsidiary of BPI. BPI Family Savings Bank then registered with the Bureau of
Domestic Trade the trade or business name "BPI Family Bank," and acquired a reputation and
goodwill under the name.13chanroblesvirtuallawlibrary
Proceedings before the SEC
Eventually, it reached respondent's attention that petitioner is using or attempting to use the name
"Family Bank." Thus, on March 8, 2002, respondent petitioned the SEC Company Registration
and Monitoring Department (SEC CRMD) to disallow or prevent the registration of the name "GSIS
Family Bank" or any other corporate name with the words "Family Bank" in it. Respondent claimed
exclusive ownership to the name "Family Bank," having acquired the name since its purchase and
merger with Family Bank and Tmst Company way back 1985. 14 Respondent also alleged that
through the years, it has been known as "BPI Family Bank" or simply "Family Bank" both locally
and internationally. As such, it has acquired a reputation and goodwill under the name, not only
with clients here and abroad, but also with correspondent and competitor banks, and the public in
general.15
Respondent prayed the SEC CRMD to disallow or prevent the registration of the name "GSIS
Family Bank" or any other corporate name with the words "Family Bank" should the same be
presented for registration. Respondent likewise prayed the SEC CRMD to issue an order directing
petitioner or any other corporation to change its corporate name if the names have already been
registered with the SEC.16
The SEC CRMD was thus confronted with the issue of whether the names BPI Family Bank and
GSIS Family Bank are confusingly similar as to require the amendment of the name of the latter
corporation.
The SEC CRMD declared that upon the merger of FBTC with the BPI in 1985, the latter acquired
the right to the use of the name of the absorbed corporation. Thus, BPI Family Bank has a prior
right to the use of the name Family Bank in the banking industry, arising from its long and extensive
nationwide use, coupled with its registration with the Intellectual Property Office (IPO) of the name
"Family Bank" as its trade name. Applying the rule of "priority in registration" based on the legal
maxim first in time, first in right, the SEC CRMD concluded that BPI has the preferential right to
the use of the name "Family Bank." More, GSIS and Comsavings Bank were then fully aware of
the existence and use of the name "Family Bank" by FBTC prior to the latter's merger with BPI. 17
The SEC CRMD also held that there exists a confusing similarity between the corporate names
BPI Family Bank and GSIS Family Bank. It explained that although not identical, the corporate
names are indisputably similar, as to cause confusion in the public mind, even with the exercise
of reasonable care and observation, especially so since both corporations are engaged in the
banking business.18
In a decision19 dated May 19, 2003, the SEC CRMD said, cralawlawlibrary
PREMISES CONSIDERED respondent GSIS FAMILY BANK is hereby directed to refrain from
using the word "Family" as part of its name and make good its commitment to change its name by
deleting or dropping the subject word from its corporate name within [thirty (30) days] from the
date of actual receipt hereof.20chanrobleslaw
Petitioner appealed21 the decision to the SEC En Banc, which denied the appeal, and upheld the
SEC CRMD in the SEC En Banc Decision.22 Petitioner elevated the SEC En Banc Decision to the
Court of Appeals, raising the following issues:chanRoblesvirtualLawlibrary
1. Whether the use by GSIS Family Bank of the words "Family Bank" is deceptively and
confusingly similar to the name BPI Family Bank;
2. Whether the use by Comsavings Bank of "GSIS Family Bank" as its business
constitutes unfair competition;
3. Whether BPI Family Bank is guilty of forum shopping;
4. Whether the approval of the DTI and the BSP of petitioner's application to use the
name GSIS Family Bank constitutes its authority to the lawful and valid use of such
trade name or trade mark;
5. Whether the application of respondent BPI Family Bank for the exclusive use of the
name "Family Bank," a generic name, though not yet approved by IPO of the Bureau of
Patents, has barred the GSIS Family Bank from using such trade mark or name. 23
Court of Appeals Ruling
The Court of Appeals ruled that the approvals by the BSP and by the DTI of petitioner's application
to use the name "GSIS Family Bank" do not constitute authority for its lawful and valid use. It said
that the SEC has absolute jurisdiction, supervision and control over all corporations. 24 The Court
of Appeals held that respondent was entitled to the exclusive use of the corporate name because
of its prior adoption of the name "Family Bank" since 1969. 25 There is confusing similarity in the
corporate names because "[c]onfusion as to the possible association with GSIS might arise if we
were to allow Comsavings Bank to add its parent company's acronym, 'GSIS' to 'Family Bank.'
This is true especially considering both companies belong to the banking industry. Proof of actual
confusion need not be shown. It suffices that confusion is probably or likely to occur."26 The Court
of Appeals also ruled out forum shopping because not all the requirements of litis pendentia are
present.27
The dispositive portion of the decision read,cralawlawlibrary
WHEREFORE, the instant petition for review is hereby DISMISSED for lack of
merit.28chanrobleslaw
After its Motion for Reconsideration was denied,29 petitioner brought the decision to this Court via
a Petition for Review on Certiorari.30
Issues in the Petition
Petitioner raised the following issues in its petition:chanRoblesvirtualLawlibrary
I. The Court of Appeals gravely erred in affirming the SEC Resolution finding the word
"Family" not generic despite its unregistered status with the IPO of the Bureau of
Patents and the use by GSIS-Family Bank in its corporate name of the words "[F]amily
[B]ank" as deceptive and [confusingly similar] to the name BPI Family Bank; 31
II. The Court of Appeals gravely erred when it ruled that the respondent is not guilty of
forum shopping despite the filing of three (3) similar complaints before the DTI and BSP
and with the SEC without the requisite certification of non-forum shopping attached
thereto;32
III. The Court of Appeals gravely erred when it completely disregarded the opinion of the
Banko Sentral ng Pilipinas that the use by the herein petitioner of the trade name GSIS
Family Bank - Thrift Bank is not similar or does not deceive or likely cause any deception
to the public.33
Court's Ruling
We uphold the decision of the Court of Appeals.
Section 18 of the Corporation Code provides,
Section 18. Corporate name. - No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the
amended name.chanrobleslaw
In Philips Export B.V. v. Court of Appeals,34 this Court ruled that to fall within the prohibition of
the law on the right to the exclusive use of a corporate name, two requisites must be proven,
namely:chanRoblesvirtualLawlibrary
(1) that the complainant corporation acquired a prior right over the use of such corporate
name; and
(2) the proposed name is either
(a) identical or
(b) deceptive or confusingly similar to that of any existing corporation or to any other
name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.35
These two requisites are present in this case. On the first requisite of a prior right, Industrial
Refractories Corporation of the Philippines v. Court of Appeals (IRCP case)36 is instructive. In
that case, Refractories Corporation of the Philippines (RCP) filed before the SEC a petition to
compel Industrial Refractories Corporation of the Philippines (IRCP) to change its corporate
name on the ground that its corporate name is confusingly similar with that of RCP's such that
the public may be confused into believing that they are one and the same corporation. The SEC
and the Court of Appeals found for petitioner, and ordered IRCP to delete or drop from its
corporate name the word "Refractories." Upon appeal of IRCP, this Court upheld the decision of
the CA.
Applying the priority of adoption rule to determine prior right, this Court said that RCP has
acquired the right to use the word "Refractories" as part of its corporate name, being its prior
registrant. In arriving at this conclusion, the Court considered that RCP was incorporated on
October 13, 1976 and since then continuously used the corporate name "Refractories Corp. of
the Philippines." Meanwhile, IRCP only started using its corporate name "Industrial Refractories
Corp. of the Philippines" when it amended its Articles of Incorporation on August 23, 1985. 37
In this case, respondent was incorporated in 1969 as Family Savings Bank and in 1985 as BPI
Family Bank. Petitioner, on the other hand, was incorporated as GSIS Family - Thrift Bank only
in 2002,38 or at least seventeen (17) years after respondent started using its name. Following the
precedent in the IRCP case, we rule that respondent has the prior right over use of the corporate
name.
The second requisite in the Philips Export case likewise obtains on two points: the proposed
name is (a) identical or (b) deceptive or confusingly similar to that of any existing corporation or
to any other name already protected by law.
On the first point (a), the words "Family Bank" present in both petitioner and respondent's
corporate name satisfy the requirement that there be identical names in the existing corporate
name and the proposed one. Respondent cannot justify its claim under Section 3 of the Revised
Guidelines in the Approval of Corporate and Partnership Names,39 to wit:cralawlawlibrary
3. The name shall not be identical, misleading or confusingly similar to one already registered by
another corporation or partnership with the Commission or a sole proprietorship registered with
the Department of Trade and Industry.
If the proposed name is similar to the name of a registered firm, the proposed name must
contain at least one distinctive word different from the name of the company already
registered.chanrobleslaw
Section 3 states that if there be identical, misleading or confusingly similar name to one already
registered by another corporation or partnership with the SEC, the proposed name must contain
at least one distinctive word different from the name of the company already registered. To show
contrast with respondent's corporate name, petitioner used the words "GSIS" and "thrift." But
these are not sufficiently distinct words that differentiate petitioner's corporate name from
respondent's. While "GSIS" is merely an acronym of the proper name by which petitioner is
identified, the word "thrift" is simply a classification of the type of bank that petitioner is. Even if
the classification of the bank as "thrift" is appended to petitioner's proposed corporate name, it
will not make the said corporate name distinct from respondent's because the latter is likewise
engaged in the banking business.
This Court used the same analysis in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus,
H.S.K. sa Bans ang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan40 In that case, Iglesia ng Dios Kay Cristo Jesus filed a case before the SEC to
compel Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus to change its corporate name, and
to prevent it from using the same or similar name on the ground that the same causes confusion
among their members as well as the public. Ang mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus claimed that it complied with SEC Memorandum Circular No. 14-2000 by adding not only
two, but eight words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang
Pilipinas, Inc.," which effectively distinguished it from Iglesia ng Dios Kay Cristo Jesus. This
Court rejected the argument, thus:cralawlawlibrary
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name
are, as correctly observed by the SEC, merely descriptive of and also referring to the members,
or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly
serve as an effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym - H.S.K.; not to mention the fact that both
are espousing religious beliefs and operating in the same place. xxx 41chanrobleslaw
On the second point (b), there is a deceptive and confusing similarity between petitioner's
proposed name and respondent's corporate name, as found by the SEC. 42 In determining the
existence of confusing similarity in corporate names, the test is whether the similarity is such as
to mislead a person using ordinary care and discrimination. 43 And even without such proof of
actual confusion between the two corporate names, it suffices that confusion is probable or likely
to occur.44

Petitioner's corporate name is "GSIS Family BankA Thrift Bank" and respondent's corporate
name is "BPI Family Bank." The only words that distinguish the two are "BPI," "GSIS," and
"Thrift." The first two words are merely the acronyms of the proper names by which the two
corporations identify themselves; and the third word simply describes the classification of the
bank. The overriding consideration in determining whether a person, using ordinary care and
discrimination, might be misled is the circumstance that both petitioner and respondent are
engaged in the same business of banking. "The likelihood of confusion is accentuated in cases
where the goods or business of one corporation are the same or substantially the same to that of
another corporation."45
Respondent alleged that upon seeing a Comsavings Bank branch with the signage "GSIS
Family Bank" displayed at its premises, some of the respondent's officers and their clients began
asking questions. These include whether GSIS has acquired Family Bank; whether there is a
joint arrangement between GSIS and Family Bank; whether there is a joint arrangement
between BPI and GSIS regarding Family Bank; whether Comsavings Bank has acquired Family
Bank; and whether there is there an arrangement among Comsavings Bank, GSIS, BPI, and
Family Bank regarding BPI Family Bank and GSIS Family Bank.46 The SEC made a finding that
"[i]t is not a remote possibility that the public may entertain the idea that a relationship or
arrangement indeed exists between BPI and GSIS due to the use of the term 'Family Bank' in
their corporate names."47
Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and
even finality by this Court, if supported by substantial evidence, in recognition of their expertise
on the specific matters under their consideration, more so if the same has been upheld by the
appellate court, as in this case.48
Petitioner cannot argue that the word "family" is a generic or descriptive name, which cannot be
appropriated exclusively by respondent. "Family," as used in respondent's corporate name, is
not generic. Generic marks are commonly used as the name or description of a kind of goods,
such as "Lite" for beer or "Chocolate Fudge" for chocolate soda drink. Descriptive marks, on the
other hand, convey the characteristics, function, qualities or ingredients of a product to one who
has never seen it or does not know it exists, such as "Arthriticare" for arthritis medication. 49
Under the facts of this case, the word "family" cannot be separated from the word "bank." 50 In
asserting their claims before the SEC up to the Court of Appeals, both petitioner and respondent
refer to the phrase "Family Bank" in their submissions. This coined phrase, neither being generic
nor descriptive, is merely suggestive and may properly be regarded as arbitrary. Arbitrary marks
are "words or phrases used as a mark that appear to be random in the context of its use. They
are generally considered to be easily remembered because of their arbitrariness. They are
original and unexpected in relation to the products they endorse, thus, becoming themselves
distinctive."51 Suggestive marks, on the other hand, "are marks which merely suggest some
quality or ingredient of goods, xxx The strength of the suggestive marks lies on how the public
perceives the word in relation to the product or service."52
In Ang v. Teodoro,53 this Court ruled that the words "Ang Tibay" is not al descriptive term within
the meaning of the Trademark Law but rather a fanciful or coined phrase. 54 In so ruling, this
Court considered the etymology and meaning of the Tagalog words, "Ang Tibay" to determine
whether they relate to the quality or description of the merchandise to which respondent therein
applied them as trademark, thus:cralawlawlibrary
We find it necessary to go into the etymology and meaning of the Tagalog words "Ang Tibay" to
determine whether they are a descriptive term, i.e., whether they relate to the quality or
description of the merchandise to which respondent has applied them as a trade-mark. The word
"ang" is a definite article meaning "the" in English. It is also used as an adverb, a contraction of
the word "anong" (what or how). For instance, instead of saying, "Anong ganda!" ("How
beautiful!"), we ordinarily say, "Ang ganda!" Tibay is a root word from which are derived the verb
magpatibay (to strengthen); the nouns pagkamatibay (strength, durability), katibayan (proof,
support, strength), katibaytibayan (superior strength); and the adjectives matibay (strong,
durable, lasting), napakatibay (very strong), kasintibay or magkasintibay (as strong as, or of
equal strength). The phrase "Ang Tibay" is an exclamation denoting admiration of strength or
durability. For instance, one who tries hard but fails to break an object exclaims, "Ang tibay!"
("How strong!") It may also be used in a sentence thus, "Ang tibay ng sapatos mo!" ("How
durable your shoes are!") The phrase "ana tibay" is never used adjectively to define or describe
an object. One does not say, "ang tibay sapatos" or "sapatos ang tibay" to mean "durable
shoes," but "matibay na sapatos" or "sapatos na matibay."
From all of this we deduce that "Ang Tibay" is not a descriptive term within the meaning of the
Trade-Mark Law but rather a fanciful or coined phrase which may properly and legally be
appropriated as a trade-mark or trade-name, xxx55 (Underscoring supplied).chanrobleslaw
The word "family" is defined as "a group consisting of parents and children living together in a
household" or "a group of people related to one another by blood or marriage."56Bank, on the
other hand, is defined as "a financial establishment that invests money deposited by customers,
pays it out when requested, makes loans at interest, and exchanges currency." 57 By definition,
there can be no expected relation between the word "family" and the banking business of
respondent. Rather, the words suggest that respondent's bank is where family savings should
be deposited. More, as in the Ang case, the phrase "family bank" cannot be used to define an
object.
Petitioner's argument that the opinion of the BSP and the certificate of registration granted to it
by the DTI constitute authority for it to use "GSIS Family Bank" as corporate name is also
untenable.
The enforcement of the protection accorded by Section 18 of the Corporation Code to corporate
names is lodged exclusively in the SEC. The jurisdiction of the SEC is not merely confined to the
adjudicative functions provided in Section 5 of the SEC Reorganization Act,58 as amended.59 By
express mandate, the SEC has absolute jurisdiction, supervision and control over all
corporations.60 It is the SEC's duty to prevent confusion in the use of corporate names not only
for the protection of the corporations involved, but more so for the protection of the public. It has
authority to de-register at all times, and under all circumstances corporate names which in its
estimation are likely to generate confusion.61
The SEC62 correctly applied Section 18 of the Corporation Code, and Section 15 of SEC
Memorandum Circular No. 14-2000, pertinent portions of which provide:cralawlawlibrary
In implementing Section 18 of the Corporation Code of the Philippines (BP 69), the following
revised guidelines in the approval of corporate and partnership names are hereby adopted for
the information and guidance of all concerned:chanRoblesvirtualLawlibrary
xxx
15. Registrant corporations or partnership shall submit a letter undertaking to change their
corporate or partnership name in case another person or firm has acquired a prior right to the
use of the said firm name or the same is deceptively or confusingly similar to one already
registered unless this undertaking is already included as one of the provisions of the articles of
incorporation or partnership of the registrant.
chanrobleslaw
The SEC, after finding merit in respondent's claims, can compel petitioner to abide by its
commitment "to change its corporate name in the event that another person, firm or entity has
acquired a prior right to use of said name or one similar to it." 63
Clearly, the only determination relevant to this case is that one made by the SEC in the exercise
of its express mandate under the law. The BSP opinion invoked by petitioner even
acknowledges that "the issue on whether a proposed name is identical or deceptively similar to
that of any of existing corporation is matter within the official jurisdiction and competence of the
SEC."64

Judicial notice65 may also be taken of the action of the IPO in approving respondent's
registration of the trademark "BPI Family Bank" and its logo on October 17, 2008. The certificate
of registration of a mark shall be prima facie evidence of the validity of the registration, the
registrant's ownership of the mark, and of the registrant's exclusive right to use the same in
connection with the goods or services and those that are related thereto specified in the
certificate.66
Finally, we uphold the Court of Appeals' finding that the issue of forum shopping was belatedly
raised by petitioner and, thus, cannot anymore be considered at the appellate stage of the
proceedings. Petitioner raised the issue of forum shopping for the first time only on appeal. 67
Petitioner argued that the complaints filed by respondent did not contain certifications against
non-forum shopping, in violation of Section 5, Rule 7 of the Rules of Court.68
In S.C. Megaworld Construction and Development Corporation vs. Parada,69 this Court said that
objections relating to non-compliance with the verification and certification of non-forum
shopping should be raised in the proceedings below, and not for the first time on appeal. In that
case, S.C. Megaworld argued that the complaint for collection of sum of money should have
been dismissed outright by the trial court on account of an invalid non-forum shopping
certification. It alleged that the Special Power of Attorney granted to Parada did not specifically
include an authority for the latter to sign the verification and certification of non-forum shopping,
thus rendering the complaint defective for violation of Sections 4 and 5 of Rule 7 of the Rules of
Court. On motion for reconsideration of the decision of the Court of Appeals, petitioner raised for
the first time, the issue of forum shopping. The Court ruled against S.C. Megaworld,
thus:cralawlawlibrary
It is well-settled that no question will be entertained on appeal unless it has been raised in the
proceedings below. Points of law, theories, issues and arguments not brought to the attention of
the lower court, administrative agency or quasi-judicial body, need not be considered by a
reviewing court, as they cannot be raised for the first time at that late stage. Basic considerations
of fairness and due process impel this rule. Any issue raised for the first time on appeal is barred
by estoppel.70chanrobleslaw
In this case, the fact that respondent filed a case before the DTI was made known to petitioner 71
long before the SEC rendered its decision. Yet, despite its knowledge, petitioner failed to
question the alleged forum shopping before the SEC. The exceptions to the general rule that
forum shopping should be raised in the earliest opportunity, as explained in the cited case of
Young v. Keng Seng,72 do not obtain in this case.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated March 29,
2006 is hereby AFFIRMED.
SO ORDERED.chanroblesvirtuallawlibrary
Velasco, Jr. (Chairperson) Peralta, Villarama, Jr., and Perez,*JJ., concur.
G.R. No. 101897. March 5, 1993.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF
APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF
LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN
MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private
respondents, which are also educational institutions, to delete the word "Lyceum" from their
corporate names and permanently to enjoin them from using "Lyceum" as part of their respective
names.
Some of the private respondents actively participated in the proceedings before the SEC. These
are the following, the dates of their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum 27 October 1950
Lyceum of Cabagan 31 October 1962
Lyceum of Lallo, Inc. 26 March 1972
Lyceum of Aparri 28 March 1972
Lyceum of Tuao, Inc. 28 March 1972
Lyceum of Camalaniugan 28 March 1972
The following private respondents were declared in default for failure to file an answer despite
service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the
Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against the
Liceum of Araullo was dismissed when that school motu proprio change its corporate name to
"Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc.
to require it to change its corporate name and to adopt another name not "similar [to] or identical"
with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio Sulit held
that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were substantially
identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the
geographical location of the campus being the only word which distinguished one from the other
corporate name. The SEC also noted that petitioner had registered as a corporation ahead of the
Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to change its name to another
name "not similar or identical [with]" the names of previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case
docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court
denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21
October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the
educational institutions it could find using the word "Lyceum" as part of their corporate name, and
advised them to discontinue such use of "Lyceum." When, with the passage of time, it became
clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No. 2579 to
enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC hearing
officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word
"Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case (SEC-
Case No. 1241) and held that the word "Lyceum" was capable of appropriation and that petitioner
had acquired an enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing
officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have
become so identified with petitioner as to render use thereof by other institutions as productive of
confusion about the identity of the schools concerned in the mind of the general public. Unlike its
hearing officer, the SEC En Banc held that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools from one another, especially in view of the
fact that the campuses of petitioner and those of the private respondents were physically quite
remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991,
however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner
filed a motion for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-
46595 did not constitute stare decisis as to apply to this case and in not holding that said
Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary
meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated
by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by
noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare decisis
pertinent, if only because the SEC En Banc itself has re-examined Associate Commissioner Sulit's
ruling in the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. No. L-46595 was
not a reasoned adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as
corporate names are concerned:
"SECTION 18. Corporate name. No corporate name may be allowed by the Securities an
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the amended
name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or which
is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal with the entity concerned, the evasion
of legal obligations and duties, and the reduction of difficulties of administration and supervision
over corporations. 7
We do not consider that the corporate names of private respondent institutions are "identical with,
or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate
names of private respondent entities all carry the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do
not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of
the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the
Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to
a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by
the youth for exercise and by the philosopher Aristotle and his followers for teaching." 8 In time,
the word "Lyceum" became associated with schools and other institutions providing public lectures
and concerts and public discussions. Thus today, the word "Lyceum" generally refers to a school
or an institution of learning. While the Latin word "lyceum" has been incorporated into the English
language, the word is also found in Spanish (liceo) and in French (lycee). As the Court of Appeals
noted in its Decision, Roman Catholic schools frequently use the term; e.g., "Liceo de Manila,"
"Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in
fact as generic in character as the word "university." In the name of the petitioner, "Lyceum"
appears to be a substitute for "university;" in other places, however, "Lyceum," or "Liceo" or
"Lycee" frequently denotes a secondary school or a college. It may be (though this is a question
of fact which we need not resolve) that the use of the word "Lyceum" may not yet be as widespread
as the use of "university," but it is clear that a not inconsiderable number of educational institutions
have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo"
denotes a school or institution of learning, it is not unnatural to use this word to designate an entity
which is organized and operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in
relation to petitioner with the result that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the
doctrine of secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word or phrase has come to mean that the article
was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at least
that portion of the general public which has to do with schools). The Court of Appeals recognized
this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so exclusively by one producer with
reference to this article that, in that trade and to that group of the purchasing public, the word or
phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into which the name or phrase
has evolved through the substantial and exclusive use of the same for a considerable period of
time. Consequently, the same doctrine or principle cannot be made to apply where the evidence
did not prove that the business (of the plaintiff) has continued for so long a time that it has become
of consequence and acquired a good will of considerable value such that its articles and produce
have acquired a well-known reputation, and confusion will result by the use of the disputed name
(by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the
appellant. If there was any of this kind, the same tend to prove only that the appellant had been
using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive use of
the word (Lyceum) was never established or proven as in fact the evidence tend to convey that
the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior to the date the
appellant started using the same word in its corporate name. Furthermore, educational institutions
of the Roman Catholic Church had been using the same or similar word like 'Liceo de Manila,'
'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before appellant
started using the word 'Lyceum'. The appellant also failed to prove that the word 'Lyceum' has
become so identified with its educational institution that confusion will surely arise in the minds of
the public if the same word were to be used by other educational institutions.
In other words, while the appellant may have proved that it had been using the word 'Lyceum' for
a long period of time, this fact alone did not amount to mean that the said word had acquired
secondary meaning in its favor because the appellant failed to prove that it had been using the
same word all by itself to the exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private respondents in the case at
bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the
exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also
that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the
term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name with
the SEC and began using the word "Lyceum." It follows that if any institution had acquired an
exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan
Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which
records had been destroyed during World War II, Western Pangasinan Lyceum should be deemed
to have lost all rights it may have acquired by virtue of its past registration. It might be noted that
the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner had filed its
own registration on 21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must
be deemed to have lost its rights under its original 1933 registration, appears to us to be quite
secondary in importance; we refer to this earlier registration simply to underscore the fact that
petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor
an exclusive use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth
shared with the Western Pangasinan Lyceum and a little later with other private respondent
institutions which registered with the SEC using "Lyceum" as part of their corporation names.
There may well be other schools using Lyceum or Liceo in their names, but not registered with the
SEC because they have not adopted the corporate form of organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive
right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum"
as part of their corporate names. To determine whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's corporate name, it is not enough to
ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names
in their entirety and when the name of petitioner is juxtaposed with the names of private
respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar"
with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision
of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ ., concur.
Gutierrez, Jr., J ., on terminal leave.
[G.R. No. 129552. June 29, 2005]
P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR. and ROSALINA F. JAVIER,
petitioners, vs. HON. COURT OF APPEALS, PAIC SAVINGS & MORTGAGE BANK, INC.,
SHERIFFS GRACE BELVIS, SOFRONIO VILLARIN, PIO MARTINEZ and NICANOR BLANCO,
respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is an appeal by certiorari under Rule 45 of the Rules of Court which seeks to set aside
the decision[1] of the Court of Appeals dated 31 January 1997 which affirmed in toto the decision
of Branch 62 of the Regional Trial Court (RTC) of Makati City, dismissing the complaint for
Annulment of Mortgage and Foreclosure with Preliminary Injunction, Prohibition and Damages
filed by petitioners, and its Resolution[2] dated 20 June 1997 denying petitioners motion for
reconsideration.
A complaint[3] for Annulment of Mortgage and Foreclosure with Preliminary Injunction, Prohibition
and Damages was filed by petitioners P.C. Javier & Sons, Inc. and spouses Pablo C. Javier, Sr.
and Rosalina F. Javier against PAIC Savings & Mortgage Bank, Inc., Grace S. Belvis, Acting Ex
Officio Regional Sheriff of Pasig, Metro Manila and Sofronio M. Villarin, Deputy Sheriff-in-Charge,
before Branch 62 of the RTC of Makati City, on 07 May 1984. The case was docketed as Civil
Case No. 7184.
On 10 May 1984, a Supplemental Complaint[4] was filed to include additional defendants, namely:
Pio Martinez, Acting Ex Officio Regional Sheriff of Antipolo, Rizal, and Nicanor D. Blanco, Deputy
Sheriff-in-Charge.
The facts that gave rise to the aforesaid complaint, as found by Branch 62 of the RTC of Makati
City, and adopted by the respondent court, are as follows:
In February, 1981, Plaintiff P.C. Javier and Sons Services, Inc., Plaintiff Corporation, for short,
applied with First Summa Savings and Mortgage Bank, later on renamed as PAIC Savings and
Mortgage Bank, Defendant Bank, for short, for a loan accommodation under the Industrial
Guarantee Loan Fund (IGLF) for P1.5 Million. On March 21, 1981, Plaintiff Corporation through
Plaintiff Pablo C. Javier, Plaintiff Javier for short, was advised that its loan application was
approved and that the same shall be forwarded to the Central Bank (CB) for processing and
release (Exhibit A also Exhibit 8).
The CB released the loan to Defendant Bank in two (2) tranches of P750,000 each. The first
tranche was released to the Plaintiff Corporation on May 18, 1981 in the amount of P750,000.00
and the second tranche was released to Plaintiff Corporation on November 21, 1981 in the amount
of P750,000.00. From the second tranche release, the amount of P250,000.00 was deducted and
deposited in the name of Plaintiff Corporation under a time deposit.
Plaintiffs claim that the loan releases were delayed; that the amount of P250,000.00 was deducted
from the IGLF loan of P1.5 Million and placed under time deposit; that Plaintiffs were never allowed
to withdraw the proceeds of the time deposit because Defendant Bank intended this time deposit
as automatic payments on the accrued principal and interest due on the loan. Defendant Bank,
however, claims that only the final proceeds of the loan in the amount of P750,000.00 was delayed
the same having been released to Plaintiff Corporation only on November 20, 1981, but this was
because of the shortfall in the collateral cover of Plaintiffs loan; that this second tranche of the
loan was precisely released after a firm commitment was made by Plaintiff Corporation to cover
the collateral deficiency through the opening of a time deposit using a portion of the loan proceeds
in the amount of P250,000.00 for the purpose; that in compliance with their commitment to submit
additional security and open time deposit, Plaintiff Javier in fact opened a time deposit for
P250,000.00 and on February 15, 1983, executed a chattel mortgage over some machineries in
favor of Defendant Bank; that thereafter, Plaintiff Corporation defaulted in the payment of its IGLF
loan with Defendant Bank hence Defendant Bank sent a demand letter dated November 22, 1983,
reminding Plaintiff Javier to make payments because their accounts have been long overdue; that
on May 2, 1984, Defendant Bank sent another demand letter to Plaintiff spouses informing them
that since they have defaulted in paying their obligation, their mortgage will now be foreclosed;
that when Plaintiffs still failed to pay, Defendant Bank initiated extrajudicial foreclosure of the real
estate mortgage executed by Plaintiff spouses and accordingly the auction sale of the property
covered by TCT No. 473216 was scheduled by the ExOfficio Sheriff on May 9, 1984.[5]
The instant complaint was filed to forestall the extrajudicial foreclosure sale of a piece of land
covered by Transfer Certificate of Title (TCT) No. 473216[6] mortgaged by petitioner corporation
in favor of First Summa Savings and Mortgage Bank which bank was later renamed as PAIC
Savings and Mortgage Bank, Inc.[7] It likewise asked for the nullification of the Real Estate
Mortgages it entered into with First Summa Savings and Mortgage Bank. The supplemental
complaint added several defendants who scheduled for public auction other real estate properties
contained in the same real estate mortgages and covered by TCTs No. N-5510, No. 426872, No.
506346 and Original Certificate of Title No. 10146.[8]
Several extrajudicial foreclosures of the mortgaged properties were scheduled but were
temporarily restrained by the RTC notwithstanding the denial[9] of petitioners prayer for a writ of
preliminary injunction. In an Order[10] dated 10 December 1990, the RTC ordered respondents-
sheriffs to maintain the status quo and to desist from further proceeding with the extrajudicial
foreclosure of the mortgaged properties.
Among the issues raised by petitioners at the RTC are whether or not First Summa Savings and
Mortgage Bank and PAIC Savings and Mortgage Bank, Inc. are one and the same entity, and
whether or not their obligation is already due and demandable at the time respondent bank
commenced to extrajudicially foreclose petitioners properties in April 1984.
The RTC declared that First Summa Savings and Mortgage Bank and PAIC Savings and
Mortgage Bank, Inc. are one and the same entity and that petitioner corporation is liable to
respondent bank for the unpaid balance of its Industrial Guarantee Loan Fund (IGLF) loans. The
RTC further ruled that respondent bank was justified in extrajudicially foreclosing the real estate
mortgages executed by petitioner corporation in its favor because the loans were already due and
demandable when it commenced foreclosure proceedings in April 1984.
In its decision dated 06 July 1993, the RTC disposed of the case as follows:
Premises considered, judgment is hereby rendered dismissing the Complaint against Defendant
Bank and ordering Plaintiffs to pay Defendant Bank jointly and severally, the following:
1. The principal amount of P700,453.45 under P.N. No. 713 plus all the accrued interests,
liquidated damages and other fees due thereon from March 18, 1983 until fully paid as provided
in said PN;
2. The principal amount of P749,879.38 under P.N. No. 841 plus all the accrued interests,
liquidated damages and other fees due thereon from September 1, 1982 until fully paid as
provided in such PN;
3. The amount of P40,000.00 as actual damages;
4. The amount of P30,000.00 as exemplary damages;
5. The amount of P50,000.00 as attorneys fees; plus
6. Cost of suit.[11]
Petitioners filed a Motion for Reconsideration[12] which was opposed[13] by respondent bank.
The motion was denied in an Order dated 11 May 1994.
Petitioners appealed the decision to the Court of Appeals. The latter affirmed in toto the decision
of the lower court. It also denied petitioners motion for reconsideration.
Hence, this appeal by certiorari.
Petitioners assigned the following as errors:
a. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DISMISSAL
OF PETITIONERS COMPLAINT AND IN AFFIRMING THE RIGHT OF THE RESPONDENT
BANK TO COLLECT THE IGLF LOANS IN LIEU OF FIRST SUMMA SAVINGS AND MORTGAGE
BANK WHICH ORIGINALLY GRANTED SAID LOANS.
COROLLARY TO THE ABOVE ARGUMENT, THE PUBLIC RESPONDENT COURT ALSO
GRAVELY ERRED WHEN IT RULED THAT THE PETITIONERS CANNOT WITHHOLD THEIR
PAYMENT TO THE RESPONDENT BANK NOTWITHSTANDING THE ADMITTED INABILITY
OF THE RESPONDENT BANK TO FURNISH THE PETITIONERS THE SAID REQUESTED
DOCUMENTS.
b. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE
COLLECTION OF THE ENTIRE PROCEEDS OF THE IGLF LOANS OF P1,500,000.00 DESPITE
THE FACT THAT THE P250,000.00 OF THIS LOAN WAS WITHHELD BY THE FIRST SUMMA
SAVINGS AND MORTGAGE BANK TO BECOME PART OF THE COLLATERALS TO THE SAID
P1,500,000.00 LOAN.
c. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DAMAGES
AWARDED TO THE RESPONDENT BANK DESPITE THE ABSENCE OF MALICE OR BAD
FAITH ON THE PART OF THE PETITIONERS IN FILING THIS CASE AGAINST THE
RESPONDENT BANK.
On the first assigned error, petitioners argue that they are legally justified to withhold their
amortized payments to the respondent bank until such time they would have been properly notified
of the change in the corporate name of First Summa Savings and Mortgage Bank. They claim that
they have never received any formal notice of the alleged change of corporate name of First
Summa Savings and Mortgage Bank to PAIC Savings & Mortgage Bank, Inc. They further claim
that the only and first time they received formal evidence of a change in the corporate name of
First Summa Savings and Mortgage Bank surfaced when respondent bank presented its witness,
Michael Caguioa, on 03 April 1990, where he presented the Securities and Exchange Commission
(SEC) Certificate of Filing of the Amended Articles of Incorporation of First Summa Savings and
Mortgage Bank,[14] the Central Bank (CB) Certificate of Authority[15] to change the name of First
Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., and the CB
Circular Letter[16] dated 27 June 1983.
Their argument does not hold water. Their defense that they should first be formally notified of the
change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings and
Mortgage Bank, Inc., before they will continue paying their loan obligations to respondent bank
presupposes that there exists a requirement under a law or regulation ordering a bank that
changes its corporate name to formally notify all its debtors. After going over the Corporation Code
and Banking Laws, as well as the regulations and circulars of both the SEC and the Bangko
Sentral ng Pilipinas (BSP), we find that there is no such requirement. This being the case, this
Court cannot impose on a bank that changes its corporate name to notify a debtor of such change
absent any law, circular or regulation requiring it. Such act would be judicial legislation. The formal
notification is, therefore, discretionary on the bank. Unless there is a law, regulation or circular
from the SEC or BSP requiring the formal notification of all debtors of banks of any change in
corporate name, such notification remains to be a mere internal policy that banks may or may not
adopt.
In the case at bar, though there was no evidence showing that petitioners were furnished copies
of official documents showing the First Summa Savings and Mortgage Banks change of corporate
name to PAIC Savings and Mortgage Bank, Inc., evidence abound that they had notice or
knowledge thereof. Several documents establish this fact. First, letter[17] dated 16 July 1983
signed by Raymundo V. Blanco, Accountant of petitioner corporation, addressed to PAIC Savings
and Mortgage Bank, Inc. Part of said letter reads: In connection with your inquiry as to the
utilization of funds we obtained from the former First Summa Savings and Mortgage Bank, . . .
Second, Board Resolution[18] of petitioner corporation signed by Pablo C. Javier, Sr. on 24 August
1983 authorizing him to execute a Chattel Mortgage over certain machinery in favor of PAIC
Savings and Mortgage Bank, Inc. Third, Secretarys Certificate[19] signed by Fortunato E. Gabriel,
Corporate Secretary of petitioner corporation, on 01 September 1983, certifying that a board
resolution was passed authorizing Mr. Pablo C. Javier, Sr. to execute a chattel mortgage on the
corporations equipment that will serve as collateral to cover the IGLF loan with PAIC Savings and
Mortgage Bank, Inc. Fourth, undated letter[20] signed by Pablo C. Javier, Sr. and addressed to
PAIC Savings and Mortgage Bank, Inc., authorizing Mr. Victor F. Javier, General Manager of
petitioner corporation, to secure from PAIC Savings and Mortgage Bank, Inc. certain documents
for his signature.
From the foregoing documents, it cannot be denied that petitioner corporation was aware of First
Summa Savings and Mortgage Banks change of corporate name to PAIC Savings and Mortgage
Bank, Inc. Knowing fully well of such change, petitioner corporation has no valid reason not to pay
because the IGLF loans were applied with and obtained from First Summa Savings and Mortgage
Bank. First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are
one and the same bank to which petitioner corporation is indebted. A change in the corporate
name does not make a new corporation, whether effected by a special act or under a general law.
It has no effect on the identity of the corporation, or on its property, rights, or liabilities.[21] The
corporation, upon such change in its name, is in no sense a new corporation, nor the successor
of the original corporation. It is the same corporation with a different name, and its character is in
no respect changed.[22]
Anent the second assigned error, this Court rules that respondent court did not err when it
sustained the collection of the entire proceeds of the IGLF loans amounting to P1,500,000.00
despite the withholding of P250,000.00 to become part of the collaterals to the said P1,500,000.00
IGLF loan.
Petitioners contend that the collaterals they submitted were more than sufficient to cover the
P1,500,000.00 IGLF loan. Such contention is untenable. Petitioner corporation was required to
place P250,000.00 in a time deposit with respondent bank for the simple reason that the collateral
it put up was insufficient to cover the IGLF loans it has received. It admitted the shortfall of its
collateral when it authorized petitioner Pablo C. Javier, Sr., via a board resolution,[23] to execute
a chattel mortgage over certain machinery in favor of PAIC Savings and Mortgage Bank, Inc.
which was certified by its corporate secretary.[24] If the collateral it put up was sufficient, why then
did it execute another chattel mortgage?
In his order dated 07 September 1984, Hon. Rafael T. Mendoza found that the loanable value of
the lands, buildings, machinery and equipment amounted only to P934,000.00. The order reads
in part:
The terms and conditions of the IGLF loan extended to plaintiff corporation are governed by the
loan and security documents evidencing said loan. Although the loan agreement was approved
by the defendant bank, the same has to be processed and be finally approved by the Central Bank
of the Philippines, in pursuance to the IGLF program, of which the defendant bank is an accredited
participant. The defendant had to await Central Banks advise (sic) regarding the final approval of
the loan before the release of the proceeds thereof. The proceeds of the loan was released to the
plaintiff on 6 April and November 20, 1981, and the final proceeds was released only on November
20, 1981, on account of short fall in the collateral covered by the lands and buildings as well as
the machineries and equipment then subject of the existing mortgages in favor of the defendant
bank, having only a loanable value of P934,000.00, and only after a firm commitment made by
plaintiff corporation to the defendant bank to correct the collateral deficiency thru the execution of
a chattel mortgage on additional machineries, equipment and tools and thru the opening of a time
deposit with PAIC Bank using a portion of the loan proceeds in the amount of P250,000.00 to
answer for its obligation to the defendant bank under the IGLF loan was the final proceeds of the
loan released in favor of the plaintiffs. The delay in the release of the final proceeds of the IGLF
loan was due to the aforestated collateral deficiency.[25]
As declared by the respondent court, the finding in said order was not disputed in the appeal
before it. It said that what was contained in petitioners brief was that their loans were
overcollateralized, and fail to specify why or in what manner it was so.[26] Having failed to raise
this issue before the respondent court, petitioners thus cannot raise this issue before this Court.
Moreover, since the issue of whether or not the collateral put up by petitioners is sufficient is
factual, the same is not proper for this Courts consideration. The basic rule is that factual questions
are beyond the province of the Supreme Court in a petition for review.[27]
Petitioners maintain that to collect the P250,000.00 from them would be a clear case of unjust
enrichment because they have not availed or used said amount for the same was unlawfully
withheld from them.
We do not agree. The fundamental doctrine of unjust enrichment is the transfer of value without
just cause or consideration. The elements of this doctrine are: enrichment on the part of the
defendant; impoverishment on the part of the plaintiff; and lack of cause. The main objective is to
prevent one to enrich himself at the expense of another.[28] It is commonly accepted that this
doctrine simply means that a person shall not be allowed to profit or enrich himself inequitably at
another's expense.[29] In the instant case, there is no unjust enrichment to speak of. The amount
of P225,905.79 was applied as payment for petitioner corporations loan which was taken from the
P250,000.00, together with its accrued interest, that was placed in time deposit with First Summa
Savings and Mortgage Bank. The use of said amount as payment was approved by petitioner
Pablo C. Javier, Sr. on 17 March 1983.[30] As further found by the RTC in its decision, the balance
of the time deposit was withdrawn by petitioners.[31]
Petitioner corporation faults respondent bank, then known as First Summa Savings and Mortgage
Bank, for requiring it to put up as additional collateral the amount of P250,000.00 inasmuch as the
CB never required it to do so. It added that respondent bank took advantage of its urgent and
immediate need at the time for the proceeds of the IGLF loans that it had no choice but to comply
with respondent banks requirement to put in time deposits the said amount as additional collateral.
We agree with respondent court that the questioning of the propriety of the placing of the
P250,000.00 in time deposits[32] with respondent bank as additional collateral was belatedly
made. As above-discussed, the requirement to give additional collateral was warranted because
the collateral petitioner corporation put up failed to cover its IGLF loans. If petitioner corporation
was really bent on questioning the reasonableness of putting up the aforementioned amount as
additional collateral, it should have done immediately after it made the time deposits on 26
November 1981. This, it did not do. It questioned the placing of the time deposits only on 08
February 1984[33] or long after defendant bank had already demanded full payment of the loans,
then amounting to P2,045,401.79 as of 22 November 1983. It is too late in the day for petitioner
corporation to question the placing of the P250,000.00 in time deposits after it failed to pay its loan
obligations as scheduled, making them due and demandable, and after a demand for full payment
has been made. We will not allow petitioner corporation to have ones cake and eat it too.
As regards the payments made by petitioner corporation, respondent court has this to say:
The trial court held, based on plaintiffs own exhibits, that plaintiff[s] made the following payments:
On Promissory Note No. 713:
Date Actual Date of Amount
(Per PN Schedule) Payment
July 6, 1981 August 3, 1981 P 28,125.00
October 6, 1981 October 28, 1981 28,836.13
January 6, 1982 January 22, 1982 29,227.38
March 17, 1983 225,905.79
TOTAL P 312,094.30
And on Promissory Note No. 841:
Date Actual Date of Amount
(Per PN Schedule) Payment
February 20, 1982 April 13, 1982 P 28,569.30
May 20, 1982 July 7, 1982 29,254.31
August 20, 1982 August 31, 1982 36,795.44
TOTAL P 94,619.05
Plaintiff-appellant[s] does not dispute the finding, which is obvious from the foregoing summary,
that plaintiff[s] stopped payments on March 17, 1983 on Promissory Note No. 713, and on August
31, 1982 on Promissory Note No. 841.
By simply looking at the amortization schedule attached to the two promissory notes, it is clear
that plaintiff[s] already defaulted on its loan obligations when the defendant Bank gave notice of
the foreclosure proceedings on April 28, 1984. On amortization payments alone, plaintiff[s] should
have paid a total of P459,339 as of April 6, 1984 on Promissory [Note] No. 713, and a total of
P328,173.00 as of February 20, 1984 on Promissory Note [No.] 841. No extended computation is
necessary to demonstrate that, even without imputing the liquidated damages equivalent to 2% a
month on the delayed payments (see second paragraph of the promissory notes), the plaintiffs
were grossly deficient in amortization payments, and already in default when the foreclosure
proceedings were commenced. Further, we note that under the terms of the promissory note,
failure to pay an installment when due shall entitle the bank or its assign to declare all the
obligations as immediately due and payable (second paragraph).[34]
As to the third assigned error, petitioners argue that there being no malice or bad faith on their
part when they filed the instant case, no damages should have been awarded to respondent bank.
We cannot sustain such argument. The presence of malice or bad faith is very evident in the case
before us. By the documents it executed, petitioner corporation was well aware that First Summa
Savings and Mortgage Bank changed its corporate name to PAIC Savings and Mortgage Bank,
Inc. Despite knowledge that First Summa Savings and Mortgage Bank and PAIC Savings and
Mortgage Bank, Inc., are one and the same entity, it pretended otherwise. It used this purported
ignorance as an excuse to renege on its obligation to pay its loans after they became due and
after demands for payment were made, claiming that it never obtained the loans from respondent
bank.
No good faith was shown by petitioner corporation. If it were in good faith in complying with its
loan obligations since it believed that respondent bank had no right to the payment, it should have
made a valid consignation in court. This, it did not do. If petitioner corporation were at a loss as to
who should receive the payment, it could have easily taken steps and inquired from the SEC, CB
of the Philippines or from the bank itself from which it received the loans and to where it made
previous payments. Further, the fact that it was respondent bank that was demanding payment
for loans already due and demandable and not First Summa Savings and Mortgage Bank is
sufficient to make petitioner corporation wonder why this is so. It never took any initiative to clear
the matter. Instead, it paid no attention to the valid demands of respondent bank.
The awarding of actual and compensatory damages, as well as attorneys fees, is justified under
the circumstances. We quote with approval the reasons given by the RTC for the grant of the
same:
Considering that Defendant Bank had been prevented at least four (4) times from foreclosing the
mortgages (i.e., Temporary Restraining Orders of May 9 and 19 and October 22, 1984 and status
quo order of December 10, 1990 enjoining the extrajudicial foreclosure sales of May 9 and 16 and
October 23, 1984 and December 20, 1990, respectively), it is proper that Defendant Bank be
reimbursed its actual expenses. The amount of P40,000.00 is reasonable reimbursement for the
publication and other expenses incurred in the four (4) extrajudicial foreclosures which were
enjoined by the Court. Considering the wanton and reckless filing of this clearly unfounded and
baseless legal action and the fact that Defendant Bank had to defend itself against such suit,
attorneys fees in the amount of P50,000.00 should be paid by the Plaintiffs to the Defendant Bank.
Defendant Bank failed to adduce indubitable proof on the moral and exemplary damages that it
seeks. Nevertheless, since such proof is not absolutely necessary and primarily as an example
for the public good to deter others from filing a similar clearly unfounded legal action, Defendant
Bank should be entitled to an award of exemplary damages.[35]
This Court finds that petitioners failed to comply with what is incumbent upon them to pay their
loans when they became due. The lame excuse they belatedly advanced for their non-payment
cannot and should not prevent respondent bank from exercising its right to foreclose the real
estate mortgages executed in its favor.
WHEREFORE, premises considered, the Court of Appeals decision dated 31 January 1997 and
its resolution dated 20 June 1997 are hereby AFFIRMED in toto. Costs against petitioners.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
G.R. No. L-26370 July 31, 1970
PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff-appellant,
vs.
MARIA CARMEN HARTIGAN, CGH, and O. ENGKEE, defendants-appellees.
Bausa, Ampil & Suarez for plaintiff-appellant.
Nicasio E. Martin for defendants-appellees.
BARREDO, J.:
Appeal from the decision dated 6 October 1962 of the Court of First Instance of Manila
dismissing the action in its Civil Case No. 48925 brought by the herein plaintiff-appellant
Philippine First Insurance Co., Inc. to the Court of Appeals which could, upon finding that the said
appeal raises purely questions of law, declared itself without jurisdiction to entertain the same and,
in its resolution dated 15 July 1966, certified the records thereof to this Court for proper
determination.
The antecedent facts are set forth in the pertinent portions of the resolution of the Court of Appeals
referred to as follows:
According to the complaint, plaintiff was originally organized as an insurance
corporation under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.'
The articles of incorporation originally presented before the Security and Exchange
Commissioner and acknowledged before Notary Public Mr. E. D. Ignacio on June 1,
1953 state that the name of the corporation was 'The Yek Tong Lin Fire and Marine
Insurance Co., Ltd.' On May 26, 1961 the articles of incorporation were amended
pursuant to a certificate of the Board of Directors dated March 8, 1961 changing the
name of the corporation to 'Philippine First Insurance Co., Inc.'.
The complaint alleges that the plaintiff Philippine First Insurance Co., Inc., doing
business under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Lt.'
signed as co-maker together with defendant Maria Carmen Hartigan, CGH, a
promissory note for P5,000.00 in favor of the China Banking Corporation payable within
30 days after the date of the promissory note with the usual banking interest; that the
plaintiff agreed to act as such co-maker of the promissory note upon the application of
the defendant Maria Carmen Hartigan, CGH, who together with Antonio F. Chua and
Chang Ka Fu, signed an indemnity agreement in favor of the plaintiff, undertaking jointly
and severally, to pay the plaintiff damages, losses or expenses of whatever kind or
nature, including attorney's fees and legal costs, which the plaintiff may sustain as a
result of the execution by the plaintiff and co-maker of Maria Carmen Hartigan, CGH, of
the promissory note above-referred to; that as a result of the execution of the promissory
note by the plaintiff and Maria Carmen Hartigan, CGH, the China Banking Corporation
delivered to the defendant Maria Carmen Hartigan, CGH, the sum of P5,000.00 which
said defendant failed to pay in full, such that on August 31, 1961 the same was. renewed
and as of November 27, 1961 there was due on account of the promissory note the sum
of P4,559.50 including interest. The complaint ends with a prayer for judgment against
the defendants, jointly and severally, for the sum of P4,559.50 with interest at the rate
of 12% per annum from November 23, 1961 plus P911.90 by way of attorney's fees and
costs.
Although O. Engkee was made as party defendant in the caption of the complaint, his
name is not mentioned in the body of said complaint. However, his name Appears in
the Annex A attached to the complaint which is the counter indemnity agreement
supposed to have been signed according to the complaint by Maria Carmen Hartigan,
CGH, Antonio F. Chua and Chang Ka Fu.
In their answer the defendants deny the allegation that the plaintiff formerly conducted
business under the name and style of 'The Yek Tong Lin Fire and Marine Insurance
Co., Ltd.' They admit the execution of the indemnity agreement but they claim that they
signed said agreement in favor of the Yek Tong Lin Fire and Marine Insurance Co., Ltd.'
and not in favor of the plaintiff. They likewise admit that they failed to pay the promissory
note when it fell due but they allege that since their obligation with the China Banking
Corporation based on the promissory note still subsists, the surety who co-signed the
promissory note is not entitled to collect the value thereof from the defendants otherwise
they will be liable for double amount of their obligation, there being no allegation that
the surety has paid the obligation to the creditor.
By way of special defense, defendants claim that there is no privity of contract between
the plaintiff and the defendants and consequently, the plaintiff has no cause of action
against them, considering that the complaint does not allege that the plaintiff and the
'Yek Tong Lin Fire and Marine Insurance Co., Ltd.' are one and the same or that the
plaintiff has acquired the rights of the latter. The parties after the admission of Exhibit A
which is the amended articles of incorporation and Exhibit 1 which is a demand letter
dated August 16, 1962 signed by the manager of the loans and discount department of
the China Banking Corporation showing that the promissory note up to said date in the
sum of P4,500.00 was still unpaid, submitted the case for decision based on the
pleadings.
Under date of 6 October 1962, the Court of First Instance of Manila rendered the decision
appealed. It dismissed the action with costs against the plaintiff Philippine First Insurance Co.,
Inc., reasoning as follows:
... With these undisputed facts in mind, the parties correctly concluded that the issues
for resolution by this Court are as follows:
(a) Whether or not the plaintiff is the real party in interest that may validly sue on the
indemnity agreement signed by the defendants and the Yek Tong Lin Fire & Marine
Insurance Co., Ltd. (Annex A to plaintiff's complaint ); and
(b) Whether or not a suit for indemnity or reimbursement may under said indemnity
agreement prosper without plaintiff having yet paid the amount due under said
promissory note.
In the first place, the change of name of the Yek Tong Lin Fire & Marine Insurance Co.,
Ltd. to the Philippines First Insurance Co., Inc. is of dubious validity. Such change of
name in effect dissolved the original corporation by a process of dissolution not
authorized by our corporation law (see Secs. 62 and 67, inclusive, of our Corporation
Law). Moreover, said change of name, amounting to a dissolution of the Yek Tong Lin
Fire & Marine Insurance Co., Ltd., does not appear to have been effected with the
written note or assent of stockholders representing at least two-thirds of the subscribed
capital stock of the corporation, a voting proportion required not only for the dissolution
of a corporation but also for any amendment of its articles of incorporation (Secs. 18
and 62, Corporation Law). Furthermore, such change of corporate name appears to be
against public policy and may be effected only by express authority of law (Red Line
Transportation Co. v. Rural Transit Co., Ltd., 60 Phil. 549, 555; Cincinnati Cooperage
Co., Ltd. vs. Vate, 26 SW 538, 539; Pilsen Brewing Co. vs. Wallace, 125 NE 714), but
there is nothing in our corporation law authorizing the change of corporate name in this
jurisdiction.
In the second place, assuming that the change of name of the Yek Tong Lin Fire &
Marine Insurance Co. Ltd., to Philippines pine First Insurance Co., Inc., as accomplished
on March 8, 1961, is valid, that would mean that the original corporation, the Yek Tong
Lin Fire & Marine Insurance Co., Ltd., became dissolved and of no further existence
since March 8, 1961, so that on May 15, 1961, the date the indemnity agreement, Annex
A, was executed, said original corporation bad no more power to enter into any
agreement with the defendants, and the agreement entered into by it was ineffective for
lack of capacity of said dissolved corporation to enter into said agreement. At any rate,
even if we hold that said change of name is valid, the fact remains that there is no
evidence showing that the new entity, the Philippine First Insurance Co., Inc. has with
the consent of the original parties, assumed the obligations or was assigned the rights
of action in the original corporation, the Yek Tong Lin Fire & Marine Insurance Co., Ltd.
In other words, there is no evidence of conventional subrogation of the Plaintiffs in the
rights of the Yek Tong Lin Fire & Marine Insurance Co., Ltd. under said indemnity
agreement (Arts. 1300, 1301, New Civil Code). without such subrogation assignment of
rights, the herein plaintiff has no cause of action against the defendants, and is,
therefore, not the right party in interest as plaintiff.
 Last, but not least, assuming that the said change of name was legal and operated to
dissolve the original corporation, the dissolved corporation, must pursuant to Sec. 77 of
our corporation law, be deemed as continuing as a body corporate for three (3) years
from March 8, 1961 for the purpose of prosecuting and defending suits. It is, therefore,
the Yek Tong Lin Fire & Marine Insurance Co., Ltd. that is the proper party to sue the
defendants under said indemnity agreement up to March 8, 1964.
Having arrived at the foregoing conclusions, this Court need not squarely pass upon
issue (b) formulated above.
WHEREFORE, plaintiff's action is hereby dismissed, with costs against the plaintiff.
In due time, the Philippine First Insurance Company, Inc. moved for reconsideration of the decision
aforesaid, but said motion was denied on December 3, 1962 in an order worded thus:
The motion for reconsideration, dated November 8, 1962, raises no new issue that we
failed to consider in rendering our decision of October 6, 1962. However, it gives us an
opportunity to amplify our decision as regards the question of change of name of a
corporation in this jurisdiction.
We find nothing in our Corporation Law authorizing a change of name of a corporation
organized pursuant to its provisions. Sec. 18 of the Corporation Law authorizes, in our
opinion, amendment to the Articles of Incorporation of a corporation only as to matters
other than its corporate name. Once a corporation is organized in this jurisdiction by the
execution and registration of its Articles of Incorporation, it shall continue to exist under
its corporate name for the lifetime of its corporate existence fixed in its Articles of
Incorporation, unless sooner legally dissolved (Sec. 11, Corp. Law). Significantly,
change of name is not one of the methods of dissolution of corporations expressly
authorized by our Corporation Law. Also significant is the fact that the power to change
its corporate name is not one of the general powers conferred on corporations in this
jurisdiction (Sec. 13, Corp. Law). The enumeration of corporate powers made in our
Corporation Law implies the exclusion of all others (Thomas v. West Jersey R. Co., 101
U.S. 71, 25 L. ed. 950). It is obvious, in this connection, that change of name is not one
of the powers necessary to the exercise of the powers conferred on corporations by
said Sec. 13 (see Sec. 14, Corp. Law).
To rule that Sec. 18 of our Corporation Law authorizes the change of name of a
corporation by amendment of its Articles of Incorporation is to indulge in judicial
legislation. We have examined the cases cited in Volume 13 of American Jurisprudence
in support of the proposition that the general power to alter or amend the charter of a
corporation necessarily includes the power to alter the name of a corporation, and find
no justification for said conclusion arrived at by the editors of American Jurisprudence.
On the contrary, the annotations in favor of plaintiff's view appear to have been based
on decisions in cases where the statute itself expressly authorizes change of corporate
name by amendment of its Articles of Incorporation. The correct rule in harmony with
the provisions of our Corporation Law is well expressed in an English case as follows:
After a company has been completely register without defect or
omission, so as to be incorporated by the name set forth in the deed
of settlement, such incorporated company has not the power to
change its name ... Although the King by his prerogative might
incorporate by a new name, and the newly named corporation
might retain former rights, and sometimes its former name also, ...
it never appears to be such an act as the corporation could do by
itself, but required the same power as created the corporation.
(Reg. v. Registrar of Joint Stock Cos 10 Q.B. 839, 59 E.C.L. 839).
The contrary view appears to represent the minority doctrine, judging from the
annotations on decided cases on the matter.
The movant invokes as persuasive precedent the action of the Securities Commissioner
in tacitly approving the Amended, Articles of Incorporation on May 26, 1961. We regret
that we cannot in good conscience lend approval to this action of the Securities and
Exchange Commissioner. We find no justification, legal, moral, or practical, for adhering
to the view taken by the Securities and Exchange Commissioner that the name of a
corporation in the Philippines may be changed by mere amendment of its Articles of
Incorporation as to its corporate name. A change of corporate name would serve no
useful purpose, but on the contrary would most probably cause confusion. Only a
dubious purpose could inspire a change of a corporate. name which, unlike a natural
person's name, was chosen by the incorporators themselves; and our Courts should
not lend their assistance to the accomplishment of dubious purposes.
WHEREFORE, we hereby deny plaintiff's motion for reconsideration, dated November
8, 1962, for lack of merit.
In this appeal appellant contends that
I
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS JURISDICTION, THERE IS
NOTHING IN OUR CORPORATION LAW AUTHORIZING THE CHANGE OF
CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A CHANGE OF CORPORATE
NAME APPEARS TO BE AGAINST PUBLIC POLICY;
III
THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE OF CORPORATE NAME
HAS THE LEGAL EFFECT OF DISSOLVING THE ORIGINAL CORPORATION:
IV
THE TRIAL COURT ERRED IN HOLDING THAT THE CHANGE OF NAME OF THE
YEK TONG LIN FIRE & MARINE INSURANCE CO., LTD. IS OF DUBIOUS VALIDITY;
V
THE TRIAL COURT ERRED IN HOLDING THAT THE APPELLANT HEREIN IS NOT
THE RIGHT PARTY INTEREST TO SUE DEFENDANTS-APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE COMPLAINT.
Appellant's Position is correct; all the above assignments of error are well taken. The whole case,
however, revolves around only one question. May a Philippine corporation change its name and
still retain its original personality and individuality as such?
The answer is not difficult to find. True, under Section 6 of the Corporation Law, the first thing
required to be stated in the Articles of Incorporation of any corn corporation is its name, but it is
only one among many matters equally if not more important, that must be stated therein. Thus, it
is also required, for example, to state the number and names of and residences of the
incorporators and the residence or location of the principal office of the corporation, its term of
existence, the amount of its capital stock and the number of shares into which it is divided, etc.,
etc.
On the other hand, Section 18 explicitly permits the articles of incorporation to be amended thus:
Sec. 18. Any corporation may for legitimate corporate purpose or purposes, amend
its articles of incorporation by a majority vote of its board of directors or trustees and the
vote or written assent of two-thirds of its members, if it be a nonstock corporation or, if
it be a stock corporation, by the vote or written assent of the stockholders representing
at least two-thirds of the subscribed capital stock of the corporation Provided, however,
That if such amendment to the articles of incorporation should consist in extending the
corporate existence or in any change in the rights of holders of shares of any class, or
would authorize shares with preferences in any respect superior to those of outstanding
shares of any class, or would restrict the rights of any stockholder, then any stockholder
who did not vote for such corporate action may, within forty days after the date upon
which such action was authorized, object thereto in writing and demand Payment for
his shares. If, after such a demand by a stockholder, the corporation and the stockholder
cannot agree upon the value of his share or shares at the time such corporate action
was authorized, such values all be ascertained by three disinterested persons, one of
whom shall be named by the stockholder, another by the corporation, and the third by
the two thus chosen. The findings of the appraisers shall be final, and if their award is
not paid by the corporation within thirty days after it is made, it may be recovered in an
action by the stockholder against the corporation. Upon payment by the corporation to
the stockholder of the agreed or awarded price of his share or shares, the stockholder
shall forthwith transfer and assign the share or shares held by him as directed by the
corporation: Provided, however, That their own shares of stock purchased or otherwise
 acquired by banks, trust companies, and insurance companies, should be disposed of
within six months after acquiring title thereto.
Unless and until such amendment to the articles of incorporation shall have been
abandoned or the action rescinded, the stockholder making such demand in writing
shall cease to be a stockholder and shall have no rights with respect to such shares,
except the right to receive payment therefor as aforesaid.
A stockholder shall not be entitled to payment for his shares under the provisions of this
section unless the value of the corporate assets which would remain after such payment
would be at least equal to the aggregate amount of its debts and liabilities and the
aggregate par value and/or issued value of the remaining subscribed capital stock.
A copy of the articles of incorporation as amended, duly certified to be correct by the
president and the secretary of the corporation and a majority of the board of directors
or trustees, shall be filed with the Securities and Exchange Commissioner, who shall
attach the same to the original articles of incorporation, on file in his office. From the
time of filing such copy of the amended articles of incorporation, the corporation shall
have the same powers and it and the members and stockholders thereof shall thereafter
be subject to the same liabilities as if such amendment had been embraced in the
original articles of incorporation: Provided, however, That should the amendment
consist in extending the corporate life, the extension shall not exceed 50 years in any
one instance. Provided, further, That the original articles and amended articles together
shall contain all provisions required by law to be set out in the articles of incorporation:
And provided, further, That nothing in this section shall be construed to authorize any
corporation to increase or diminish its capital stock or so as to effect any rights or actions
which accrued to others between the time of filing the original articles of incorporation
and the filing of the amended articles.
The Securities and, Exchange Commissioner shall be entitled to collect and receive the sum of
ten pesos for filing said copy of the amended articles of incorporation. Provided, however, That
when the amendment consists in extending the term of corporate existence, the Securities and
Exchange Commissioner shall be entitled to collect and receive for the filing of its amended articles
of incorporation the same fees collectible under existing law for the filing of articles of
incorporation. The Securities & Exchange Commissioner shall not hereafter file any amendment
to the articles of incorporation of any bank, banking institution, or building and loan association
unless accompanied by a certificate of the Monetary Board (of the Central Bank) to the effect that
such amendment is in accordance with law. (As further amended by Act No. 3610, Sec. 2 and
Sec. 9. R.A. No. 337 and R.A. No. 3531.)
It can be gleaned at once that this section does not only authorize corporations to amend their
charter; it also lays down the procedure for such amendment; and, what is more relevant to the
present discussion, it contains provisos restricting the power to amend when it comes to the term
of their existence and the increase or decrease of the capital stock. There is no prohibition therein
against the change of name. The inference is clear that such a change is allowed, for if the
legislature had intended to enjoin corporations from changing names, it would have expressly
stated so in this section or in any other provision of the law.
No doubt, "(the) name (of a corporation) is peculiarly important as necessary to the very existence
of a corporation. The general rule as to corporations is that each corporation shall have a name
by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect
designates the corporation in the same manner as the name of an individual designates the
person."1 Since an individual has the right to change his name under certain conditions, there is
no compelling reason why a corporation may not enjoy the same right. There is nothing sacrosanct
in a name when it comes to artificial beings. The sentimental considerations which individuals
attach to their names are not present in corporations and partnerships. Of course, as in the case
of an individual, such change may not be made exclusively. by the corporation's own act. It has to
follow the procedure prescribed by law for the purpose; and this is what is important and
indispensably prescribed strict adherence to such procedure.
Local well known corporation law commentators are unanimous in the view that a corporation may
change its name by merely amending its charter in the manner prescribed by law.2 American
authorities which have persuasive force here in this regard because our corporation law is of
American origin, the same being a sort of codification of American corporate law,3 are of the same
opinion.
A general power to alter or amend the charter of a corporation necessarily includes the
power to alter the name of the corporation. Ft. Pitt Bldg., etc., Assoc. v. Model Plan
Bldg., etc., Assoc., 159 Pa. St. 308, 28 Atl. 215; In re Fidelity Mut. Aid Assoc., 12 W.N.C.
(Pa.) 271; Excelsior Oil Co., 3 Pa. Co. Ct. 184; Wetherill Steel Casting Co., 5 Pa. Co.
Ct. 337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec. 7, relating to an increase of the
capital stock of a corporation, it is provided that 'such agreement may be amended in
any other particular, excepting as provided in the following section', which relates to a
decrease of the capital stock This section has been held to authorize a change in the
name of a corporation. Armington v. Palmer, 21 R.I. 109, 42 Atl. 308, 43, L.R.A. 95, 79
Am. St. Rep. 786. (Vol. 19, American and English Annotated Cases, p. 1239.)
Fletcher, a standard authority on American an corporation law also says:
Statutes are to be found in the various jurisdictions dealing with the matter of change in
corporate names. Such statutes have been subjected to judicial construction and have,
in the main, been upheld as constitutional. In direct terms or by necessary implication,
they authorize corporations new names and prescribe the mode of procedure for that
purpose. The same steps must be taken under some statutes to effect a change in a
corporate name, as when any other amendment of the corporate charter is sought ....
When the general law thus deals with the subject, a corporation can change its name
only in the manner provided. (6 Fletcher, Cyclopedia of the Law of Private Corporations,
1968 Revised Volume, pp. 212-213.) (Emphasis supplied)
The learned trial judge held that the above-quoted proposition are not supported by the weight of
authority because they are based on decisions in cases where the statutes expressly authorize
change of corporate name by amendment of the articles of incorporation. We have carefully
examined these authorities and We are satisfied of their relevance. Even Lord Denman who has
been quoted by His Honor from In Reg. v. Registrar of Joint Stock Cos. 10, Q.B., 59 E.C.L.
maintains merely that the change of its name never appears to be such an act as the corporation
could do for itself, but required ;the same Power as created a corporation." What seems to have
been overlooked, therefore, is that the procedure prescribes by Section 18 of our Corporation Law
for the amendment of corporate charters is practically identical with that for the incorporation itself
of a corporation.
In the appealed order of dismissal, the trial court, made the observation that, according to this
Court in Red Line Transportation Co. v. Rural Transit Co., Ltd., 60 Phil, 549, 555, change of name
of a corporation is against public policy. We must clarify that such is not the import of Our said
decision. What this Court held in that case is simply that:
We know of no law that empowers the Public Service Commission or any court in this
jurisdiction to authorize one corporation to assume the name of another corporation as
a trade name. Both the Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc.,
are Philippine corporations and the very law of their creation and continued existence
requires each to adopt and certify a distinctive name. The incorporators 'constitute a
body politic and corporate under the name stated in the certificate.' (Section 11, Act No.
1459, as amended.) A corporation has the power 'of succession by its corporate name.'
(Section 13, ibid.) The name of a corporation is therefore essential to its existence. It
cannot change its name except in the manner provided by the statute. By that name
alone is it authorized to transact business. The law gives a corporation no express or
implied authority to assume another name that is unappropriated; still less that of
another corporation, which is expressly set apart for it and protected by the law. If any
corporation could assume at pleasure as an unregistered trade name the name of
another corporation, this practice would result in confusion and open the door to frauds
and evasions and difficulties of administration and supervision. The policy of the law as
expressed our corporation statute and the Code of Commerce is clearly against such a
practice. (Cf. Scarsdale Pub. Co. Colonial Press vs. Carter, 116 New York
Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois [Appellate
Courts], 428, 434.)
In other words, what We have held to be contrary to public policy is the use by one corporation of
the name of another corporation as its trade name. We are certain no one will disagree that such
an act can only "result in confusion and open the door to frauds and evasions and difficulties of
administration and supervision." Surely, the Red Line case was not one of change of name.
Neither can We share the posture of His Honor that the change of name of a corporation results
in its dissolution. There is unanimity of authorities to the contrary.
An authorized change in the name of a corporation has no more effect upon its identity
as a corporation than a change of name of a natural person has upon his identity. It
does not affect the rights of the corporation or lessen or add to its obligations. After a
corporation has effected a change in its name it should sue and be sued in its new name
.... (13 Am. Jur. 276-277, citing cases.)
A mere change in the name of a corporation, either by the legislature or by the
corporators or stockholders under legislative authority, does not, generally speaking,
affect the identity of the corporation, nor in any way affect the rights, privileges, or
obligations previously acquired or incurred by it. Indeed, it has been said that a change
of name by a corporation has no more effect upon the identity of the corporation than a
change of name by a natural person has upon the identity of such person. The
corporation, upon such change in its name, is in no sense a new corporation, nor the
successor of the original one, but remains and continues to be the original corporation.
It is the same corporation with a different name, and its character is in no respect
changed. ... (6 Fletcher, Cyclopedia of the Law of Private Corporations, 224-225, citing
cases.)
The change in the name of a corporation has no more effect upon its identity as a
corporation than a change of name of a natural person has upon his identity. It does not
affect the rights of the corporation, or lessen or add to its obligations.
England. Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L. J. Exch. 418.
United States. Metropolitan Nat. Bank v. Claggett, 141 U.S. 520, 12 S. Ct. 60, 35
U.S. (L. ed.) 841.
Alabama. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So. 670; North
Birmingham Lumber Co. v. Sims, 157 Ala. 595, 48 So. 84.
Connecticut. Trinity Church v. Hall, 22 Com. 125.
Illinois. Mt. Palatine Academy v. Kleinschnitz 28 III, 133; St. Louis etc. R. Co. v. Miller,
43 Ill. 199; Reading v. Wedder, 66 III. 80.
Indiana. Rosenthal v. Madison etc., Plank Road Co., 10 Ind. 358.
Kentucky. Cahill v. Bigger, 8 B. Mon. 211; Wilhite v. Convent of Good Shepherd, 177
Ky. 251, 78 S. W. 138.
Maryland. Phinney v. Sheppard & Enoch Pratt Hospital, 88 Md. 633, 42 Atl. 58, writ
of error dismissed, 177 U.S. 170, 20 S. Ct. 573, 44 U.S. (L. ed.) 720.
Missouri. Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. Carlon v. City Sav. Bank, 82 Neb. 582, 188 N. W. 334. New York First
Soc of M.E. Church v. Brownell, 5 Hun 464.
Pennsylvania. Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. South Carolina Mut Ins. Co. v. Price 67 S.C. 207, 45 S.E. 173.
Virginia. Wilson v. Chesapeake etc., R. Co., 21 Gratt 654; Wright-Caesar Tobacco
Co. v. Hoen, 105 Va. 327, 54 S.E. 309.
Washington. King v. Ilwaco R. etc., Co., 1 Wash. 127. 23 Pac. 924.
Wisconsin. Racine Country Bank v. Ayers, 12 Wis. 512.
The fact that the corporation by its old name makes a format transfer of its property to
the corporation by its new name does not of itself show that the change in name has
affected a change in the identity of the corporation. Palfrey v. Association for Relief,
etc., 110 La. 452, 34 So. 600. The fact that a corporation organized as a state bank
afterwards becomes a national bank by complying with the provisions of the National
Banking Act, and changes its name accordingly, has no effect on its right to sue upon
obligations or liabilities incurred to it by its former name. Michigan Ins. Bank v. Eldred
143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has been held not to be affected by the
fact that the church afterwards took a different name. Cahill v. Bigger, 8 B. Mon (ky)
211.
A change in the name of a corporation is not a divestiture of title or such a change as
requires a regular transfer of title to property, whether real or personal, from the
corporation under one name to the same corporation under another name. McCloskey
v. Doherty, 97 Ky. 300, 30 S. W. 649. (19 American and English Annotated Cases 1242-
1243.)
As was very aptly said in Pacific Bank v. De Ro 37 Cal. 538, "The changing of the name
of a corporation is no more the creation of a corporation than the changing of the name
of a natural person is the begetting of a natural person. The act, in both cases, would
seem to be what the language which we use to designate it imports a change of
name, and not a change of being.
Having arrived at the above conclusion, We have agree with appellant's pose that the lower court
also erred in holding that it is not the right party in interest to sue defendants-appellees.4 As
correctly pointed out by appellant, the approval by the stockholders of the amendment of its
articles of incorporation changing the name "The Yek Tong Lin Fire & Marine Insurance Co., Ltd."
to "Philippine First Insurance Co., Inc." on March 8, 1961, did not automatically change the name
of said corporation on that date. To be effective, Section 18 of the Corporation Law, earlier quoted,
requires that "a copy of the articles of incorporation as amended, duly certified to be correct by the
president and the secretary of the corporation and a majority of the board of directors or trustees,
shall be filed with the Securities & Exchange Commissioner", and it is only from the time of such
filing, that "the corporation shall have the same powers and it and the members and stockholders
thereof shall thereafter be subject to the same liabilities as if such amendment had been embraced
in the original articles of incorporation." It goes without saying then that appellant rightly acted in
its old name when on May 15, 1961, it entered into the indemnity agreement, Annex A, with the
defendant-appellees; for only after the filing of the amended articles of incorporation with the
Securities & Exchange Commission on May 26, 1961, did appellant legally acquire its new name;
and it was perfectly right for it to file the present case In that new name on December 6, 1961.
Such is, but the logical effect of the change of name of the corporation upon its actions.
Actions brought by a corporation after it has changed its name should be brought under
the new name although for the enforcement of rights existing at the time the change
was made. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So. 670: Newlan v.
Lombard University, 62 III. 195; Thomas v. Visitor of Frederick County School, 7 Gill &
J (Md.) 388; Delaware, etc., R. Co. v. Trick, 23 N. J. L. 321; Northumberland Country
Bank v. Eyer, 60 Pa. St. 436; Wilson v. Chesapeake etc., R. Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not affect its right to bring an action on
a note given to the corporation under its former name. Cumberland College v. Ish, 22.
Cal. 641; Northwestern College v. Schwagler, 37 Ia. 577. (19 American and English
Annotated Cases 1243.)
In consequence, We hold that the lower court erred in dismissing appellant's complaint. We take
this opportunity, however, to express the Court's feeling that it is apparent that appellee's position
is more technical than otherwise. Nowhere in the record is it seriously pretended that the
indebtedness sued upon has already been paid. If appellees entertained any fear that they might
again be made liable to Yek Tong Lin Fire & Marine Insurance Co. Ltd., or to someone else in its
behalf, a cursory examination of the records of the Securities & Exchange Commission would
have sufficed to clear up the fact that Yek Tong Lin had just changed its name but it had not
ceased to be their creditor. Everyone should realize that when the time of the courts is utilized for
cases which do not involve substantial questions and the claim of one of the parties, therein is
based on pure technicality that can at most delay only the ultimate outcome necessarily adverse
to such party because it has no real cause on the merits, grave injustice is committed to
numberless litigants whose meritorious cases cannot be given all the needed time by the courts.
We address this appeal once more to all members of the bar, in particular, since it is their bounden
duty to the profession and to our country and people at large to help ease as fast as possible the
clogged dockets of the courts. Let us not wait until the people resort to other means to secure
speedy, just and inexpensive determination of their cases.
WHEREFORE, judgment of the lower court is reversed, and this case is remanded to the trial
court for further proceedings consistent herewith With costs against appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee and
Villamor, JJ., concur.
FIRST DIVISION
G.R. No. 157900, July 22, 2013
ZUELLIG FREIGHT AND CARGO SYSTEMS, Petitioner, v. NATIONAL LABOR RELATIONS
COMMISSION AND RONALDO V. SAN MIGUEL, Respondents.
DECISION
BERSAMIN, J.:
The mere change in the corporate name is not considered under the law as the creation of a new
corporation; hence, the renamed corporation remains liable for the illegal dismissal of its employee
separated under that guise.
The Case
Petitioner employer appeals the decision promulgated on November 6, 2002, 1 whereby the Court
of Appeals (CA) dismissed its petition for certiorari and upheld the adverse decision of the National
Labor Relations Commission (NLRC) finding respondent Ronaldo V. San Miguel to have been
illegally dismissed.
Antecedents
San Miguel brought a complaint for unfair labor practice, illegal dismissal, non-payment of salaries
and moral damages against petitioner, formerly known as Zeta Brokerage Corporation (Zeta). 2 He
alleged that he had been a checker/customs representative of Zeta since December 16, 1985;
that in January 1994, he and other employees of Zeta were informed that Zeta would cease
operations, and that all affected employees, including him, would be separated; that by letter dated
February 28, 1994, Zeta informed him of his termination effective March 31, 1994; that he
reluctantly accepted his separation pay subject to the standing offer to be hired to his former
position by petitioner; and that on April 15, 1994, he was summarily terminated, without any valid
cause and due process.
San Miguel contended that the amendments of the articles of incorporation of Zeta were for the
purpose of changing the corporate name, broadening the primary functions, and increasing the
capital stock; and that such amendments could not mean that Zeta had been thereby dissolved. 3
On its part, petitioner countered that San Miguels termination from Zeta had been for a cause
authorized by the Labor Code; that its non-acceptance of him had not been by any means irregular
or discriminatory; that its predecessor-in-interest had complied with the requirements for
termination due to the cessation of business operations; that it had no obligation to employ San
Miguel in the exercise of its valid management prerogative; that all employees had been given
sufficient time to make their decision whether to accept its offer of employment or not, but he had
not responded to its offer within the time set; that because of his failure to meet the deadline, the
offer had expired; that he had nonetheless been hired on a temporary basis; and that when it
decided to hire another employee instead of San Miguel, such decision was not arbitrary because
of seniority considerations.4
Decision of the Labor Arbiter
On November 15, 1999, Labor Arbiter Francisco A. Robles rendered a decision holding that San
Miguel had been illegally dismissed,5 to wit:cralavvonlinelawlibrary
Contrary to respondents claim that Zeta ceased operations and closed its business, we believe
that there was merely a change of business name and primary purpose and upgrading of stocks
of the corporation. Zuellig and Zeta are therefore legally the same person and entity and this
was admitted by Zuelligs counsel in its letter to the VAT Department of the Bureau of Internal
Revenue on 08 June 1994 (Reply, Annex A). As such, the termination of complainants legality of his dismissal.
services allegedly due to cessation of business operations of Zeta is deemed illegal.
Notwithstanding his receipt of separation benefits from respondents, complainant is not
estopped from questioning the legality of his dismissal.6
xxx x
WHEREFORE, in view of the foregoing, complainant is found to have been illegally dismissed.
Respondent Zuellig Freight and Cargo Systems, Inc. is hereby ordered to pay complainant his
backwages from April 1, 1994 up to November 15, 1999, in the amount of THREE HUNDRED
TWENTY FOUR THOUSAND SIX HUNDRED FIFTEEN PESOS (P324,615.00).
The same respondent is ordered to pay the complainant Ronaldo San Miguel attorneys fees
equivalent to ten percent (10%) of the total award.
All other claims are dismissed.
SO ORDERED.7
Decision of the NLRC
Petitioner appealed, but the NLRC issued a resolution on April 4, 2001, 8 affirming the decision of
the Labor Arbiter.
The NLRC later on denied petitioners motion for reconsideration via its resolution dated June 15,
2001.9
Decision of the CA
Petitioner then filed a petition for certiorari in the CA, imputing to the NLRC grave abuse of
discretion amounting to lack or excess of jurisdiction, as follows:cralavvonlinelawlibrary
1. In failing to consider the circumstances attendant to the cessation of business of
Zeta;chanroblesvirtualawlibrary
2. In failing to consider that San Miguel failed to meet the deadline Zeta fixed for its
employees to accept the offer of petitioner for re-
employment;chanroblesvirtualawlibrary
3. In failing to consider that San Miguels employment with petitioner from April 1 to
15, 1994 could in no way be interpreted as a continuation of employment with
Zeta;chanroblesvirtualawlibrary
4. In admitting in evidence the letter dated January 21, 1994 of petitioners counsel
to the Bureau of Internal Revenue; and
5. In awarding attorneys fees to San Miguel based on Article 2208 of the Civil Code
and Article 111 of the Labor Code.
On November 6, 2002, the CA promulgated its assailed decision dismissing the petition for
certiorari,10viz:cralavvonlinelawlibrary
A careful perusal of the records shows that the closure of business operation was not validly
made. Consider the Certificate of Filing of the Amended Articles of Incorporation which clearly
shows that petitioner Zuellig is actually the former Zeta as per amendment dated January 21,
1994. The same observation can be deduced with respect to the Certificate of Filing of Amended
By-Laws dated May 10, 1994. As aptly pointed out by private respondent San Miguel, the
amendment of the articles of incorporation merely changed its corporate name, broadened its
primary purpose and increased its authorized capital stocks. The requirements contemplated in
Article 283 were not satisfied in this case. Good faith was not established by mere registration
with the Securities and Exchange Commission (SEC) of the Amended Articles of Incorporation
and By-Laws. The factual milleu of the case, considered in its totality, shows that there was no
closure to speak of. The termination of services allegedly due to cessation of business
operations of Zeta was illegal. Notwithstanding private respondent San Miguels receipt of
separation benefits from petitioner Zuellig, the former is not estopped from questioning the
Petitioner Zuelligs allegation that the five employees who refused to receive the termination
letters were verbally informed that they had until 6:00 p.m. of March 1, 1994 to receive the
termination letters and sign the employment contracts, otherwise the former would be
constrained to withdraw its offer of employment and seek for replacements in order to ensure the
smooth operations of the new company from its opening date, is of no moment in view of the
foregoing circumstances. There being no valid closure of business operations, the dismissal of
private respondent San Miguel on alleged authorized cause of cessation of business pursuant to
Article 283 of the Labor Code, was utterly illegal. Despite verbal notice that the employees had
until 6:00 p.m. of March 1, 1994 to receive the termination letters and sign the employment
contracts, the dismissal was still illegal for the said condition is null and void. In point of facts and
law, private respondent San Miguel remained an employee of petitioner Zuellig. If at all, the
alleged closure of business operations merely operates to suspend employment relation since it
is not permanent in character.
Where there is no showing of a clear, valid, and legal cause for the termination of employment,
the law considers the matter a case of illegal dismissal and the burden is on the employer to
prove that the termination was for a valid or authorized cause.
Findings of facts of the NLRC, particularly when both the NLRC and Labor Arbiter are in
agreement, are deemed binding and conclusive upon the Supreme Court.
As regards the second and last argument advanced by petitioner Zuellig that private respondent
San Miguel is not entitled to attorneys fees, this Court finds no reason to disturb the ruling of the
public respondent NLRC. Petitioner Zuellig maintains that the factual backdraft (sic) of this
petition does not call for the application of Article 2208 of the Civil Code and Article 111 of the
Labor Code as private respondents wages were not withheld. On the other hand, public
respondent NLRC argues that paragraphs 2 and 3, Article 2208 of the Civil Code and paragraph
(a), Article 111 of the Labor Code justify the award of attorneys fees. NLRC was saying to the
effect that by petitioner Zuelligs act of illegally dismissing private respondent San Miguel, the
latter was compelled to litigate and thus incurred expenses to protect his interest. In the same
passion, private respondent San Miguel contends that petitioner Zuellig acted in gross and
evident bad faith in refusing to satisfy his plainly valid, just and demandable claim.
After careful and judicious evaluation of the arguments advanced to support the propriety or
impropriety of the award of attorneys fees to private respondent San Miguel, this Court finds the
resolutions of public respondent NLRC supported by laws and jurisprudence. It does not need
much imagination to see that by reason of petitioner Zuelligs feigned closure of business
operations, private respondent San Miguel incurred expenses to protect his rights and
interests. Therefore, the award of attorneys fees is in order.
WHEREFORE, in view of the foregoing, the resolutions dated April 4, 2001 and June 15, 2001 of
the National Labor Relations Commission affirming the November 15, 1999 decision of the
Labor Arbiter in NLRC NCR 05-03639-94 (CA No. 022861-00) are hereby AFFIRMED and the
instant petition for certiorari is hereby DENIED and ordered DISMISSED.
SO ORDERED.
Hence, petitioner appeals.
Issues
Petitioner asserts that the CA erred in holding that the NLRC did not act with grave abuse of
discretion in ruling that the closure of the business operation of Zeta had not been bona fide,
thereby resulting in the illegal dismissal of San Miguel; and in holding that the NLRC did not act
with grave abuse of discretion in ordering it to pay San Miguel attorneys fees.11
In his comment,12 San Miguel counters that the CA correctly found no grave abuse of discretion
on the part of the NLRC because the ample evidence on record showed that he had been
illegally terminated; that such finding accorded with applicable laws and jurisprudence; and that
he was entitled to back wages and attorneys fees.
In its reply,13 petitioner reiterates that the cessation of Zetas business, which resulted in the
severance of San Miguel from his employment, was valid; that the CA erred in upholding the
NLRCs finding that San Miguel had been illegally terminated; that his acknowledgment of the
validity of his separation from Zeta by signing a quitclaim and waiver estopped him from claiming
that it had subsequently employed him; and that the award of attorneys fees had no basis in fact
and in law.
Ruling
The petition for review on certiorari is denied for its lack of merit.
First of all, the outcome reached by the CA that the NLRC did not commit any grave abuse of
discretion was borne out by the records of the case. We cannot undo such finding without
petitioner making a clear demonstration to the Court now that the CA gravely erred in passing
upon the petition for certiorari of petitioner.
Indeed, in a special civil action for certiorari brought against a court or quasi-judicial body with
jurisdiction over a case, petitioner carries the burden of proving that the court or quasi-judicial
body committed not a merely reversible error but a grave abuse of discretion amounting to lack
or excess of jurisdiction in issuing the impugned order.14 Showing mere abuse of discretion is
not enough, for it is necessary to demonstrate that the abuse of discretion was grave. Grave
abuse of discretion means either that the judicial or quasi-judicial power was exercised in an
arbitrary or despotic manner by reason of passion or personal hostility, or that the respondent
judge, tribunal or board evaded a positive duty, or virtually refused to perform the duty enjoined
or to act in contemplation of law, such as when such judge, tribunal or board exercising judicial
or quasi-judicial powers acted in a capricious or whimsical manner as to be equivalent to lack of
jurisdiction.15 Under the circumstances, the CA committed no abuse of discretion, least of all
grave, because its justifications were supported by the records and by the applicable laws and
jurisprudence.
Secondly, it is worthy to point out that the Labor Arbiter, the NLRC, and the CA were united in
concluding that the cessation of business by Zeta was not a bona fide closure to be regarded as
a valid ground for the termination of employment of San Miguel within the ambit of Article 283 of
the Labor Code. The provision pertinently reads:cralavvonlinelawlibrary
Article 283. Closure of establishment and reduction of personnel. The employer may also
terminate the employment of any employee due to the installation of labor-saving devices,
redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers and the Department of
Labor and Employment at least one (1) month before the intended date thereof. x x x.
The unanimous conclusions of the CA, the NLRC and the Labor Arbiter, being in accord with
law, were not tainted with any abuse of discretion, least of all grave, on the part of the NLRC.
Verily, the amendments of the articles of incorporation of Zeta to change the corporate name to
Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined and delineated the different modes of
dissolving a corporation, and amendment of the articles of incorporation was not one of such
modes. The effect of the change of name was not a change of the corporate being, for, as well
stated in Philippine First Insurance Co., Inc. v. Hartigan:16 The changing of the name of a
corporation is no more the creation of a corporation than the changing of the name of a natural
person is begetting of a natural person. The act, in both cases, would seem to be what the
language which we use to designate it imports a change of name, and not a change of being.
The consequences, legal and otherwise, of the change of name were similarly dealt with in P.C.
Javier & Sons, Inc. v. Court of Appeals,17 with the Court holding thusly:cralavvonlinelawlibrary
From the foregoing documents, it cannot be denied that petitioner corporation was aware of First
Summa Savings and Mortgage Banks change of corporate name to PAIC Savings and
Mortgage Bank, Inc. Knowing fully well of such change, petitioner corporation has no valid
reason not to pay because the IGLF loans were applied with and obtained from First Summa
Savings and Mortgage Bank. First Summa Savings and Mortgage Bank and PAIC Savings and
Mortgage Bank, Inc., are one and the same bank to which petitioner corporation is indebted. A
change in the corporate name does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the identity of the corporation, or on
its property, rights, or liabilities. The corporation, upon such change in its name, is in no
sense a new corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect changed. (Bold
underscoring supplied for emphasis)
In short, Zeta and petitioner remained one and the same corporation. The change of name did
not give petitioner the license to terminate employees of Zeta like San Miguel without just or
authorized cause. The situation was not similar to that of an enterprise buying the business of
another company where the purchasing company had no obligation to rehire terminated
employees of the latter.18 Petitioner, despite its new name, was the mere continuation of Zetas
corporate being, and still held the obligation to honor all of Zetas obligations, one of which was
to respect San Miguels security of tenure. The dismissal of San Miguel from employment on the
pretext that petitioner, being a different corporation, had no obligation to accept him as its
employee, was illegal and ineffectual.
And, lastly, the CA rightfully upheld the NLRCs affirmance of the grant of attorneys fees to San
Miguel. Thereby, the NLRC did not commit any grave abuse of its discretion, considering that
San Miguel had been compelled to litigate and to incur expenses to protect his rights and
interest. In Producers Bank of the Philippines v. Court of Appeals,19 the Court ruled that
attorneys fees could be awarded to a party whom an unjustified act of the other party compelled
to litigate or to incur expenses to protect his interest. It was plain that petitioners refusal to
reinstate San Miguel with backwages and other benefits to which he had been legally entitled
was unjustified, thereby entitling him to recover attorneys fees.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on
November 6, 2002; and ORDERS petitioner to pay the costs of suit.
SO ORDERED.
Sereno, C.J., Leonardo-De Castro, Villarama, Jr, and Reyes, JJ., concur.
G.R. No. L-28113 March 28, 1969
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO
BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN
MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO. respondents.
L. Amores and R. Gonzales for petitioners.
Jose W. Diokno for respondents.
CASTRO, J.:
The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors,
of the municipality of Balabagan of the same province. Balabagan was formerly a part of the
municipality of Malabang, having been created on March 15, 1960, by Executive Order 386 of the
then President Carlos P. Garcia, out of barrios and sitios 1 of the latter municipality.
The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain
the respondent municipal officials from performing the functions of their respective office relying
on the ruling of this Court in Pelaez v. Auditor General 2 and Municipality of San Joaquin v. Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section
23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power to
create barrios in the provincial board, is a "statutory denial of the presidential authority to create a
new barrio [and] implies a negation of the bigger power to create municipalities," and (2) that
section 68 of the Administrative Code, insofar as it gives the President the power to create
municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative
power and (b) because it offends against section 10 (1) of article VII of the Constitution, which
limits the President's power over local governments to mere supervision. As this Court summed
up its discussion: "In short, even if it did not entail an undue delegation of legislative powers, as it
certainly does, said section 68, as part of the Revised Administrative Code, approved on March
10, 1917, must be deemed repealed by the subsequent adoption of the Constitution, in 1935,
which is utterly incompatible and inconsistent with said statutory enactment."
On the other hand, the respondents, while admitting the facts alleged in the petition, nevertheless
argue that the rule announced in Pelaez can have no application in this case because unlike the
municipalities involved in Pelaez, the municipality of Balabagan is at least a de facto corporation,
having been organized under color of a statute before this was declared unconstitutional, its
officers having been either elected or appointed, and the municipality itself having discharged its
corporate functions for the past five years preceding the institution of this action. It is contended
that as a de facto corporation, its existence cannot be collaterally attacked, although it may be
inquired into directly in an action for quo warranto at the instance of the State and not of an
individual like the petitioner Balindong.
It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved to
the State in a proceeding for quo warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of government. 4 But the rule disallowing
collateral attacks applies only where the municipal corporation is at least a de facto corporations.
5
For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its existence
may be, questioned collaterally or directly in any action or proceeding by any one whose rights or
interests ate affected thereby, including the citizens of the territory incorporated unless they are
estopped by their conduct from doing so. 6
And so the threshold question is whether the municipality of Balabagan is a de facto corporation.
As earlier stated, the claim that it is rests on the fact that it was organized before the promulgation
of this Court's decision in Pelaez. 7
Accordingly, we address ourselves to the question whether a statute can lend color of validity to
an attempted organization of a municipality despite the fact that such statute is subsequently
declared unconstitutional.lawphi1.et
This has been a litigiously prolific question, sharply dividing courts in the United States. Thus,
some hold that a de facto corporation cannot exist where the statute or charter creating it is
unconstitutional because there can be no de facto corporation where there can be no de jure one,
8
while others hold otherwise on the theory that a statute is binding until it is condemned as
unconstitutional. 9
An early article in the Yale Law Journal offers the following analysis:
It appears that the true basis for denying to the corporation a de facto status lay in the
absence of any legislative act to give vitality to its creation. An examination of the cases
holding, some of them unreservedly, that a de facto office or municipal corporation can
exist under color of an unconstitutional statute will reveal that in no instance did the
invalid act give life to the corporation, but that either in other valid acts or in the
constitution itself the office or the corporation was potentially created....
The principle that color of title under an unconstitutional statute can exist only where
there is some other valid law under which the organization may be effected, or at least
an authority in potentia by the state constitution, has its counterpart in the negative
propositions that there can be no color of authority in an unconstitutional statute that
plainly so appears on its face or that attempts to authorize the ousting of a de jure or de
facto municipal corporation upon the same territory; in the one case the fact would imply
the imputation of bad faith, in the other the new organization must be regarded as a
mere usurper....
As a result of this analysis of the cases the following principles may be deduced which
seem to reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal
corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a)
been upheld for a time by the courts or (b) not yet been declared
void; provided that a warrant for its creation can be found in some
other valid law or in the recognition of its potential existence by the
general laws or constitution of the state.
II. There can be no de facto municipal corporation unless either directly or
potentially, such a de jure corporation is authorized by some legislative fiat.
 III. There can be no color of authority in an unconstitutional statute alone, the
invalidity of which is apparent on its face.
IV. There can be no de facto corporation created to take the place of an existing de
jure corporation, as such organization would clearly be a usurper.10
In the cases where a de facto municipal corporation was recognized as such despite the fact that
the statute creating it was later invalidated, the decisions could fairly be made to rest on the
consideration that there was some other valid law giving corporate vitality to the organization.
Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute
had not been invalidated cannot conceivably make it a de facto corporation, as, independently of
the Administrative Code provision in question, there is no other valid statute to give color of
authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court granted a
similar petition for prohibition and nullified an executive order creating the municipality of Lawigan
in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was created in 1961,
before section 68 of the Administrative Code, under which the President had acted, was
invalidated. 'Of course the issue of de facto municipal corporation did not arise in that case.
In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it confers
no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed." Accordingly, he held that
bonds issued by a board of commissioners created under an invalid statute were unenforceable.
Executive Order 386 "created no office." This is not to say, however, that the acts done by the
municipality of Balabagan in the exercise of its corporate powers are a nullity because the
executive order "is, in legal contemplation, as inoperative as though it had never been passed."
For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored." As
Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13
The courts below have proceeded on the theory that the Act of Congress, having been
found to be unconstitutional, was not a law; that it was inoperative, conferring no rights
and imposing no duties, and hence affording no basis for the challenged decree. Norton
v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559,
566. It is quite clear, however, that such broad statements as to the effect of a
determination of unconstitutionality must be taken with qualifications. The actual
existence of a statute, prior to such a determination, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot always be erased by a
new judicial declaration. The effect of the subsequent ruling as to invalidity may have to
be considered in various aspects with respect to particular relations, individual and
corporate, and particular conduct, private and official. Questions of rights claimed to
have become vested, of status of prior determinations deemed to have finality and acted
upon accordingly, of public policy in the light of the nature both of the statute and of its
previous application, demand examination. These questions are among the most
difficult of those which have engaged the attention of courts, state and federal, and it is
manifest from numerous decisions that an all-inclusive statement of a principle of
absolute retroactive invalidity cannot be justified.
There is then no basis for the respondents' apprehension that the invalidation of the executive
order creating Balabagan would have the effect of unsettling many an act done in reliance upon
the validity of the creation of that municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the
respondents are hereby permanently restrained from performing the duties and functions of their
respective offices. No pronouncement as to costs.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano, JJ., concur.
Teehankee and Barredo, JJ., took no part.
Separate Opinions
FERNANDO, J., concurring:
I concur fully with the well-written opinion of Justice Castro. It breaks new ground; it strikes out
new paths. It is precisely because of its impact on the power of judicial review of executive acts
that I deem a few additional words would not be amiss.
1. Insofar as the effect of a declaration of unconstitionality is concerned, the latter and
more realistic trend reflected in Chicot County Drainage District v. Baxter State Bank 1
had previously elicited our approval. Thus: "'Rutter vs. Esteban (93 Phil. 68) may be
construed to mean that at the time of the decision the Moratorium law could no longer
be validly applied because of the prevailing circumstances. At any rate, although the
general rule is that an unconstitutional statute 'confers no right, creates no office,
affords no protection and justifies no acts performed under it.' ... there are several
instances wherein courts, out of equity, have relaxed its operation ... or qualified its
effects 'since the actual existence of a statute prior to such declaration is an operative
fact, and may have consequences which cannot justly be ignored' ... and a realistic
approach is eroding the general doctrine ....'" 2 Also: "We have taken note, of the fact
that, on June 30, 1961, Section 25 of Reorganization Plan No. 20-A had been declared
unconstitutional by this Court in the case of Corominas, et al. v. The Labor Standards
Commission, et al., .... It appears, however, that the Plaintiff had filed his claim before
Regional Office No. 4 of the Department of Labor on July 26, 1960, or about one year
before said Section 25 had been declared unconstitutional. The circumstance that
Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional should
not be counted against the defendant in the present case. In the case of Manila Motor
Co., Inc. v. Flores, ..., this Court upheld the right of a party under the Moratorium Law
which had accrued in his favor before said law was declared unconstitutional by this
Court in the case of Rutter v. Esteban, 93 Phil. 68." 3
2. Nothing can be clearer therefore in the light of the two above cases than that a
previous declaration of invalidity of legislative acts would not be bereft of legal results.
Would that view hold true of nullification of executive acts? There might have been
doubts as to the correct answer before. There is none now.
A judicial decision annulling a presidential exercise of authority 4 is not without its effect
either. That much is evident from the holding now reached. The act stricken down,
whether proceeding from the legislature or the Executive, could in the language of the
Chicot County case, be considered, prior to the declaration of invalidity, as "an operative
fact and may have consequences which cannot justly be ignored."
Thus the frontiers of the law have been extended, a doctrine which to some may come
into play when a statute is voided is now considered equally applicable to a Presidential
act that has met a similar fate. Such a result should not occasion surprise. That is to be
expected.
There would be an unjustified deviation from the doctrine of separation of powers if a
consequence attached to the annulment of a statue is considered as not operative
where an executive order is involved. The doctrine of co-equal or coordinate
departments would be meaningless if a discrimination of the above sort were considered
permissible. The cognizance taken of the prior existence of an enactment subsequently
declared unconstitutional applies as well as to a Presidential act thereafter successfully
assailed. There was a time when it too did exist and, as such, a fact to be reckoned
with, though an infirm source of a legal right, if, as subsequently held, considered
violative of a constitutional command.
3. Precisionists may cavil at the above view; they may assert, and with some degree of
plausibility, that the holding in the Pelaez case goes no further than to locate a statutory
infirmity in the Presidential act there challenged, creating municipal corporations under
what the then Executive considered a grant of authority found in the Revised
Administrative Code. 5 Such a power having been found not to exist, the decision, so it
may be asserted, did not reach the constitutional issue of non-delegation of legislative
power. Tersely put, there was no finding of nullity based on a violation of the
Constitution.
To such a claim, it suffices to answer that while the challenged Administrative Code provision
was in fact held as not containing within itself the authority conferred on the President to create
municipal corporations, the opinion by the then Justice, now Chief Justice, Concepcion went
further. As was pointed out by him: "Although Congress may delegate to another branch of the
Government the power to fill in the details in the execution, enforcement or administration of a
law, it is essential, to forestall a violation of the principle of separation of powers, that said law: (a)
be complete in itself it must set forth therein the policy to be executed, carried out or
implemented by the delegate and (b) fix a standard the limits of which are sufficiently
determinate or determinable to which the delegate must conform in the performance of his
functions. Indeed, without a statutory declaration of policy, the delegate would, in effect, make or
formulate such policy, which is the essence of every law; and without the aforementioned
standard, there would be no means to determine, with reasonable certainty, whether the delegate
has acted within or beyond the scope of his authority. Hence, he could thereby arrogate upon
himself the power, not only to make the law, but also and this is worse to unmake it, by
adopting measures inconsistent with the end sought to be attained by the Act of Congress, thus
nullifying the principle of separation of powers and the system of checks and balances, and,
consequently, undermining the very foundation of our Republican system." 6
From which, it would follow, in the language of the opinion: "Section 68 of the Revised
Administrative Code does not meet these well-settled requirements for a valid delegation of the
power to fix the details in the enforcement of a law. It does not enunciate any policy to be carried
out or implemented by the President. Neither does it give a standard sufficiently precise to avoid
the evil effects above referred to."
It is thus clear that while it might not be strictly accurate to advance the view that there was a
finding of unconstitutionality of a challenged statutory norm, there could be no objection to the
view that the holding was one of unconstitutional application.
Nor is this all. If there be admission of the force of the assertion that the Pelaez opinion went no
further than to locate in the challenged Executive orders creating municipal corporations an act in
excess of statutory authority, then our decision in this case is all the more noteworthy for the more
hospitable scope accorded the Chicot doctrine. For as originally formulated, it would merely
recognize that during its existence, prior to its being declared violative of the constitute, the statute
must be deemed an operative fact. Today we decide that such a doctrine extends to a Presidential
act held void not only on the ground of unconstitutional infirmity but also because in excess of the
statutory power conferred. That to me is the more significant aspect of this decision. To repeat, to
that point of view I yield full concurrence.
I do so because it appears to me a logical corollary to the principle of separation of powers. Once
we accept the basic doctrine that each department as a coordinate agency of government is
entitled to the respect of the other two, it would seem to follow that at the very least, there is a
presumption of the validity of the act performed by it, unless subsequently declared void in
accordance with legally accepted principles. The rule of law cannot be satisfied with anything less.
Since under our Constitution, judicial review exists precisely to test the validity of executive or
legislative acts in an appropriate legal proceeding, there is always the possibility of their being
declared inoperative and void. Realism compels the acceptance of the thought that there could
be a time-lag between the initiation of such Presidential or congressional exercise of power and
the final declaration of nullity. In the meanwhile, it would be productive of confusion, perhaps at
times even of chaos, if the parties affected were left free to speculate as to its fate being one of
doom, thus leaving them free to disobey it in the meanwhile. Since, however, the orderly
processes of government not to mention common sense, requires that the presumption of validity
be accorded an act of Congress or an order of the President, it would be less than fair, and it may
be productive of injustice, if no notice of its existence as a fact be paid to it, even if thereafter, it is
stricken down as contrary, in the case of Presidential act, either to the Constitution or a controlling
statute.
The far-reaching import in the above sense of the decision we now render calls, to my mind, for
an articulation of further reflection on its varied implications. We have here an illustration to
paraphrase Dean Pound, of the law being stable and yet far from standing still. That is as it ought
to be; that is how law grows. It is in that sense that the judicial process is impressed with creativity,
admittedly within limits rather narrowly confined. That in itself is to hold fast to the appropriate role
of the judiciary, far from insignificant as our decision discloses. Hence, this separate concurring
opinion, which, I trust, will make manifest why my agreement with what Justice Castro had so ably
expressed in the opinion of the Court is wholehearted and entire.
Concepcion, C.J., concurs.
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial
Co., Inc., organized to engage in a general lumber business to carry on as general contractors,
operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that
23,428 shares of stock had been subscribed and fully paid with certain properties transferred to
the corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to
do business with the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities
and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid
governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have
it dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company;
and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of
the receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo warranto
proceeding instituted in accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation
but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed that
the Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued not before (sec. 11, Corporation Law).
The complaining associates have not represented to the others that they were incorporated any
more than the latter had made similar representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is
not an instance requiring the enforcement of contracts with the corporation through the rule of
estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies,
and therefore the court had not jurisdiction to take cognizance of said civil case number 381.
Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a corporation
under this Act and its right to exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may be a party, but such inquiry
may be had at the suit of the Insular Government on information of the Attorney-
General.
There are least two reasons why this section does not govern the situation. Not having obtained
the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its
stockholders may not probably claim "in good faith" to be a corporation.
 Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim is
compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply
with the law the claim to be a corporation "under this act" could not be made "in good
faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys
vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state.
There might be room for argument on the right of minority stockholders to sue for dissolution; 1 but
that question does not affect the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal. Whkch brings us to one principal reason why this petition may not
prosper, namely: the petitioners have their remedy by appealing the order of dissolution at the
proper time.
There is a secondary issue in connection with the appointment of a receiver. But it must be
admitted that receivership is proper in proceedings for dissolution of a company or corporation,
and it was no error to reject the counter-bond, the court having declared the dissolution. As to the
amount of the bond to be demanded of the receiver, much depends upon the discretion of the trial
court, which in this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
There is no merit whatever in the appellant's contention. The general rule is that in the absence
of fraud a person who has contracted or otherwise dealt with an association in such a way as to
recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny
its corporate existence in any action leading out of or involving such contract or dealing, unless its
existence is attacked for cause which have arisen since making the contract or other dealing relied
on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227;
Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by making a promissory
note in its favor and making partial payments on the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate
existence. Under these circumstances it was unnecessary for the plaintiff to present other
evidence of the corporate existence of either of the parties. It may be noted that there is no
evidence showing circumstances taking the case out of the rules stated.
The judgment appealed from is affirmed, with the costs against the appellant. So ordered.
Street, Malcolm, Avancea, Villamor and Romualdez, JJ., concur.
234 Md. 477 (1964)
200 A.2d 33
CRANSON v. INTERNATIONAL BUSINESS MACHINES CORPORATION
Court of Appeals of Maryland.
Decided April 30, 1964.
Attorney(s) appearing for the Case
William J. Brannan, Jr., with whom were Kardy, Brannan & Neumann on the brief, for the appellant.
Henry J. Noyes for the appellee.
The cause was argued before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT,
JJ.

G.R. No. 22106 September 11, 1924 HORNEY, J., delivered the opinion of the Court.
ASIA BANKING CORPORATION, plaintiff-appellee, On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation
vs. and that Albion C. Cranson, Jr., was a partner in the business conducted by the Bureau and as
STANDARD PRODUCTS, CO., INC., defendant-appellant. such was personally liable for its debts, the International Business Machines Corporation brought
Charles C. De Selms for appellant. this action against Cranson for the balance due on electric typewriters purchased by the Bureau.
Gibbs & McDonough and Roman Ozaeta for appellee. At the same time it moved for summary judgment and supported the motion by affidavit. In due
OSTRAND, J.: course, Cranson filed a general issue plea and an affidavit in opposition to summary judgment in
This action is brought to recover the sum of P24,736.47, the balance due on the following which he asserted in effect that the Bureau was a de facto corporation and that he was not
promissory note: personally liable for its debts.
P37,757.22 The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new
business corporation which was about to be created. Towards this purpose he met with other
MANILA, P. I., Nov. 28, 1921. interested individuals and an attorney and agreed to purchase stock and become an officer and
director. Thereafter, upon being advised by the attorney that the corporation had been formed
MANILA, P. I., Nov. 28, 1921. under the laws of Maryland, he paid for and received a stock certificate evidencing ownership of
On demand, after date we promise to pay to the Asia Banking Corporation, or order, the shares in the corporation, and was shown the corporate seal and minute book. The business of
sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their office the new venture was conducted as if it were a corporation, through corporate bank accounts, with
in Manila, for value received, together with interest at the rate of ten per cent per annum. auditors maintaining corporate books and records, and under a lease
No. ________ Due __________ [234 Md. 480]
THE STANDARD PRODUCTS CO., INC. entered into by the corporation for the office from which it operated its business. Cranson was
By (Sgd.) GEORGE H. SEAVER elected president and all transactions conducted by him for the corporation, including the dealings
with I.B.M., were made as an officer of the corporation. At no time did he assume any personal
obligation or pledge his individual credit to I.B.M. Due to an oversight on the part of the attorney,
By President of which Cranson was not aware, the certificate of incorporation, which had been signed and
acknowledged prior to May 1, 1961, was not filed until November 24, 1961. Between May 17 and
The court below rendered judgment in favor of the plaintiff for the sum demanded in the complaint, November 8, the Bureau purchased eight typewriters from I.B.M., on account of which partial
with interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10 per cent per payments were made, leaving a balance due of $4,333.40, for which this suit was brought.
annum, and the costs. From this judgment the defendant appeals to this court. Although a question is raised as to the propriety of making use of a motion for summary judgment
At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties as the means of determining the issues presented by the pleadings, we think the motion was
and the appellant insists that under these circumstances the court erred in finding that the parties appropriate. Since there was no genuine dispute as to the material facts, the only question was
were corporations with juridical personality and assigns same as reversible error.
whether I.B.M. was entitled to judgment as a matter of law. The trial court found that it was, but
we disagree.
The fundamental question presented by the appeal is whether an officer 1 of a defectively
incorporated association may be subjected to personal liability under the circumstances of this
case. We think not.
Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively
incorporated association with the corporate attribute of limited liability. The first, often referred to
as the doctrine of de facto corporations, has been applied in those cases where there are elements
showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to incorporate
under the existing law; and (3) actual user or exercise of corporate powers. Ballantine, Private
Corporations, 23; 8 Fletcher, Cyclopedia of the Law of Private
[234 Md. 481]
Corporations, 3777; 13 Am. Jur., Corporations, 49-56; 18 C.J.S., Corporations, 99. The with a condition subsequent to corporate existence, this Court has held that such nonperformance
second, the doctrine of estoppel to deny the corporate existence, is generally employed where the
person seeking to hold the officer personally liable has contracted or otherwise dealt with the
association in such a manner as to recognize and in effect admit its existence as a corporate body.
Ballantine, op.cit., 29; Machen, Modern Law of Corporations, 278-282; 18 C.J.S., op.cit., Railroad Co., 4 G. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102
109.
It is not at all clear what Maryland has done with respect to the two doctrines. There have been
no recent cases in this State on the subject and some of the seemingly irreconcilable earlier cases
offer little to clarify the problem.2
In one line of cases, the Court, in determining the rights and liabilities of a defectively organized
corporation, or a member or stockholder thereof, seems to have drawn a distinction between those
acts or requirements which are a condition precedent to corporate existence and those acts
prescribed by law to be done after incorporation. In so doing, it has been generally held that where
there had been a failure to comply with a requirement which the law declared to be a condition
precedent to the existence of the corporation, the corporation was not a legal entity and was
therefore precluded from suing or being sued as such. Boyce v. M.E. Church, 46 Md. 359 (1877);
Regester v. Medcalf, 71 Md. 528, 18 Atl. 966 (1889); Bonaparte v. Lake Roland R.R. Co., 75 Md.
340, 23 Atl. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 Atl. 76 (1894); Maryland
Tube Works v. West End Imp. Co., 87 Md. 207, 39 Atl. 620 (1898); Cleaveland v. Mullin, 96 Md.
598,
[234 Md. 482]
54 Atl. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 Atl. 19 (1909). These
cases appear to stand for the proposition that substantial compliance with those formalities of the
corporation law, which are made a condition precedent to corporate existence, was not only
necessary for the creation of a corporation de jure, but was also a prerequisite to the existence of
a de facto corporation or a corporation by estoppel.
In the Boyce case, an action in assumpsit against a defectively incorporated religious society, the
Court (at p. 373 and p. 374), in holding that the society was not estopped to deny its corporate
existence, said:
We think it would be extending the doctrine of estoppel to an extent, not justified by the principles
of public policy, to allow it to operate through the conduct of the parties concerned, to create
substantially a de facto corporation, with just such powers as the parties may by their acts give to
it. * * * The statute law of the State, expressly requiring certain prescribed acts to be done to
constitute a corporation, to permit parties indirectly, or upon the principle of estoppel, virtually to
create a corporation for any purpose, or to have acts so construed, would be in manifest opposition
to the statute law, and clearly against its policy, and justified upon no sound principle in the
administration of justice.
In the Maryland Tube case, an action by a corporation for specific performance of a contract to
convey land which it had entered into prior to its becoming a legal entity, the Court, having cited
(at p. 217) the statements in Jones v. Aspen Hardware Co., 40 Pac. 457 (Colo. 1895),3 with
approval for the
[234 Md. 483]
proposition that "`the doctrine of estoppel cannot be successfully invoked, unless the corporation
has at least a de facto existence,'" that "`a de facto corporation can never be recognized in violation
of a positive law'" and that "`there is a broad distinction between those acts made necessary by
the statute as a prerequisite to the exercise of corporate powers, and those acts required of
individuals seeking incorporation but not made prerequisite to the exercise of such powers,'" went
on to say (at p. 218) that "these principles were clearly recognized and applied" in the Boyce case.
In the National Shutter Bar case, an action by a corporation for an alleged libel which had occurred
before the performance of a condition precedent necessary for legal incorporation, it was held
citing the Maryland Tube case for the proposition that statutory conditions precedent must have
been complied with to give existence to corporations formed under general laws that the
corporation had no legal existence at the time of the alleged libel. In referring to the Boyce case,
it was said (at p. 320) that "it has been held by our predecessors that a corporation cannot be
actually or virtually created by estoppel in Maryland." And, on the basis of the statements in Jones
v. Aspen Hardware Co., supra (also relied on in the Maryland Tube case), it was concluded that
the corporation could not maintain the action.
On the other hand, where the corporation has obtained legal existence but has failed to comply
afforded the State the right to institute proceedings for the forfeiture of the charter, but that such
neglect or omission could never be set up by the corporation itself, or by its members and
stockholders, as a defense to an action to enforce their liabilities. C. & O. Canal Co. v. B. & O.
Md. 501, 63 Atl. 62 (1906).
[234 Md. 484]
In the Hammond case, an action by a creditor against a stockholder of a state bank on his statutory
liability, the Court, after stating that a corporation or a stockholder could not defeat an action by
showing noncompliance with the requirements of the corporation law unless the acts required are
conditions precedent to corporate existence, said (at p. 15):
By holding otherwise, parties might avail themselves of the powers and privileges of a corporation,
without in any manner subjecting themselves to its duties and obligations, and might set up their
own neglect of duty, of wilful omission to comply with the requirements of the statute, as means
of discharge from all their just obligations under the law. This is forbidden by every principle of law
and justice, and hence such a defense could never be tolerated.
It seems clear therefore that when a defect in the incorporation process resulted from a failure to
comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit of a
creditor to estop the corporation, or the members or stockholders thereof, from denying its
corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and Practice (rev.
ed.), 339.
In another line of Maryland cases which determined the rights and liabilities of a defectively
organized corporation, or a member or stockholder thereof, the Court, apparently disregarding the
distinction made between those requirements which are conditions precedent and those which
are conditions subsequent to corporate existence, has generally precluded, on the grounds of
estoppel or collateral attack, inquiry into the question of corporate existence. Maltby v.
Northwestern Va. R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building Asso., 24 Md. 259
(1866); Grape Sugar & Vinegar Mfg. Co. v. Small, 40 Md. 395 (1874); Laflin & Rand Powder Co.
v. Sinsheimer, 46 Md. 315 (1877); Keene v. Van Reuth, 48 Md. 184 (1878); Bartlett v. Wilbur, 53
Md. 485 (1880); Pott & Co. v. Schmucker, 84 Md. 535, 36 Atl. 592 (1897). In the Grape Sugar
case, an action against a defectively organized corporation to
[234 Md. 485]
recover the balance due for work done and materials furnished, the Court said (at p. 400):
The second prayer proceeds upon the assumption that the [corporation] is not liable, provided the
work was done prior to the recording of the certificate of incorporation. It is true, that under the
general incorporation law of this State, the recording of the certificate was necessary to constitute
the [corporation] a body politic. If, however, the contract was made with the [creditor] through * * *
[the] President of the [corporation], after the certificate had been signed by the members of the
proposed corporation, but before it was recorded, and the company, after its incorporation was
complete, accepted the work done under the contract, it will be estopped, both in law and equity,
from denying its liability, on account of the same.
Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which might
be distinguishable in that it involved an effort to impose liability on a religious society and not a
business corporation.
In the Laflin & Rand case, decided in the same year (1877) as the Boyce case, the Court, in an
action against certain members of a corporation to make them individually liable for goods sold
and delivered to the corporation, said (at p. 321):
[The company] has been clothed with all the forms of a corporation by the laws of a neighboring
State, and was in the exercise and use of the franchises conferred upon it. It was a corporation
de facto at the time the goods were sold and delivered to it * * * and its existence as a corporation
cannot be collaterally drawn into question. To permit a recovery against the defendants, and
thereby to say that they are to be regarded in law as a voluntary unincorporated association, would
be a departure from all the cases. The debt was not created with them individually, but with a
company acting under a formal incorporation, and in the exercise of its corporate powers. This
[creditor] dealt with it and gave it credit as a corporation. If its assets are not ample to pay, it is the
misfortune of the creditor.4
See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for similar
statements of the law. From these cases it appears that where the parties have assumed
corporate existence and dealt with each other on that basis, the Court will apply the estoppel
doctrine on the theory that the parties by recognizing the organization as a corporation were
thereafter prevented from raising a question as to its corporate existence.
When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals
that the cases seem to fall into one or the other of two categories. In one line of cases, the Court,
choosing to disregard the nature of the dealings between the parties, refused to recognize both
doctrines where there had been a failure to comply with a condition precedent to corporate
existence, but, whenever such noncompliance concerned a condition subsequent to incorporation,
the Court often applied the estoppel doctrine. In the other line of cases, the Court, choosing to
make no distinction between defects which
[234 Md. 487]
were conditions precedent and those which were conditions subsequent, emphasized the course
of conduct between the parties and applied the estoppel doctrine when there had been substantial
dealings between them on a corporate basis.
Whether or not the decisions in the Boyce and Maryland Tube cases had the effect of repudiating
the de facto doctrine in this state, as some of the text writers seem to think, is a question we do
not reach in this case and therefore need not consider at this time. On the other hand, since it is
clear that the Maryland Tube and National Shutter Bar cases are inconsistent with other Maryland
cases insofar as they held (in relying on the statements in Jones v. Aspen Hardware Co., supra)
that the doctrine of estoppel cannot be invoked unless a corporation has at least a de facto
existence, both cases Maryland Tube and National Shutter Bar should be, and are hereby,
overruled to the extent of the inconsistency. There is, as we see it, a wide difference between
creating a corporation by means of the de facto doctrine and estopping a party, due to his conduct
in a particular case, from setting up the claim of no incorporation. Although some cases tend to
assimilate the doctrines of incorporation de facto and by estoppel, each is a distinct theory and
they are not dependent on one another in their application. See 8 Fletcher, op.cit., 3763; France
on Corporations (2nd ed.), 29; 18 C.J.S., op.cit., 111h. Where there is a concurrence of the
three elements necessary for the application of the de facto corporation doctrine, there exists an
entity which is a corporation de jure against all persons but the state. On the other hand, the
estoppel theory is applied only to the facts of each particular case and may be invoked even where
there is no corporation de facto. Accordingly, even though one or more of the requisites of a de
facto corporation are absent, we think that this factor does not preclude the application of the
estoppel doctrine5 in a proper case, such as the one at bar.
[234 Md. 488]
I.B.M. contends that the failure of the Bureau to file its certificate of incorporation debarred all
corporate existence. But, in spite of the fact that the omission might have prevented the Bureau
from being either a corporation de jure or de facto,6 Jones v. Linden Building Asso., supra, we
think that I.B.M. having dealt with the Bureau as if it were a corporation and relied on its credit
rather than that of Cranson, is estopped to assert that the Bureau was not incorporated at the time
the typewriters were purchased. Laflin & Rand Powder Co. v. Sinsheimer, supra. See also Tulane
Improvement Co. v. S.A. Chapman & Co., 56 So. 509 (La. 1911). In 1 Clark and Marshall, Private
Corporations, 89, it is stated:
The doctrine in relation to estoppel is based upon the ground that it would generally be inequitable
to permit the corporate existence of an association to be denied by persons who have represented
it to be a corporation, or held it out as a corporation, or by any persons who have recognized it as
a corporation by dealing with it as such; and by the overwhelming weight of authority, therefore, a
person may be estopped to deny the legal incorporation of an association which is not even a
corporation de facto.
In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts of
other jurisdictions have held that where one has recognized the corporate existence of an
association, he is estopped to assert the contrary with respect to a claim arising out of such
dealings. See, for example, Tarbell v. Page, 24 Ill. 46 (1860); Magnolia Shingle Co. v. J. Zimmern's
Co., 58 So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John Lucas Co.
v. Bernhardt's Estate, 100 So. 399 (La. 1924).
Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson was
not liable for the balance due on account of the typewriters.
Judgment reversed; the appellee to pay the costs.
FootNotes
1. Although we are concerned with the liability of an "officer" in this case, the principles of law
stated herein might under other circumstances be applicable to a determination of the liability of a
member or shareholder of a defectively organized corporation.
2. Apparently because it was not requested to do so, the lower court did not undertake to prepare
and file a memorandum of its reasons for deciding the problem as it did. But, inexcusably, the
briefs were for the most part of no practical use to this Court in arriving at a decision of the intricate
question of law presented by the appeal. While the appellant cited three Maryland cases for the
proposition that a de facto corporation was created and the appellee cited one Maryland case for
the proposition that a corporation cannot be created by estoppel, neither made an attempt to
analogize or distinguish the numerous other Maryland cases touching the problem.
3. This case involved an action of replevin brought by a corporation for goods seized under a writ
of attachment. The Colorado statute required the payment of a fee by persons forming a
corporation to the Secretary of State "for incorporation and certain other privileges" and further
provided that no such corporation "shall have or exercise any corporate powers or be permitted
to do any business in this State until the said fee shall have been paid." It was held that the
corporation did not have title to the property it sought to replevy since the goods had been
transferred to it before the payment of the fee which was made a condition precedent to corporate
existence by the statute.
4. In this case, the first point the Court considered was whether the validity of the incorporation
could be attacked by proving, aliunde the certificate of its incorporation, that certain prerequisites
of the law had not been complied with in good faith. Then, after stating the established rule that a
company incorporated according to all the required forms of law must be regarded by third persons
as a corporation until it is dissolved by a judicial proceeding on behalf of the government that
created it, the Court apparently assumed that as the company was in fact dealing with the third
person on a corporate basis, it was to him a corporation de facto. Although this assumption seems
(1) to have confused the de facto doctrine with the estoppel theory and (2) was unnecessary in
view of the fact that the company might have been a corporation de jure, we believe that it did not
affect the force of the holding with respect to the proposition that third persons who have dealt
with a company on a corporate basis are precluded from impeaching its corporate existence.
5. A third doctrine, called the modern "enterprise-entity theory," which in many respects is not
unlike the estoppel theory applied in Maryland, is described in 1 Oleck, Modern Corporation Law,
592. For an excellent analysis of the law concerning defective incorporation in general, see
Chapter 25 of Vol. 1, 584-595. See also the last sentence in 591 (p. 839) where the author
says that "in time the doctrine of `de facto' corporation may become merely an historic example of
legal conceptualism at its worst."
6. Those states which recognize the de facto doctrine are not in accord as to whether a corporation
de facto may be created in spite of the failure to file the necessary papers. Some courts, without
making clear in every instance whether a de facto corporation was meant or not, have stated that
failure to file the required papers prevented the organizations from becoming a corporation and
have held in effect that the persons acting as a corporation are a mere association or partnership.
See, among others, Slocum v. Head, 81 N.W. 673 (Wis.); Perrine v. Levin, 123 N.Y. Supp. 1007;
H.J. Hughes Co. v. Farmers' Union Produce Co., 194 N.W. 872 (Neb.); Elrod Slug Casting Mach.
Co. v. O'Malley, 57 F.Supp. 915 (D. Neb.). Other courts, without expressly deciding whether a de
facto corporation was created, hold that the statutes of the state imply corporate existence prior
to the filing of articles of incorporation. See, for example, Merrick v. Reynolds Eng. & Gov. Co.,
101 Mass. 381; Granby Min. & Smelt. Co. v. Richards, 8 S.W. 246 (Mo.). Still other courts hold
that a de facto existence is not precluded by failure to file the articles of incorporation. See Mason
v. Stevens, 92 N.W. 424 (S.D.); Frawley v. Tenafly Transportation Co., 113 Atl. 242 (N.J.L.); Tisch
Auto Supply Co. v. Nelson, 192 N.W. 600 (Mich.); Berlin Bank v. Nelson, 204 N.W. 92 (Mich.);
A.W. Mendenhall Co. v. Booher, 48 S.W.2d 120 (Mo. App.); Culkin v. Hillside Restaurant, 8 A.2d
173 (N.J. Eq.). Numerous other cases on the problem are collected in 22 A.L.R. 376, 37 A.L.R.
1319. See also 1 Oleck, Modern Corporation Law, 585, and the cases cited in the footnotes.
G.R. No. L-11442 May 23, 1958
MANUELA T. VDA. DE SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order
of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between the former and the Philippine
Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas,
Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease
with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing
under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business
address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was
provided in said contract, among other things, that the lifetime of the lease would be for a period
of 10 years; that the land would be planted to kenaf, ramie or other crops suitable to the soil; that
the lessor would be entitled to 30 per cent of the net income accruing from the harvest of any,
crop without being responsible for the cost of production thereof; and that after every harvest, the
lessee was bound to declare at the earliest possible time the income derived therefrom and to
deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were not complied
with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance
of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q.
Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She averred that
sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased property which
crop was, at the time of the commencement of the action, already harvested, processed and sold
by defendants; that notwithstanding that fact, defendants refused to render an accounting of the
income derived therefrom and to deliver the lessor's share; that the estimated gross income was
P4,500, and the deductible expenses amounted to P1,000; that as defendants' refusal to
undertake such task was in violation of the terms of the covenant entered into between the plaintiff
and defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they were allegedly
notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June
8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to
render a complete accounting of the harvest of the land subject of the proceeding within 15 days
from receipt of the decision and to deliver 30 per cent of the net income realized from the last
harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It
was further provide that upon defendants' failure to abide by the said requirement, the gross
income would be fixed at P4,200 or a net income of P3,200 after deducting the expenses for
production, 30 per cent of which or P960 was held to be due the plaintiff pursuant to the
aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon
motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte
caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No
property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On
January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and void with respect to him, there being no
allegation in the complaint pointing to his personal liability and thus prayed that an order be issued
limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a quo granted
the same and ordered the Provincial Sheriff of Leyte to release all properties belonging to the
movant that might have already been attached, after finding that the evidence on record made no
mention or referred to any fact which might hold movant personally liable therein. As plaintiff's
petition for relief from said order was denied, Manuela T. Vda. de Salvatierra instituted the instant
action asserting that the trial Judge in issuing the order complained of, acted with grave abuse of
discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by
tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the
Rules of Court. Section 3 of said Rule, however, in providing for the period within which such a
motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. A petition
provided for in either of the preceding sections of this rule must be verified, filed within
sixty days after the petitioner learns of the judgment, order, or other proceeding to be
set aside, and not more than six months after such judgment or order was entered, or
such proceeding was taken; and must be must be accompanied with affidavit showing
the fraud, accident, mistake, or excusable negligence relied upon, and the facts
constituting the petitioner is good and substantial cause of action or defense, as the
case may be, which he may prove if his petition be granted". (Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment,
and not more than 6 months after the judgment or order was rendered, both of which must be
satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas the motion
filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23
days, the filing of the aforementioned motion was clearly made beyond the prescriptive period
provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a
decision or order is certainly an alert of grace or benevolence intended to afford said litigant a
penultimate opportunity to protect his interest. Considering the nature of such relief and the
purpose behind it, the periods fixed by said rule are non-extendible and never interrupted; nor
could it be subjected to any condition or contingency because it is of itself devised to meet a
condition or contingency (Palomares vs. Jimenez, * G.R. No. L-4513, January 31, 1952). On this
score alone, therefore, the petition for a writ of certiorari filed herein may be granted. However,
taking note of the question presented by the motion for relief involved herein, We deem it wise to
delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense
that the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so
in his capacity as president of the corporation. And this allegation was found by the Court a quo
to be supported by the records. Plaintiff on the other hand tried to refute this averment by
contending that her failure to specify defendant's personal liability was due to the fact that all the
time she was under the impression that the Philippine Fibers Producers Co., Inc., represented by
Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent inquiry
from the Securities and Exchange Commission yielded otherwise. While as a general rule a
person who has contracted or dealt with an association in such a way as to recognize its existence
as a corporate body is estopped from denying the same in an action arising out of such transaction
or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania
Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49
Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part in the said
transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the
Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no
confirmation or denial and the circumstances surrounding the execution of the contract lead to the
inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe
that such corporation was duly organized in accordance with law.
There can be no question that a corporation with registered has a juridical personality separate
and distinct from its component members or stockholders and officers such that a corporation
cannot be held liable for the personal indebtedness of a stockholder even if he should be its
president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or
member cannot be held personally liable for any financial obligation be, the corporation in excess
of his unpaid subscription. But this rule is understood to refer merely to registered corporations
and cannot be made applicable to the liability of members of an unincorporated association. The
reason behind this doctrine is obvious-since an organization which before the law is non-existent
has no personality and would be incompetent to act and appropriate for itself the powers and
attribute of a corporation as provided by law; it cannot create agents or confer authority on another
to act in its behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law that a person
who acts as an agent without authority or without a principal is himself regarded as the principal,
possessed of all the rights and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges
and obligations and comes personally liable for contracts entered into or for other acts performed
as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of
the Philippines, Fifth Ed., P. 689-690). Considering that defendant Refuerzo, as president of the
unregistered corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the
consummation of the lease agreement by acting as its representative, his liability cannot be limited
or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation which
he knew to be unregistered, he assumed the risk of reaping the consequential damages or
resultant rights, if any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this
matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant
therein which might have been attached in the execution of such judgment, is hereby set aside
and nullified as if it had never been issued. With costs against respondent Segundino Refuerzo.
It is so ordered.
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
G.R. No. L-58028 April 18, 1989
CHIANG KAI SHEK SCHOOL, petitioner,
vs.
COURT OF APPEALS and FAUSTINA FRANCO OH, respondents.
CRUZ, J.:
An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang Kai Shek
School in Sorsogon on the first week of July, 1968. She was told she had no assignment for the
next semester. Oh was shocked. She had been teaching in the school since 1932 for a continuous
period of almost 33 years. And now, out of the blue, and for no apparent or given reason, this
abrupt dismissal.
Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity
benefits and moral and exemplary damages. 1 The original defendant was the Chiang Kai Shek
School but when it filed a motion to dismiss on the ground that it could not be sued, the complaint
was amended. 2 Certain officials of the school were also impleaded to make them solidarily liable
with the school.
The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was
set aside by the respondent court, which held the school suable and liable while absolving the
other defendants. 4 The motion for reconsideration having been denied, 5 the school then came
to this Court in this petition for review on certiorari.
The issues raised in the petition are:
1. Whether or not a school that has not been incorporated may be sued by reason alone of its
long continued existence and recognition by the government,
2. Whether or not a complaint filed against persons associated under a common name will justify
a judgment against the association itself and not its individual members.
3. Whether or not the collection of tuition fees and book rentals will make a school profit-making
and not charitable.
4. Whether or not the Termination Pay Law then in force was available to the private respondent
who was employed on a year-to-year basis.
5. Whether or not the awards made by the respondent court were warranted.
We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules
of Court clearly provides that "only natural or juridical persons may be parties in a civil action." It
is also not denied that the school has not been incorporated. However, this omission should not
prejudice the private respondent in the assertion of her claims against the school.
As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which
provided as follows:
Unless exempted for special reasons by the Secretary of Public Instruction, any private
school or college recognized by the government shall be incorporated under the
provisions of Act No. 1459 known as the Corporation Law, within 90 days after the date
of recognition, and shall file with the Secretary of Public Instruction a copy of its
incorporation papers and by-laws.
Having been recognized by the government, it was under obligation to incorporate under the
Corporation Law within 90 days from such recognition. It appears that it had not done so at the
time the complaint was filed notwithstanding that it had been in existence even earlier than 1932.
The petitioner cannot now invoke its own non-compliance with the law to immunize it from the
private respondent's complaint.
There should also be no question that having contracted with the private respondent every year
for thirty two years and thus represented itself as possessed of juridical personality to do so, the
petitioner is now estopped from denying such personality to defeat her claim against it. According
to Article 1431 of the Civil Code, "through estoppel an admission or representation is rendered
conclusive upon the person making it and cannot be denied or disproved as against the person
relying on it."
As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15,
under which the persons joined in an association without any juridical personality may be sued
with such association. Besides, it has been shown that the individual members of the board of
trustees are not liable, having been appointed only after the private respondent's dismissal. 6
It is clear now that a charitable institution is covered by the labor laws 7 although the question was
still unsettled when this case arose in 1968. At any rate, there was no law even then exempting
such institutions from the operation of the labor laws (although they were exempted by the
Constitution from ad valorem taxes). Hence, even assuming that the petitioner was a charitable
institution as it claims, the private respondent was nonetheless still entitled to the protection of the
Termination Pay Law, which was then in force.
While it may be that the petitioner was engaged in charitable works, it would not necessarily follow
that those in its employ were as generously motivated. Obviously, most of them would not have
the means for such charity. The private respondent herself was only a humble school teacher
receiving a meager salary of Pl80. 00 per month.
At that, it has not been established that the petitioner is a charitable institution, considering
especially that it charges tuition fees and collects book rentals from its students. 8 While this alone
may not indicate that it is profit-making, it does weaken its claim that it is a non-profit entity.
The petitioner says the private respondent had not been illegally dismissed because her teaching
contract was on a yearly basis and the school was not required to rehire her in 1968. The argument
is that her services were terminable at the end of each year at the discretion of the school.
Significantly, no explanation was given by the petitioner, and no advance notice either, of her relief
after teaching year in and year out for all of thirty-two years, the private respondent was simply
told she could not teach any more.
The Court holds, after considering the particular circumstance of Oh's employment, that she had
become a permanent employee of the school and entitled to security of tenure at the time of her
dismissal. Since no cause was shown and established at an appropriate hearing, and the notice
then required by law had not been given, such dismissal was invalid.
The private respondent's position is no different from that of the rank-and-file employees involved
in Gregorio Araneta University Foundation v. NLRC, 9 of whom the Court had the following to say:
Undoubtedly, the private respondents' positions as deans and department heads of the
petitioner university are necessary in its usual business. Moreover, all the private
respondents have been serving the university from 18 to 28 years. All of them rose from
the ranks starting as instructors until they became deans and department heads of the
 university. A person who has served the University for 28 years and who occupies a
high administrative position in addition to teaching duties could not possibly be a
temporary employee or a casual.
The applicable law is the Termination Pay Law, which provided:
SECTION 1. In cases of employment, without a definite period, in a commercial,
industrial, or agricultural establishment or enterprise, the employer or the employee may
terminate at any time the employment with just cause; or without just cause in the case
of an employee by serving written notice on the employer at least one month in advance,
or in the case of an employer, by serving such notice to the employee at least one month
in advance or one-half month for every year of service of the employee, whichever, is
longer, a fraction of at least six months being considered as one whole year.
The employer, upon whom no such notice was served in case of termination of
employment without just cause may hold the employee liable for damages.
The employee, upon whom no such notice was served in case of termination of
employment without just cause shall be entitled to compensation from the date of
termination of his employment in an I amount equivalent to his salaries or wages
correspond to the required period of notice. ... .
The respondent court erred, however, in awarding her one month pay instead of only one-half
month salary for every year of service. The law is quite clear on this matter. Accordingly, the
separation pay should be computed at P90.00 times 32 months, for a total of P2,880.00.
Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School Teachers,
confers security of tenure on the teacher upon appointment as long as he possesses the required
qualification. 10 And under the present policy of the Department of Education, Culture and Sports,
a teacher becomes permanent and automatically acquires security of tenure upon completion of
three years in the service. 11
While admittedly not applicable to the case at bar, these I rules nevertheless reflect the attitude of
the government on the protection of the worker's security of tenure, which is now guaranteed by
no less than the Constitution itself. 12
We find that the private respondent was arbitrarily treated by the petitioner, which has shown no
cause for her removal nor had it given her the notice required by the Termination Pay Law. As the
respondent court said, the contention that she could not report one week before the start of classes
is a flimsy justification for replacing her. 13 She had been in its employ for all of thirty-two years.
Her record was apparently unblemished. There is no showing of any previous strained relations
between her and the petitioner. Oh had every reason to assume, as she had done in previous
years, that she would continue teaching as usual.
It is easy to imagine the astonishment and hurt she felt when she was flatly and without warning
told she was dismissed. There was not even the amenity of a formal notice of her replacement,
with perhaps a graceful expression of thanks for her past services. She was simply informed she
was no longer in the teaching staff. To put it bluntly, she was fired.
For the wrongful act of the petitioner, the private respondent is entitled to moral damages. 14 As
a proximate result of her illegal dismissal, she suffered mental anguish, serious anxiety, wounded
feelings and even besmirched reputation as an experienced teacher for more than three decades.
We also find that the respondent court did not err in awarding her exemplary damages because
the petitioner acted in a wanton and oppressive manner when it dismissed her. 15
The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are
always at the forefront in the battle against illiteracy and ignorance. If only because it is they who
open the minds of their pupils to an unexplored world awash with the magic of letters and numbers,
which is an extraordinary feat indeed, these humble mentors deserve all our respect and
appreciation.
WHEREFORE, the petition is DENIED. The appealed decision is AFFIRMED except for the award
of separation pay, which is reduced to P2,880.00. All the other awards are approved. Costs
against the petitioner.
This decision is immediately executory.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.
[G.R. No. 125221. June 19, 1997]
REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R. DE LOS SANTOS, Presiding
Judge, RTC, Br. 58, Angeles City; and ANTONIO ANDA, respondents.
DECISION
PUNO, J.:
This petition for certiorari seeks to annul and set aside the decision of the Regional Trial Court,
Branch 58, Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat and Magalang,
Pampanga to dismiss Civil Case No. 1214 for lack of jurisdiction.
The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil Case
No. 1214 for damages against respondent Antonio Anda before the Municipal Circuit Trial Court
(MCTC), Mabalacat and Magalang, Pampanga. Petitioner alleged that he was the president of the
Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc. (KAMAJDA) while respondent
Anda was the president of the Samahang Angeles-Mabalacat Jeepney Operators' and Drivers'
Association, Inc. (SAMAJODA); in August 1995, upon the request of the Sangguniang Bayan of
Mabalacat, Pampanga, petitioner and private respondent agreed to consolidate their respective
associations and form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers'
Association, Inc. (UMAJODA); petitioner and private respondent also agreed to elect one set of
officers who shall be given the sole authority to collect the daily dues from the members of the
consolidated association; elections were held on October 29, 1995 and both petitioner and private
respondent ran for president; petitioner won; private respondent protested and, alleging fraud,
refused to recognize the results of the election; private respondent also refused to abide by their
agreement and continued collecting the dues from the members of his association despite several
demands to desist. Petitioner was thus constrained to file the complaint to restrain private
respondent from collecting the dues and to order him to pay damages in the amount of P25,000.00
and attorney's fees of P500.00.i[1]
Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction
was lodged with the Securities and Exchange Commission (SEC). The MCTC denied the motion
on February 9, 1996.ii[2] It denied reconsideration on March 8, 1996.iii[3]
Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58, Angeles
City.iv[4] The trial court found the dispute to be intracorporate, hence, subject to the jurisdiction of
the SEC, and ordered the MCTC to dismiss Civil Case No. 1214 accordingly.v[5] It denied
reconsideration on May 31, 1996.vi[6]
Hence this petition. Petitioner claims that:
"THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING
THAT THE SECURITIES AND EXCHANGE COMMISSION HAS JURISDICTION OVER A CASE
OF DAMAGES BETWEEN HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO
INTENDED TO CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC]
APPROVED AND REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION."vii[7]
The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of
Presidential Decree No. 902-A. Section 5 reads as follows:
"Section 5. x x x [T]he Securities and Exchange Commission [has] original and exclusive
jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business associates,
its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.
(b) Controversies arising out of intracorporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation, partnership
or association of which they are stockholders, members, or associates, respectively; and between
such corporation, partnership or association and the state insofar as it concerns their individual
franchise or right to exist as such entity.
(c) Controversies in the election or appointment of directors, trustees, officers or managers of such
corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension
of payments in cases where the corporation, partnership or association possesses sufficient
property to cover all its debts but foresees the impossibility of meeting them when they respect
very fall due or in cases where the corporation, partnership or association has no sufficient assets
to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree."
The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under the
law.viii[8] This jurisdiction is determined by a concurrence of two elements: (1) the status or
relationship of the parties; and (2) the nature of the question that is the subject of their
controversy.ix[9]
The first element requires that the controversy must arise out of intracorporate or partnership
relations between and among stockholders, members, or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and the State
in so far as it concerns their individual franchises.x[10] The second element requires that the
dispute among the parties be intrinsically connected with the regulation of the corporation,
partnership or association or deal with the internal affairs of the corporation, partnership or
association.xi[11] After all, the principal function of the SEC is the supervision and control of
corporations, partnerships and associations with the end in view that investments in these entities
may be encouraged and protected, and their activities pursued for the promotion of economic
development.xii[12]
There is no intracorporate nor partnership relation between petitioner and private respondent. The
controversy between them arose out of their plan to consolidate their respective jeepney drivers'
and operators' associations into a single common association. This unified association was,
however, still a proposal. It had not been approved by the SEC, neither had its officers and
members submitted their articles of consolidation in accordance with Sections 78 and 79 of the
Corporation Code. Consolidation becomes effective not upon mere agreement of the members
but only upon issuance of the certificate of consolidation by the SEC.xiii[13] When the SEC, upon
processing and examining the articles of consolidation, is satisfied that the consolidation of the
corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it
issues a certificate of consolidation which makes the reorganization official.xiv[14] The new
consolidated corporation comes into existence and the constituent corporations dissolve and
cease to exist.xv[15]
The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly
registered with the SEC, but these associations are two separate entities. The dispute between
petitioner and private respondent is not within the KAMAJDA nor the SAMAJODA. It is between
members of separate and distinct associations. Petitioner and private respondent have no
intracorporate relation much less do they have an intracorporate dispute. The SEC therefore has
no jurisdiction over the complaint.
The doctrine of corporation by estoppelxvi[16] advanced by private respondent cannot override
jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the
parties.xvii[17] It cannot be acquired through or waived, enlarged or diminished by, any act or
omission of the parties, neither can it be conferred by the acquiescence of the court.xviii[18]
Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and
unfairness.xix[19] It applies when persons assume to form a corporation and exercise corporate
functions and enter into business relations with third persons. Where there is no third person
involved and the conflict arises only among those assuming the form of a corporation, who
therefore know that it has not been registered, there is no corporation by estoppel.xx[20]
IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the order
dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are set aside. The
Municipal Circuit Trial Court of Mabalacat and Magalang, Pampanga is ordered to proceed with
dispatch in resolving Civil Case No. 1214. No costs.
SO ORDERED.
Regalado, (Chairman), Romero, Mendoza, and Torres, Jr., JJ., concur.
[G.R. No. 136448. November 3, 1999]
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow money to pursue a
business and to divide the profits or losses that may arise therefrom, even if it is shown that they
have not contributed any capital of their own to a "common fund." Their contribution may be in the
form of credit or industry, not necessarily cash or fixed assets. Being partners, they are all liable
for debts incurred by or on behalf of the partnership. The liability for a contract entered into on
behalf of an unincorporated association or ostensible corporation may lie in a person who may not
have directly transacted on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV 41477,xxi[1] which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby
affirmed.xxii[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by
the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September
20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and circumstances
and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said
Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed on their
respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in
court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted
from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the unpaid price of
nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount
of P600,045.00, this Court noted that these items were attached to guarantee any judgment that
may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further
deterioration of the nets during the pendency of this case, it was ordered sold at public auction for
not less than P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds
of the sale paid for by plaintiff was deposited in court. In effect, the amount of P900,000.00
replaced the attached property as a guaranty for any judgment that plaintiff may be able to secure
in this case with the ownership and possession of the nets and floats awarded and delivered by
the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been noted that
ownership of the nets [was] retained by the plaintiff until full payment [was] made as stipulated in
the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for this reason also
that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve
as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled
to in this case will have to be satisfied from the amount of P900,000.00 as this amount replaced
the attached nets and floats. Considering, however, that the total judgment obligation as computed
above would amount to only P840,216.92, it would be inequitable, unfair and unjust to award the
excess to the defendants who are not entitled to damages and who did not put up a single centavo
to raise the amount of P900,000.00 aside from the fact that they are not the owners of the nets
and floats. For this reason, the defendants are hereby relieved from any and all liabilities arising
from the monetary judgment obligation enumerated above and for plaintiff to retain possession
and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by
it with the Clerk of Court.
SO ORDERED. xxiii[3]
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged
in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the
agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth
P68,000 were also sold to the Corporation.xxiv[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three in their capacities as general
partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent corporation
as shown by a Certification from the Securities and Exchange Commission.xxv[5] On September
20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by
attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent some of the
nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have
waived his right to cross-examine witnesses and to present evidence on his behalf, because of
his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer
with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.xxvi[6] The
trial court maintained the Writ, and upon motion of private respondent, ordered the sale of the
fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding and deposited
with the said court the sales proceeds of P900,000.xxvii[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners,
were jointly liable to pay respondent.xxviii[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
threexxix[9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC
of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation
of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages.xxx[10] The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than
P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao.xxxi[11]
The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit and
loss.xxxii[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing
business and may thus be held liable as a such for the fishing nets and floats purchased by and
for the use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing x x x. Obviously,
the ultimate undertaking of the defendants was to divide the profits among themselves which is
what a partnership essentially is x x x. By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New Civil Code).xxxiii[13]
Hence, petitioner brought this recourse before this Court.xxxiv[14]
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE
CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE
FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT
OF PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats purchased from
respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could
be deemed to have entered into a partnership.
This Courts Ruling
The Petition is devoid of merit.
First and Second Issues: Existence of a Partnership and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent,
petitioner controverts the CA finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement alone.
Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that the
negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he
had merely leased to the two the main asset of the purported partnership -- the fishing boat F/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article
1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among
themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings:xxxv[15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to
join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing
boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance
the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale
over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and
other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the partnership
in the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the
ownership papers of two other boats, Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong
Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4)
injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between the
parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started by buying boats worth P3.35 million, financed by
a loan secured from Jesus Lim who was petitioners brother. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats,
and to divide equally among them the excess or loss. These boats, the purchase and the repair
of which were financed with borrowed money, fell under the term common fund under Article 1767.
The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit
or industry. That the parties agreed that any loss or profit from the sale and operation of the boats
would be divided equally among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also
to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were
obviously acquired in furtherance of their business. It would have been inconceivable for Lim to
involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of
the partnership, and they agreed that the proceeds from the sales and operations thereof would
be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to
the rule.xxxvi[16] In assailing the factual findings of the two lower courts, petitioner effectively goes
beyond the bounds of a petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership
Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership
was the Compromise Agreement. He also claims that the settlement was entered into only to end
the dispute among them, but not to adjudicate their preexisting rights and obligations. His
arguments are baseless. The Agreement was but an embodiment of the relationship extant among
the parties prior to its execution.
A proper adjudication of claimants rights mandates that courts must review and thoroughly
appraise all relevant facts. Both lower courts have done so and have found, correctly, a preexisting
partnership among the parties. In implying that the lower courts have decided on the basis of one
piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the
history of the document and explored all the possible consequential combinations in harmony with
law, logic and fairness. Verily, the two lower courts factual findings mentioned above nullified
petitioners argument that the existence of a partnership was based only on the Compromise
Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua
and Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract
of Lease and the registration papers showing that he was the owner of the boats, including F/B
Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the
sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided
among the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale
proved that there was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and
Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the
vessels which would be used in their fishing business. The sale of the boats, as well as the division
among the three of the balance remaining after the payment of their loans, proves beyond cavil
that F/B Lourdes, though registered in his name, was not his own property but an asset of the
partnership. It is not uncommon to register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a
debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee,
instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only
to Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort committed by
it as such, it shall not be allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all the liabilities of a principal,
a person acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally liable for contracts entered into
or for other acts performed as such agent.xxxvii[17]
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party.
In the first instance, an unincorporated association, which represented itself to be a corporation,
will be estopped from denying its corporate capacity in a suit against it by a third person who relied
in good faith on such representation. It cannot allege lack of personality to be sued to evade its
responsibility for a contract it entered into and by virtue of which it received advantages and
benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid
for the nets it sold. The only question here is whether petitioner should be held jointlyxxxviii[18]
liable with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in
the name of the ostensible corporation should be held liable. Since his name does not appear on
any of the contracts and since he never directly transacted with the respondent corporation, ergo,
he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the
attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by persons with whom he previously had
an existing relationship, he is deemed to be part of said association and is covered by the scope
of the doctrine of corporation by estoppel. We reiterate the ruling of the Court in Alonso v.
Villamor:xxxix[19]
A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the
subtle art of movement and position , entraps and destroys the other. It is, rather, a contest in
which each contending party fully and fairly lays before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of
procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won by
a rapiers thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant consideration from courts. There should be no
vested rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We
agree with the Court of Appeals that this issue is now moot and academic. As previously
discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of
petitioner, only to assure payment of the debt he and his partners owed. The nets and the floats
were specifically manufactured and tailor-made according to their own design, and were bought
and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the
payment of the price stipulated in the invoices is proper. Besides, by specific agreement,
ownership of the nets remained with Respondent Philippine Fishing Gear, until full payment
thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
Melo, (Chairman), Purisima, and Gonzaga-Reyes, JJ., concur.
Vitug, J., Pls. see concurring opinion.
CONCURRING OPINION
VITUG, J.:
I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim
have incurred the liabilities of general partners. I merely would wish to elucidate a bit, albeit briefly,
the liability of partners in a general partnership.
When a person by his act or deed represents himself as a partner in an existing partnership or
with one or more persons not actual partners, he is deemed an agent of such persons consenting
to such representation and in the same manner, if he were a partner, with respect to persons who
rely upon the representation.xl[1] The association formed by Chua, Yao and Lim, should be, as it
has been deemed, a de facto partnership with all the consequent obligations for the purpose of
enforcing the rights of third persons. The liability of general partners (in a general partnership as
so opposed to a limited partnership) is laid down in Article 1816xli[2] which posits that all partners
shall be liable pro rata beyond the partnership assets for all the contracts which may have been
entered into in its name, under its signature, and by a person authorized to act for the partnership.
This rule is to be construed along with other provisions of the Civil Code which postulate that the
partners can be held solidarily liable with the partnership specifically in these instances (1) where,
by any wrongful act or omission of any partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is caused to any person, not being
a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the
same extent as the partner so acting or omitting to act; (2) where one partner acting within the
scope of his apparent authority receives money or property of a third person and misapplies it;
and (3) where the partnership in the course of its business receives money or property of a third
person and the money or property so received is misapplied by any partner while it is in the custody
of the partnershipxlii[3] consistently with the rules on the nature of civil liability in delicts and quasi-
delicts.
[G.R. No. 117188. August 7, 1997]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner, vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN
ENCARNACION and HORATIO AYCARDO, respondents.
DECISION
ROMERO, J.:
May the failure of a corporation to file its by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic
dissolution?
This is the issue raised in this petition for review on certiorari of the Decisionxliii[1] of the Court of
Appeals affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This
quasi-judicial body recognized Loyola Grand Villas Homeowners Association (LGVHA) as the sole
homeowners association in Loyola Grand Villas, a duly registered subdivision in Quezon City and
Marikina City that was owned and developed by Solid Homes, Inc. It revoked the certificates of
registration issued to Loyola Grand Villas Homeowners (North) Association Incorporated (the
North Association for brevity) and Loyola Grand Villas Homeowners (South) Association
Incorporated (the South Association).
LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of
the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor
of herein respondent HIGC, as the sole homeowners organization in the said subdivision under
Certificate of Registration No. 04-197. It was organized by the developer of the subdivision and its
first president was Victorio V. Soliven, himself the owner of the developer. For unknown reasons,
however, LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do
so.xliv[2] To the officers consternation, they discovered that there were two other organizations
within the subdivision the North Association and the South Association. According to private
respondents, a non-resident and Soliven himself, respectively headed these associations. They
also discovered that these associations had five (5) registered homeowners each who were also
the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed
as member of the North Association while three (3) members of LGVHAI were listed as members
of the South Association.xlv[3] The North Association was registered with the HIGC on February
13, 1989 under Certificate of Registration No. 04-1160 covering Phases West II, East III, West III
and East IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the
head of the legal department of the HIGC, informed him that LGVHAI had been automatically
dissolved for two reasons. First, it did not submit its by-laws within the period required by the
Corporation Code and, second, there was non-user of corporate charter because HIGC had not
received any report on the associations activities. Apparently, this information resulted in the
registration of the South Association with the HIGC on July 27, 1989 covering Phases West I, East
I and East 11. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC.
They questioned the revocation of LGVHAIs certificate of registration without due notice and
hearing and concomitantly prayed for the cancellation of the certificates of registration of the North
and South Associations by reason of the earlier issuance of a certificate of registration in favor of
LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents obtained a favorable
ruling from HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as
follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners
Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of
Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola
Grand Villas Homeowners Association, Inc., all assets and records of the Association now under
his custody and possession.
The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September
8, 1993, the Boardxlvi[4] dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First,
whether or not LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the
Corporation Code resulted in the automatic dissolution of LGVHAI. Second, whether or not two
homeowners associations may be authorized by the HIGC in one sprawling subdivision. However,
in the Decision of August 23, 1994 being assailed here, the Court of Appeals affirmed the
Resolution of the HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private
corporation commences to have corporate existence and juridical personality from the date the
Securities and Exchange Commission (SEC) issues a certificate of incorporation under its official
seal. The requirement for the filing of by-laws under Section 46 of the Corporation Code within
one month from official notice of the issuance of the certificate of incorporation presupposes that
it is already incorporated, although it may file its by-laws with its articles of incorporation.
Elucidating on the effect of a delayed filing of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e., Sections 46 and 22, Corporation
Code, or in any other provision of the Code and other laws which provide or at least imply that
failure to file the by-laws results in an automatic dissolution of the corporation. While Section 46,
in prescribing that by-laws must be adopted within the period prescribed therein, may be
interpreted as a mandatory provision, particularly because of the use of the word must, its meaning
cannot be stretched to support the argument that automatic dissolution results from non-
compliance.
We realize that Section 46 or other provisions of the Corporation Code are silent on the result of
the failure to adopt and file the by-laws within the required period. Thus, Section 46 and other
related provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A.
This section empowers the SEC to suspend or revoke certificates of registration on the grounds
listed therein. Among the grounds stated is the failure to file by-laws (see also II Campos: The
Corporation Code, 1990 ed., pp. 124-125). Such suspension or revocation, the same section
provides, should be made upon proper notice and hearing. Although P.D. 902-A refers to the SEC,
the same principles and procedures apply to the public respondent HIGC as it exercises its power
to revoke or suspend the certificates of registration or homeowners associations. (Section 2 [a],
E.O. 535, series 1979, transferred the powers and authorities of the SEC over homeowners
associations to the HIGC.)
We also do not agree with the petitioners interpretation that Section 46, Corporation Code prevails
over Section 6, P.D. 902-A and that the latter is invalid because it contravenes the former. There
is no basis for such interpretation considering that these two provisions are not inconsistent with
each other. They are, in fact, complementary to each other so that one cannot be considered as
invalidating the other.
The Court of Appeals added that, as there was no showing that the registration of LGVHAI had
been validly revoked, it continued to be the duly registered homeowners association in the Loyola
Grand Villas. More importantly, the South Association did not dispute the fact that LGVHAI had
been organized and that, thereafter, it transacted business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous rulingxlvii[5] that the HIGC has
the authority to order the holding of a referendum to determine which of two contending
associations should represent the entire community, village or subdivision.
Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as
sole issue for resolution the first issue it had raised before the Court of Appeals, i.e., whether or
not the LGVHAIs failure to file its by-laws within the period prescribed by Section 46 of the
Corporation Code had the effect of automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word must with respect to the filing of by-laws,
noncompliance therewith would result in self-extinction either due to non-occurrence of a
suspensive condition or the occurrence of a resolutory condition under the hypothesis that (by)
the issuance of the certificate of registration alone the corporate personality is deemed already
formed. It asserts that the Corporation Code provides for a gradation of violations of requirements.
Hence, Section 22 mandates that the corporation must be formally organized and should
commence transactions within two years from date of incorporation. Otherwise, the corporation
would be deemed dissolved. On the other hand, if the corporation commences operations but
becomes continuously inoperative for five years, then it may be suspended or its corporate
franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not
provide for sanctions for non-filing of the by-laws. However, it insists that no sanction need be
provided because the mandatory nature of the provision is so clear that there can be no doubt
about its being an essential attribute of corporate birth. To petitioner, its submission is buttressed
by the facts that the period for compliance is spelled out distinctly; that the certification of the
SEC/HIGC must show that the by-laws are not inconsistent with the Code, and that a copy of the
by-laws has to be attached to the articles of incorporation. Moreover, no sanction is provided for
because in the first place, no corporate identity has been completed. Petitioner asserts that non-
provision for remedy or sanction is itself the tacit proclamation that non-compliance is fatal and no
corporate existence had yet evolved, and therefore, there was no need to proclaim its
demise.xlviii[6] In a bid to convince the Court of its arguments, petitioner stresses that:
x x x the word MUST is used in Sec. 46 in its universal literal meaning and corollary human
implication its compulsion is integrated in its very essence MUST is always enforceable by the
inevitable consequence that is, OR ELSE. The use of the word MUST in Sec. 46 is no exception
it means file the by-laws within one month after notice of issuance of certificate of registration OR
ELSE. The OR ELSE, though not specified, is inextricably a part of MUST. Do this or if you do not
you are Kaput. The importance of the by-laws to corporate existence compels such meaning for
as decreed the by-laws is `the government of the corporation. Indeed, how can the corporation do
any lawful act as such without by-laws. Surely, no law is intended to create chaos.xlix[7]
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation
Code which itself does not provide sanctions for non-filing of by-laws. For the petitioner, it is not
proper to assess the true meaning of Sec. 46 x x x on an unauthorized provision on such matter
contained in the said decree.
In their comment on the petition, private respondents counter that the requirement of adoption of
by-laws is not mandatory. They point to P.D. No. 902-A as having resolved the issue of whether
said requirement is mandatory or merely directory. Citing Chung Ka Bio v. Intermediate Appellate
Court,l[8] private respondents contend that Section 6(I) of that decree provides that non-filing of
by-laws is only a ground for suspension or revocation of the certificate of registration of
corporations and, therefore, it may not result in automatic dissolution of the corporation. Moreover,
the adoption and filing of by-laws is a condition subsequent which does not affect the corporate
personality of a corporation like the LGVHAI. This is so because Section 9 of the Corporation
Code provides that the corporate existence and juridical personality of a corporation begins from
the date the SEC issues a certificate of incorporation under its official seal. Consequently, even if
the by-laws have not yet been filed, a corporation may be considered a de facto corporation. To
emphasize the fact the LGVHAI was registered as the sole homeowners association in the Loyola
Grand Villas, private respondents point out that membership in the LGVHAI was an unconditional
restriction in the deeds of sale signed by lot buyers.
In its reply to private respondents comment on the petition, petitioner reiterates its argument that
the word must in Section 46 of the Corporation Code is mandatory. It adds that, before the ruling
in Chung Ka Bio v. Intermediate Appellate Court could be applied to this case, this Court must
first resolve the issue of whether or not the provisions of P.D. No. 902-A prescribing the rules and
regulations to implement the Corporation Code can rise above and change the substantive
provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of controversy in this case
states:
Sec. 46. Adoption of by-laws. Every corporation formed under this Code, must within one (1)
month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent
with this Code. For the adoption of by-laws by the corporation, the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock, or of at least a
majority of the members, in the case of non-stock corporations, shall be necessary. The by-laws
shall be signed by the stockholders or members voting for them and shall be kept in the principal
office of the corporation, subject to the stockholders or members voting for them and shall be kept
in the principal office of the corporation, subject to inspection of the stockholders or members
during office hours; and a copy thereof, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed
prior to incorporation; in such case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange Commission, together with the
articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust company,
insurance company, public utility, educational institution or other special corporations governed
by special laws, unless accompanied by a certificate of the appropriate government agency to the
effect that such by-laws or amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this provision of law begins with the
determination of the meaning and import of the word must in this section. Ordinarily, the word
must connotes an imperative act or operates to impose a duty which may be enforced.li[9] It is
synonymous with ought which connotes compulsion or mandatoriness.lii[10] However, the word
must in a statute, like shall, is not always imperative. It may be consistent with an exercise of
discretion. In this jurisdiction, the tendency has been to interpret shall as the context or a
reasonable construction of the statute in which it is used demands or requires.liii[11] This is equally
true as regards the word must. Thus, if the language of a statute considered as a whole and with
due regard to its nature and object reveals that the legislature intended to use the words shall and
must to be directory, they should be given that meaning.liv[12]
In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are
illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to understand here, Mr.
Speaker, that by-laws must immediately be filed within one month after the issuance? In other
words, would this be mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the failure
of the corporation to file these by-laws within one month?
MR. MENDOZA. There is a provision in the latter part of the Code which identifies and
describes the consequences of violations of any provision of this Code. One such consequence
is the dissolution of the corporation for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation
by merely failing to file the by-laws within one month. Supposing the corporation was late, say,
five days, what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto
dissolution of the corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar
Filipino where a quo warranto action is brought, one takes into account the gravity of the violation
committed. If the by-laws were late the filing of the by-laws were late by, perhaps, a day or two, I
would suppose that might be a tolerable delay, but if they are delayed over a period of months as
is happening now because of the absence of a clear requirement that by-laws must be completed
within a specified period of time, the corporation must suffer certain consequences.lv[13]
This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file
the by-laws on time was never the intention of the legislature. Moreover, even without resorting to
the records of deliberations of the Batasang Pambansa, the law itself provides the answer to the
issue propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a statute is the statute itself
(optima statuli interpretatix est ipsum statutum),lvi[14] Section 46 aforequoted reveals the
legislative intent to attach a directory, and not mandatory, meaning for the word must in the first
sentence thereof. Note should be taken of the second paragraph of the law which allows the filing
of the by-laws even prior to incorporation. This provision in the same section of the Code rules out
mandatory compliance with the requirement of filing the by-laws within one (1) month after receipt
of official notice of the issuance of its certificate of incorporation by the Securities and Exchange
Commission. It necessarily follows that failure to file the by-laws within that period does not imply
the demise of the corporation. By-laws may be necessary for the government of the corporation
but these are subordinate to the articles of incorporation as well as to the Corporation Code and
related statutes.lvii[15] There are in fact cases where by-laws are unnecessary to corporate
existence or to the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either
to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly
in all cases where the charter sufficiently provides for the government of the body; and even where
the governing statute in express terms confers upon the corporation the power to adopt by-laws,
the failure to exercise the power will be ascribed to mere nonaction which will not render
void any acts of the corporation which would otherwise be valid.lviii[16] (Italics supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have
been adopted the corporation may not be able to act for the purposes of its creation, and that the
first and most important duty of the members is to adopt them. This would seem to follow as a
matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-
laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances
attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in
the case of a close corporation organized for specific purposes. And the statute or general laws
from which the corporation derives its corporate existence may expressly require it to make and
adopt by-laws and specify to some extent what they shall contain and the manner of their adoption.
The mere fact, however, of the existence of power in the corporation to adopt by-laws does
not ordinarily and of necessity make the exercise of such power essential to its corporate
life, or to the validity of any of its acts.lix[17]
Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the
consequences of the non-filing of the same within the period provided for in Section 46. However,
such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on
the jurisdiction of the SEC of which state:
SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
xxx xxx xxx xxx
(l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds provided by
law, including the following:
xxx xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the Commissions or by a
Commissioner or by such other bodies, boards, committees and/or any officer as may be created
or designated by the Commission for the purpose. The decision, ruling or order of any such
Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling
or order. The Commission shall promulgate rules of procedures to govern the proceedings,
hearings and appeals of cases falling within its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to
the Supreme Court by petition for review in accordance with the pertinent provisions of the Rules
of Court.
Even under the foregoing express grant of power and authority, there can be no automatic
corporate dissolution simply because the incorporators failed to abide by the required filing of by-
laws embodied in Section 46 of the Corporation Code. There is no outright demise of corporate
existence. Proper notice and hearing are cardinal components of due process in any democratic
institution, agency or society. In other words, the incorporators must be given the chance to explain
their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but in another law is of
no moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11,
1976, is very much apposite to the Code. Accordingly, the provisions abovequoted supply the law
governing the situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A
are statutes in pari materia. Interpretare et concordare legibus est optimus interpretandi.
Every statute must be so construed and harmonized with other statutes as to form a uniform
system of jurisprudence.lx[18]
As the rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their relation to it,lxi[19] by-laws are
indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance and management of corporations.
Nonetheless, failure to file them within the period required by law by no means tolls the automatic
dissolution of a corporation.
In this regard, private respondents are correct in relying on the pronouncements of this Court in
Chung Ka Bio v. Intermediate Appellate Court,lxii[20] as follows:
x x x. Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation
but is now considered only a ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code,
provided that the powers of the corporation would cease if it did not formally organize and
commence the transaction of its business or the continuation of its works within two years from
date of its incorporation. Section 20, which has been reproduced with some modifications in
Section 46 of the Corporation Code, expressly declared that every corporation formed under this
Act, must within one month after the filing of the articles of incorporation with the Securities and
Exchange Commission, adopt a code of by-laws. Whether this provision should be given
mandatory or only directory effect remained a controversial question until it became academic with
the adoption of PD 902-A. Under this decree, it is now clear that the failure to file by-laws within
the required period is only a ground for suspension or revocation of the certificate of registration
of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section
6(I) of PD 902-A, the SEC is empowered to suspend or revoke, after proper notice and hearing,
the franchise or certificate of registration of a corporation on the ground inter alia of failure to file
by-laws within the required period. It is clear from this provision that there must first of all be a
hearing to determine the existence of the ground, and secondly, assuming such finding, the
penalty is not necessarily revocation but may be only suspension of the charter. In fact, under the
rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with
the imposition of an administrative fine without affecting the corporate existence of the erring firm.
It should be stressed in this connection that substantial compliance with conditions subsequent
will suffice to perfect corporate personality. Organization and commencement of transaction of
corporate business are but conditions subsequent and not prerequisites for acquisition of
corporate personality. The adoption and filing of by-laws is also a condition subsequent. Under
Section 19 of the Corporation Code, a corporation commences its corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange Commission
issues certificate of incorporation under its official seal. This may be done even before the filing of
the by-laws, which under Section 46 of the Corporation Code, must be adopted within one month
after receipt of official notice of the issuance of its certificate of incorporation.lxiii[21]
That the corporation involved herein is under the supervision of the HIGC does not alter the result
of this case. The HIGC has taken over the specialized functions of the former Home Financing
Corporation by virtue of Executive Order No. 90 dated December 17, 1986.lxiv[22] With respect
to homeowners associations, the HIGC shall exercise all the powers, authorities and
responsibilities that are vested on the Securities and Exchange Commission x x x, the provision
of Act 1459, as amended by P.D. 902-A, to the contrary notwithstanding.lxv[23]
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned
Decision of the Court of Appeals AFFIRMED. This Decision is immediately executory. Costs
against petitioner.
SO ORDERED.
Regalado, (Chairman), Puno, and Mendoza, JJ., concur.
Torres, Jr., J., on leave.
G.R. No. L-23241 March 14, 1925
HENRY FLEISCHER, plaintiff-appellee,
vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province of Oriental Negros on
the 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a
corporation duly organized and existing under the laws of the Philippine Islands. The plaintiff
prayed that said board of directors be ordered to register in the books of the corporation five shares
of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for
damages sustained by him resulting from the refusal of said body to register the shares of stock
in question. The defendant filed a demurrer on the ground that the facts alleged in the complaint
did not constitute sufficient cause of action, and that the action was not brought against the proper
party, which was the Botica Nolasco, Inc. The demurrer was sustained, and the plaintiff was
granted five days to amend his complaint.
On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc.,
alleging that he became the owner of five shares of stock of said corporation, by purchase from
their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the
defendant refused to register said shares in his name in the books of the corporation in spite of
repeated demands to that effect made by him upon said corporation, which refusal caused him
damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to
register in his name in the books of the corporation the five shares of stock recorded in said books
in the name of Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to
pay the costs. The defendant again filed a demurrer on the ground that the amended complaint
did not state facts sufficient to constitute a cause of action, and that said amended complaint was
ambiguous, unintelligible, uncertain, which demurrer was overruled by the court.
The defendant answered the amended complaint denying generally and specifically each and
every one of the material allegations thereof, and, as a special defense, alleged that the defendant,
pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at
the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that
said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it from all
liability under the complaint and directing the plaintiff to deliver to the defendant the five shares of
stock in question, and to pay damages in the sum of P500, and the costs.
Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at
the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that,
in his opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its
shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially
with section 35 thereof; and rendered a judgment ordering the defendant corporation, through its
board of directors, to register in the books of said corporation the said five shares of stock in the
name of the plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the original
owner, Manuel Gonzalez, with costs against the defendant.
The defendant appealed from said judgment, and now makes several assignment of error, all of
which, in substance, raise the question whether or not article 12 of the by-laws of the corporation
is in conflict with the provisions of the Corporation Law (Act No. 1459).
There is no controversy as to the facts of the present case. They are simple and may be stated
as follows:
That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, 17,
18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said
five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided
on the back thereof, together with other credits, in consideration of a large sum of money owed by
Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo
Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer,
on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500;
that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the
preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that the plaintiff refused to
sell them to the defendant; that the plaintiff requested Doctor Miciano to register said shares in his
name; that Doctor Miciano refused to do so, saying that it would be in contravention of the by-laws
of the corporation.
It also appears from the record that on the 13th day of March, 1923, two days after the assignment
of the shares to the plaintiff, Manuel Gonzales made a written statement to the Botica Nolasco,
Inc., requesting that the five shares of stock sold by him to Henry Fleischer be noted transferred
to Fleischer's name. He also acknowledged in said written statement the preferential right of the
corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to the
Botica Nolasco, withdrawing and cancelling his written statement of March 13, 1923 (Exhibit C),
to which letter the Botica Nolasco on June 15, 1923, replied, declaring that his written statement
was in conformity with the by-laws of the corporation; that his letter of June 14th was of no effect,
and that the shares in question had been registered in the name of the Botica Nolasco, Inc.,
(Exhibit X).
As indicated above, the important question raised in this appeal is whether or not article 12 of the
by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act
No. 1459). Appellant invoked said article as its ground for denying the request of the plaintiff that
the shares in question be registered in his (plaintiff's) name, and for claiming that it (Botica
Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellant now contends
that article 12 of the said by-laws is in conformity with the provisions of Act No. 1459. Said article
is as follows:
ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero
para que estas transferencias tengan validez legal, deben constar en los registros de
la Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la
accion o acciones que se transfieran, o un documento de transferencia. Entendiendose
que, ningun accionista transferira accion alguna a otra persona sin participar antes por
escrito al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el
derecho de adquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc.,
governing the transfer of shares of stock of said corporation. The latter part of said article creates
in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the
share or shares of stock of a retiring shareholder. Has said corporation any power, under the
Corporation Law (Act. No. 1459), to adopt such by-law?
The particular provisions of the Corporation Law referring to transfer of shares of stock are as
follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of
the number of its officers and directors within the limits prescribed by law, and for the
transferring of its stock, the administration of its corporate affairs, etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary
or clerk and sealed with the seal of the corporation, shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate indorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, that date of the
transfer, the number of the certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not
inconsistent with any existing law, for the transferring of its stock. It follows from said provision,
that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the
law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No.
1459 above quoted. Said section specifically provides that the shares of stock "are personal
property and may be transferred by delivery of the certificate indorsed by the owner, etc." Said
section 35 defines the nature, character and transferability of shares of stock. Under said section
they are personal property and may be transferred as therein provided. Said section contemplates
no restriction as to whom they may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor or against a certain purchaser. The
holder of shares, as owner of personal property, is at liberty, under said section, to dispose of
them in favor of whomsoever he pleases, without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer
of shares of stock should take into consideration the specific provisions of section 35 of Act No.
1459, and said by-law should be made to harmonize with said provisions. It should not be
inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the corporation by
section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has
transcended the limits fixed by law in the same section, and has not taken into consideration the
provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to
carry into effect the objects of the corporation, and are not contradictory to the general policy of
the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71
Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and
for a corporate purpose, and always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land. They must not infringe the policy
of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge the substantial rights of
stockholder or member, affect rights of property or create obligations unknown to the law.
(People's Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland
vs. Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co.
vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock must be found in
the governing statute or the charter. Restrictions upon the traffic in stock must have their
source in legislative enactment, as the corporation itself cannot create such
impediments. By-law are intended merely for the protection of the corporation, and
prescribe regulation and not restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such a power, cannot ordinarily inquire
into or pass upon the legality of the transaction by which its stock passes from one
person to another, nor can it question the consideration upon which a sale is based. A
by-law cannot take away or abridge the substantial rights of stockholder. Under a statute
authorizing by- laws for the transfer of stock, a corporation can do no more than
prescribe a general mode of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale. (4 Thompson on Corporations, sec.
4137, p. 674.
The right of unrestrained transfer of shares inheres in the very nature of a corporation,
and courts will carefully scrutinize any attempt to impose restrictions or limitations upon
the right of stockholders to sell and assign their stock. The right to impose any restraint
in this respect must be conferred upon the corporation either by the governing statute
or by the articles of the corporation. It cannot be done by a by-law without statutory or
charter authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of property, the general rule
(subject to exceptions hereafter pointed out and discussed) is that every owner of
corporate shares has the same uncontrollable right to alien them which attaches to the
ownership of any other species of property. A shareholder is under no obligation to
refrain from selling his shares at the sacrifice of his personal interest, in order to secure
the welfare of the corporation, or to enable another shareholder to make gains and
profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to prevent or to restrain
transfers of its shares, unless such power is expressly conferred in its charter or
governing statute. This conclusion follows from the further consideration that by-laws or
other regulations restraining such transfers, unless derived from authority expressly
granted by the legislature, would be regarded as impositions in restraint of trade. (10
Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this question. They hold that
the power of a corporation to enact by-laws restraining the sale and transfer of shares, should not
only be in harmony with the law or charter of the corporation, but such power should be expressly
granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35
of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation so
as to show the names of the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred." This restriction is necessary in order that the
officers of the corporation may know who are the stockholders, which is essential in conducting
elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction
of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property
rights of shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good faith
and for a valuable consideration. He was not a privy to the contract created by said by-law between
the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to
defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-law and took part in
its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a
purchaser is not affected by any contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has assented to an
unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless stockholders, cannot be made
available to defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville
vs. Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of
action against the defendant corporation, but against the president and secretary thereof,
inasmuch as the signing and registration of shares is incumbent upon said officers pursuant to
section 35 of the Corporation Law. This contention cannot be sustained now. The question should
have been raised in the lower court. It is too late to raise it now in this appeal. Besides, as stated
above, the corporation was made defendant in this action upon the demurrer of the attorney of the
original defendant in the lower court, who contended that the Botica Nolasco, Inc., should be made
the party defendant in this action. Accordingly, upon order of the court, the complaint was
amended and the said corporation was made the party defendant.
Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus
will lie to compel the officers of the corporation to transfer said stock upon the books of the
corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower court
is in accordance with law and should be and is hereby affirmed, with costs. So ordered.
Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
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.
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 Doa Felipa Alberto for P6,000
by a public instrument executed before a notary public at Manila, P. I., on July 30, 1926.
Upon consideration of the facts above set forth it is evident that the strict letter of the law was
violated by the respondent; but it is equally obvious that its conduct has not been characterized
by obduracy or pertinacity in contempt of the law. Moreover, several facts connected with the
incident tend to mitigate the offense. The Attorney-General points out that the respondent acquired
title on December 22, 1920, when the deed was executed and delivered, by which the property
was conveyed to it as purchaser at its foreclosure sale, and this title remained in it until July 30,
1926, when the property was finally sold to Felipa Alberto. The interval between these two
conveyances is thus more than five years; and it is contended that the five year period did not
begin to run against the respondent until May 7, 1921, when the register of deeds of Tarlac
delivered the new certificate of title to the respondent pursuant to the deed by which the property
was acquired. As an equitable consideration affecting the case this contention, though not
decisive, is in our opinion more than respectable. It has been held by this court that a purchaser
of land registered under the Torrens system cannot acquire the status of an innocent purchaser
for value unless his vendor is able to place in his hands an owner's duplicate showing the title of
such land to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente,
G. R. No. 266151). It results that prior to May 7, 1921, El Hogar Filipino was not really in a position
to pass an indefeasible title to any purchaser. In this connection it will be noted that section 75 of
the Act of Congress of July 1, 1902, and the similar provision in section 13 of the Corporation Law,
allow the corporation "five years after receiving the title," within which to dispose of the property.
A fair interpretation of these provisions would seem to indicate that the date of the receiving of the
title in this case was the date when the respondent received the owner's certificate, or May 7,
1921, for it was only after that date that the respondent had an unequivocal and unquestionable
power to pass a complete title. The failure of the respondent to receive the certificate sooner was
not due in any wise to its fault, but to unexplained delay on the part of the register of deeds. For
this delay the respondent cannot be held accountable.
Again, it is urged for the respondent that the period between March 25, 1926, and April 30, 1926,
should not be counted as part of the five-year period. This was the period during which the
respondent was under obligation to sell the property to Alcantara, prior to the rescission of the
contract by reason of Alcantara's failure to make the stipulated first payment. Upon this point the
contention of the respondent is, in our opinion, well founded. The acceptance by it of Alcantara's
offer obligated the respondent to Alcantara; and if it had not been for the default of Alcantara, the
effective sale of the property would have resulted. The respondent was not at all chargeable with
the collapse of these negotiations; and hence in any equitable application of the law this period
should be deducted from the five-year period within which the respondent ought to have made the
sale. Another circumstance explanatory of the respondent's delay in selling the property is found
in the fact that it purchased the property for the full amount of the indebtedness due to it from the
former owner, which was nearly P24,000. It was subsequently found that the property was not
salable for anything like that amount and in the end it had to be sold for P6,000, notwithstanding
energetic efforts on the part of the respondent to find a purchaser upon better terms.
The question then arises whether the failure of the respondent to get rid of the San Clemente
property within five years after it first acquired the deed thereto, even supposing the five-year
period to be properly counted from that date, is such a violation of law as should work a forfeiture
of its franchise and require a judgment to be entered for its dissolution in this action of quo
warranto. Upon this point we do not hesitate to say that in our opinion the corporation has not
been shown to have offended against the law in a manner that should entail a forfeiture of its
charter. Certainly no court with any discretion to use in the matter would visit upon the respondent
and its thousands of shareholders the extreme penalty of the law as a consequence of the
delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure,
as applied by this court in Government of the Philippine Islands vs. Philippine Sugar Estates
Development Co. (38 Phil., 15). This section (212), in prescribing the judgment to be rendered
against a corporation in an action of quo warranto, among other things says:
. . . When it is found and adjudged that a corporation has offended in any matter or
manner which does not by law work as a surrender or forfeiture, or has misused a
franchise or exercised a power not conferred by law, but not of such a character as to
work a surrender or forfeiture of its franchise, judgment shall be rendered that it be
outset from the continuance of such offense or the exercise of such power.
This provision clearly shows that the court has a discretion with respect to the infliction of capital
punishment upon corporation and that there are certain misdemeanors and misuses of franchises
which should not be recognized as requiring their dissolution. In Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15), it was found that the offending
corporation had been largely (though indirectly) engaged in the buying and holding or real property
for speculative purposes in contravention of its charter and contrary to the express provisions of
law. Moreover, in that case the offending corporation was found to be still interested in the
properties so purchased for speculative at the time the action was brought. Nevertheless, instead
of making an absolute and unconditional order for the dissolution of the corporation, the judgment
of ouster was made conditional upon the failure of the corporation to discontinue its unlawful
conduct within six months after final decision. In the case before us the respondent appears to
have rid itself of the San Clemente property many months prior to the institution of this action. It is
evident from this that the dissolution of the respondent would not be an appropriate remedy in this
case. We do not of course undertake to say that a corporation might not be dissolved for offenses
of this nature perpetrated in the past, especially if its conduct had exhibited a willful obduracy and
contempt of law. We content ourselves with holding that upon the facts here before us the penalty
of dissolution would be excessively severe and fraught with consequences altogether
disproportionate to the offense committed.
The evident purpose behind the law restricting the rights of corporations with respect to the tenure
of land was to prevent the revival of the entail (mayorazgo) or other similar institution by which
land could be fettered and its alienation hampered over long periods of time. In the case before
us the respondent corporation has in good faith disposed of the piece of property which appears
to have been in its hands at the expiration of the period fixed by law, and a fair explanation is given
of its failure to dispose of it sooner. Under these circumstances the destruction of the corporation
would bring irreparable loss upon the thousand of innocent shareholders of the corporation without
any corresponding benefit to the public. The discretion permitted to this court in the application of
the remedy of quo warranto forbids so radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this court in matters like that now
before us has been expressly taken away by the third section of Act No. 2792, and that the
dissolution of the corporation is obligatory upon the court a mere finding that the respondent has
violated the provision of the Corporation Law in any respect. This makes necessary to examine
the Act last above-mentioned with some care. Upon referring thereto, we find that it consists of
three sections under the following style:
No. 2792. An Act to amend certain sections of the Corporation Law, Act Numbered
Fourteen hundred and fifty-nine, providing for the publication of the assets and liabilities
of corporations registering in the Bureau of Commerce and Industry, determining the
liability of the officers of corporations with regard to the issuance of stock or bonus,
establishing penalties for certain things, and for other purposes.
The first two section contain amendments to the Corporation Law with respect to matters with
which we are not here concurred. The third section contains anew enactment to be inserted as
section 190 (A) in the corporation Law immediately following section 190. This new section reads
as follows:
SEC. 190. (A). Penalties. The violation of any of the provisions of this Act and its
amendments not otherwise penalized therein, shall be punished by a fine of not more
than one thousand pesos, or by imprisonment for not more than five years, or both, in
the discretion of the court. If the violation being proved, be dissolved by quo warranto
proceedings instituted by the Attorney-General or by any provincial fiscal, by order of
said Attorney-General: Provided, That nothing in this section provided shall be
construed to repeal the other causes for the dissolution of corporation prescribed by
existing law, and the remedy provided for in this section shall be considered as
additional to the remedies already existing.
The contention for the plaintiff is to the effect that the second sentence in this enactment has
entirely abrogated the discretion of this court with respect to the application of the remedy of qou
warranto, as expressed in section 212 of the Code of Civil Procedure, and that it is now mandatory
upon us to dissolved any corporation whenever we find that it has committed any violation of the
Corporation Law, however trivial. In our opinion in this radical view of the meaning of the
enactment is untenable. When the statute says, "If the violation is committed by a corporation, the
same shall, upon such violation being proved, be dissolved by quo warranto proceedings . . .," the
intention was to indicate that the remedy against the corporation shall be by action of quo warranto.
There was no intention to define the principles governing said remedy, and it must be understood
that in applying the remedy the court is still controlled by the principles established in immemorial
jurisprudence. The interpretation placed upon this language in the brief of the Attorney-General
would be dangerous in the extreme, since it would actually place the life of all corporate
investments in the official. No corporate enterprise of any moment can be conducted perpetually
without some trivial misdemeanor against corporate law being committed by some one or other of
its numerous employees. As illustrations of the preposterous effects of the provision, in the sense
contended for by the Attorney-General, the attorneys for the respondent have called attention to
the fact that under section 52 of the Corporation Law, a business corporation is required to keep
a stock book and a transfer book in which the names of stockholders shall kept in alphabetical
order. Again, under section 94, railroad corporations are required to cause all employees working
on passenger trains or at a station for passengers to wear a badge on his cap or hat which will
indicate his office. Can it be supposed that the Legislature intended to penalize the violation of
such provisions as these by dissolution of the corporation involved? Evidently such could not have
been the intention; and the only way to avoid the consequence suggested is to hold, as we now
hold, that the provision now under consideration has not impaired the discretion of this court in
applying the writ of quo warranto.
Another way to put the same conclusion is to say that the expression "shall be dissolved by quo
warranto proceedings" means in effect, "may be dissolved by quo warranto proceedings in the
discretion of the court." The proposition that the word "shall" may be construed as "may", when
addressed by the Legislature to the courts, is well supported in jurisprudence. In the case of
Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of Pennsylvania had
under consideration a statute providing as follows:
It shall be the duty of the court . . . to examine, inquire and ascertain whether such
corporation does in fact posses the right or franchise to do the act from which such
alleged injury to private rights or to the rights and franchises of other corporations
results; and if such rights or franchises have not been conferred upon such corporations,
such courts, it exercising equitable power, shall, by injunction, at suit of the private
parties or other corporations, restrain such injurious acts.
In an action based on this statute the plaintiff claimed injunctive relief as a matter of right. But this
was denied the court saying:
Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to be
granted unless a proper case for injunction be made out, in accordance with the
principles and practice of equity. The word "shall" when used by the legislature to a
court, is usually a grant of authority and means "may", and even if it be intended to be
mandatory it must be subject to the necessary limitation that a proper case has been
made out for the exercise of the power.
Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West
Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash.,
567; 70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572;
16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard], 387, 394; Whipple
vs. Eddy, 161 Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505,
506; Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent on the ground that the subject-
matter of this section is not expressed in the title of the Act, with the result that the section is
invalid. This criticism is in our opinion well founded. Section 3 of our organic law (Jones Bill)
declares, among other things, that "No bill which may be enacted into law shall embrace more
than one subject, and that subject shall be expressed in the title of the bill." Any law or part of a
law passed by the Philippine Legislature since this provision went into effect and offending against
its requirement is necessarily void.
Upon examining the entire Act (No. 2792), we find that it is directed to three ends which are
successively dealt with in the first three sections of the Act. But it will be noted that these three
matters all relate to the Corporation Law; and it is at once apparent that they might properly have
been embodied in a single Act if a title of sufficient unity and generality had been prefixed thereto.
Furthermore, it is obvious, even upon casual inspection, that the subject-matter of each of the first
two sections is expressed and defined with sufficient precision in the title. With respect to the
subject-matter of section 3 the only words in the title which can be taken to refer to the subject-
matter of said section are these, "An Act . . . establishing penalties for certain things, and for other
purposes." These words undoubtedly have sufficient generality to cover the subject-matter of
section 3 of the Act. But this is not enough. The Jones Law requires that the subject-matter of the
bill "shall be expressed in the title of the bill."
When reference is had to the expression "establishing penalties for certain things," it is obvious
that these words express nothing. The constitutional provision was undoubtedly adopted in order
that the public might be informed as to what the Legislature is about while bills are in process of
passage. The expression "establishing penalties for certain things" would give no definite
information to anybody as to the project of legislation intended under this expression. An
examination of the decided cases shows that courts have always been indulgent of the practices
of the Legislature with respect to the form and generality of title, for if extreme refinements were
indulged by the courts, the work of legislation would be unnecessarily hampered. But, as has been
observed by the California court, there must be some reasonable limit to the generality of titles
that will be allowed. The measure of legality is whether the title is sufficient to give notice of the
general subject of the proposed legislation to the persons and interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to revise the
Code of Civil Procedure of the State of California, by amending certain sections, repealing others,
and adding certain new sections." This title was held to embrace more than one subject, which
were not sufficiently expressed in the title. In discussing the question the court said:
* * * It is apparent that the language of the title of the act in question, in and of itself,
express no subject whatever. No one could tell from the title alone what subject of
legislation was dealt with in the body of the act; such subject so far as the title of the act
informs us, might have been entirely different from anything to be found in the act itself.
We cannot agree with the contention of some of respondent's counsel apparently to
some extent countenanced by a few authorities that the provision of the constitution
in question can be entirely avoided by the simple device of putting into the title of an act
words which denote a subject "broad" enough to cover everything. Under that view, the
title, "An act concerning the laws of the state," would be good, and the convention and
people who framed and adopted the constitution would be convicted of the folly of
elaborately constructing a grave constitutional limitation of legislative power upon a
most important subject, which the legislature could at once circumvent by a mere verbal
trick. The word "subject" is used in the constitution embrace but "one subject" it
necessarily implies what everybody knows that there are numerous subjects of
the legislation, and declares that only one of these subjects shall embraced in any one
act. All subjects cannot be conjured into one subject by the mere magic of a word in a
title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New Jersey made
the following observation:
 * * * It is true, that it may be difficult to indicate, by a formula, how specialized the title of
a statute must be; but it is not difficult to conclude that it must mean something in the
way of being a notice of what is doing. Unless it does not enough that it embraces the
legislative purpose it must express it; and where the language is too general, it will
accomplish the former, but not the latter. Thus, a law entitled "An act for a certain
purpose," would embrace any subject, but would express none, and, consequently, it
would not stand the constitutional test.
The doctrine properly applicable in matters of this kind is, we think, fairly summed up in a current
repository of jurisprudence in the following language:
* * * While it may be difficult to formulate a rule by which to determine the extent to which
the title of a bill must specialize its object, it may be safely assumed that the title must
not only embrace the subject of proposed legislation, but also express it clearly and fully
enough to give notice of the legislative purpose. (25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and for other purposes "found at the end of
the caption of Act No. 2792, must be laid completely out of consideration. They express nothing,
and amount to nothing as a compliance with the constitutional requirement to which attention has
been directed. This expression "(for other purposes") is frequently found in the title of acts adopted
by the Philippine Legislature; and its presence in our laws is due to the adoption by our Legislature
of the style used in Congression allegation. But it must be remembered that the legislation of
Congress is subject to no constitutional restriction with respect to the title of bills. Consequently,
in Congressional legislation the words "and for other purposes" at least serve the purpose of
admonishing the public that the bill whose heading contains these words contains legislation upon
other subjects than that expressed in the title. Now, so long as the Philippine Legislature was
subject to no restriction with respect to the title of bills intended for enactment into general laws,
the expression "for other purposes" could be appropriately used in titles, not precisely for the
purpose of conveying information as to the matter legislated upon, but for the purpose ad
admonishing the public that any bill containing such words in the title might contain other subjects
than that expressed in the definitive part of the title. But, when congress adopted the Jones Law,
the restriction with which we are now dealing became effective here and the words "for other
purposes" could no longer be appropriately used in the title of legislative bills. Nevertheless, the
custom of using these words has still been followed, although they can no longer serve to cover
matter not germane to the bill in the title of which they are used. But the futility of adding these
words to the style of any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302)
In the brief for the plaintiff it is intimated that the constitutional restriction which we have been
discussing is more or less of a dead letter in this jurisdiction; and it seems to be taken for granted
that no court would ever presume to hold a legislative act or part of a legislative act invalid for non-
compliance with the requirement. This is a mistake; and no utterance of this court can be cited as
giving currency to any such notion. On the contrary the discussion contained in Central Capiz vs.
Ramirez (40 Phil., 883), shows that when a case arises where a violation of the restriction is
apparent, the court has no alternative but to declare the legislation affected thereby to be invalid.
Second cause of action. The second cause of action is based upon a charge that the
respondent is owning and holding a business lot, with the structure thereon, in the financial district
of the City of Manila is excess of its reasonable requirements and in contravention of subsection
5 of section 13 of the corporation Law. The facts on which this charge is based appear to be these:
On August 28, 1913, the respondent purchased 1,413 square meters of land at the corner of Juan
Luna Street and the Muelle de la Industria, in the City of Manila, immediately adjacent to the
building then occupied by the Hongkong and Shanghai Banking Corporation. At the time the
respondent acquired this lot there stood upon it a building, then nearly fifty years old, which was
occupied in part by the offices of an importing firm and in part by warehouses of the same firm.
The material used in the construction was Guadalupe stone and hewn timber, and the building
contained none of the facilities usually found in a modern office building.
In purchase of a design which had been formed prior to the purchase of the property, the directors
of the El Hogar Filipino caused the old building to be demolished; and they erected thereon a
modern reinforced concrete office building. As at first constructed the new building was three
stories high in the main, but in 1920, in order to obtain greater advantage from the use of the land,
an additional story was added to the building, making a structure of four stories except in one
corner where an additional story was place, making it five stories high over an area of 117.52
square meters. It is admitted in the plaintiffs brief that this "noble and imposing structure" to use
the words of the Attorney-General "has greatly improved the aspect of the banking and
commercial district of Manila and has greatly contributed to the movement and campaign for the
Manila Beautiful." It is also admitted that the competed building is reasonably proportionate in
value and revenue producing capacity to the value of the land upon which it stands. The total
outlay of the respondent for the land and the improvements thereon was P690,000 and at this
valuation the property is carried on the books of the company, while the assessed valuation of the
land and improvements is at P786,478.
Since the new building was completed the respondent has used about 324 square meters of floor
space for its own offices and has rented the remainder of the office space in said building,
consisting of about 3,175 square meters, to other persons and entities. In the second cause of
action of the complaint it is supposed that the acquisition of this lot, the construction of the new
office building thereon, and the subsequent renting of the same in great part to third persons, are
ultra vires acts on the part of the corporation, and that the proper penalty to be enforced against
it in this action is that if dissolution.
With this contention we are unable to agree. Under subsection 5 of section 13 of the Corporation
Law, every corporation has the power to purchase, hold and lease such real property as the
transaction of the lawful business of the corporation may reasonably and necessarily require.
When this property was acquired in 1916, the business of El Hogar Filipino had developed to such
an extent, and its prospects for the future were such as to justify its directors in acquiring a lot in
the financial district of the City of Manila and in constructing thereon a suitable building as the site
of its offices; and it cannot be fairly said that the area of the lot 1,413 square meters was in
excess of its reasonable requirements. The law expressly declares that corporations may acquire
such real estate as is reasonably necessary to enable them to carry out the purposes for which
they were created; and we are of the opinion that the owning of a business lot upon which to
construct and maintain its offices is reasonably necessary to a building and loan association such
as the respondent was at the time this property was acquired. A different ruling on this point would
compel important enterprises to conduct their business exclusively in leased offices a result
which could serve no useful end but would retard industrial growth and be inimical to the best
interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by
the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered
which would deny to one owner the right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to discriminate between owners in this respect is
not lightly to be imputed to the Legislature. The point here involved has been the subject of
consideration in many decisions of American courts under statutes even more restrictive than that
which prevails in this jurisdiction; and the conclusion has uniformly been that a corporations whose
business may properly be conducted in a populous center may acquire an appropriate lot and
construct thereon an edifice with facilities in excess of its own immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it appeared that the
respondent corporation owned and controlled a large ten-story business block in the City of
Chicago, worth $2,000,000, and that it occupied only about one-fourth thereof for its own
purposes, leasing the remainder to others at heavy rentals. The corporate charter merely
permitted the holding of such real estate by the respondent as might be necessary for the
successful prosecution of its business. An attempt was made to obtain the dissolution of the
corporation in a quo warranto proceeding similar to that now before us, but the remedy was denied.
In Rector vs. Hartford Deposit Co., a question was raised as to the power of the Deposit Company
to erect and own a fourteen-story building containing eight storerooms, one hundred suites of
offices, and one safety deposit vault, under a statute authorizing the corporation to possess so
much real estate "as shall be necessary for the transaction of their business." The court said:
That the appellee company possessed ample power to acquire real property and
construct a building thereon for the purpose of transacting therein the legitimate
business of the corporation is beyond the range of debate. Nor is the contrary
contended, but the insistence is that, under the guise of erecting a building for corporate
purposes, the appellee company purposely constructed a much larger building than its
business required, containing many rooms intended to be rented to others for offices
and business purposes, among them, the basement rooms contracted to be leased
to the appellant, and that in so doing it designedly exceeded its corporate powers.
The position off appellant therefore is that the appellee corporation has flagrantly
 abused its general power to acquire real estate and construct a building thereon . . . It
was within the general scope of the express powers of the appellee corporation to own
and possess a building necessary for its proper corporate purposes. In planning and
constructing such a building, as was said in People vs. Pullman's Palace Car Co., supra,
the corporation should not necessarily be restricted to a building containing the precise
number of rooms its then business might require, and no more, but that the future
probable growth and volume of its business might be considered and anticipated, and
a larger building, and one containing more rooms than the present volume of business
required be erected, and the rooms not needed might be rented by the corporation,
provided, of course, such course should be taken in good faith, and not as a mere
evasion of the public law and the policy of the state relative to the ownership of real
estate by corporations. In such state of case the question is whether the corporation
has abused or excessively and unjustifiably used the power and authority granted it by
the state to construct buildings and own real estate necessary for its corporate
purposes.
In Home savings building Association vs. Driver (129 Ky., 754), one of the questions before the
court was precisely the same as that now before us. Upon this the Supreme Court of Kentucky
said:
The third question is, has the association the right to erect, remodel, or own a building
of more than sufficient capacity to accommodate its own business and to rent out the
excess? There is nothing in the Constitution, charter of the association, or statutes
placing any limitation upon the character of a building which a corporation may erect as
a home in which to conduct its business. A corporation conducting a business of the
character of that in which appellant is engaged naturally expects its business to grow
and expand from time to time, and, in building a home it would be exercising but a short-
sighted judgment if it did not make provision for the future by building a home large
enough to take care of its expanding business, and hence, even if it should build a
house larger and roomier than its present needs or interests require, it would be acting
clearly with the exercise of its corporate right and power. The limitation which the statute
imposes is that proper conduct of its business, but it does not attempt to place any
restriction or limitation upon the right of the corporation or association as to the character
of building it shall erect on said real estate; and, while the Constitution and the statutes
provide that no corporation shall engage in any business other than that expressly
authorized by its charter, we are of opinion that, in renting out the unoccupied and
unused portions of the building so erected, the association could not be said to engaged
in any other business than that authorized by its charter. The renting of the unused
portions of the building is a mere incident in the conduct of its real business. We would
not say that a building association might embark in the business of building houses and
renting or leasing them, but there is quite a difference in building or renting a house in
which to conduct its own business and leasing the unused portion thereof for the time
being, or until such time as they may be needed by the association, and in building
houses for the purpose of renting or leasing them. The one might properly be said to be
the proper exercise of a power incident to the conduct of its legitimate business,
whereas the other would be a clear violation of that provision of the statute which denies
to any corporation the right to conduct any business other than that authorized by its
charter. To hold otherwise would be to charge most of the banking institutions, trust
companies and other corporations, such as title guaranty companies, etc., doing with
violating the law; for it is known that there are few of such institutions that do not, at
times, rent out or lease the unneeded portions of the building occupied by them as
homes. We do not think that in so doing they are violating any provisions of the law, but
that the renting out of the unused or unoccupied portions of their buildings is but an
incident in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a stockholder sought
to enjoin the bank from building a six-story building owned by the bank in the commercial district
of Hagerstown of which only the first story was to be used by the bank, the remaining stories to
be rented out for offices and places of business, on the theory that such action was ultra vires and
in violation of the provisions of the national banking act confining such corporations to the holding,
only, of such real estate "as shall be necessary for its immediate accommodation in the transaction
of its business."
The injunction was denied, the court adopting the opinion of the lower court in which the following
was said:
'The other ground urged by the complainant is that the proposed action is violative of
the restriction which permits a national bank to hold only such real estate as shall be
necessary for its immediate accommodation in the transaction of its business, and that,
therefore, the erection of a building which will contain offices not necessary for the
business of the bank is not permitted by the law, although that method of improving the
lot may be the most beneficial use that can be made of it. It is matter of common
knowledge that the actual practice of national banks is to the contrary. Where ground is
valuable, it may probably be truly said that the majority of national bank buildings are
built with accommodations in excess of the needs of the bank for the purpose of
lessening the bank's expense by renting out the unused portion. If that were not
allowable, many smaller banks in cities would be driven to become tenants as the great
cost of the lot would be prohibitive of using it exclusively for the banking accommodation
of a single bank. As indicative of the interpretation of the law commonly received and
acted upon, reference may be made to the reply of the Comptroller of the Currency to
the injury by the bank in this case asking whether the law forbids the bank constructing
such a building as was contemplated.
'The reply was follows: "Your letter of the 9th instant received, stating that the directors
contemplate making improvements in the bank building and inquiring if there is anything
in the national banking laws prohibiting the construction of a building which will contain
floors for offices to be rented out by the bank as well as the banking room. Your attention
is called to the case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the
court held that: 'If the land which a national bank purchases or leases for the
accommodation of its business is very valuable it may exercise the same rights that
belong to other landowners of improving it in a way that will yield the largest income,
lessen its own rent, and render that part of its funds which are invested in realty most
productive.'" This seems to be the common sense interpretation of the act of Congress
and is the one which prevails.'
It would seem to be unnecessary to extend the opinion by lengthy citations upon the point under
consideration, but Brown vs. Schleier (118 Fed., 981), may be cited as being in harmony with the
foregoing authorities. In dealing with the powers of a national bank the court, in this case, said:
When an occasion arises for an investment in real property for either of the purposes
specified in the statute the national bank act permits banking associations to act as any
prudent person would act in making an investment in real estate, and to exercise the
same measure of judgment and discretion. The act ought not to be construed in such
as way as to compel a national bank, when it acquires real property for a legitimate
purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with
such property.
In the brief of the Attorney-General reliance is place almost entirely upon two Illinois cases, namely
Africani Home Purchase and Loan Association vs. Carroll (267 Ill., 380), and First Methodist
Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our opinion these cases are either
distinguishable from that now before us, or they reflect a view of the law which is incorrect. At any
rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the validity of the acts
alleged in the second cause of action to have been done by the respondent in excess of its powers
that we refrain from commenting at any length upon said cases. The ground stated in the second
cause of action is in our opinion without merit.
Third cause of action. Under the third cause of action the respondent is charged with engaging
in activities foreign to the purposes for which the corporation was created and not reasonable
necessary to its legitimate ends. The specifications under this cause of action relate to three
different sorts of activities. The first consist of the administration of the offices in the El Hogar
building not used by the respondent itself and the renting of such offices to the public. As stated
in the discussion connected with the second cause of action, the respondent uses only about ten
per cent of the office space in the El Hogar building for its own purposes, and it leases the
remainder to strangers. In the years 1924 and 1925 the respondent received as rent for the leased
portions of the building the sums of P75,395.06 and P58,259.27, respectively. The activities here
criticized clearly fall within the legitimate powers of the respondent, as shown in what we have
said above relative to the second cause of action. This matter will therefore no longer detain us. If
the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as
there decided, the beneficial administration by it of such parts of the building as are let to others
must necessarily be lawful.
The second specification under the third cause of action has reference to the administration and
management of properties belonging to delinquent shareholders of the association. In this
connection it appears that in case of delinquency on the part of its shareholders in the payment of
interest, premium, and dues, the association has been accustomed (pursuant to clause 8 of its
standard mortgage) to take over and manage the mortgaged property for the purpose of applying
the income to the obligations of the debtor party. For these services the respondent charges a
commission at the rate of 2 per centum on sums collected. The case for the government
supposes that the only remedy which the respondent has in case of default on the part of its
shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in
section 185 of the Corporation Law. It will be noted, however, that, according to said section, the
association may treat the whole indebtedness as due, "at the option of the board of directors," and
this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the
association the right to take over the property which constitutes the security for the delinquent debt
and to manage it with a view to the satisfaction of the obligations due to the debtor than the
immediate enforcement of the entire obligation, and the validity of the clause allowing this course
to be taken appears to us to be not open to doubt. The second specification under this cause of
action is therefore without merit, as was true of the first.
The third specification under this cause of action relates to certain activities which are described
in the following paragraphs contained in the agreed statements of facts:.
El Hogar Filipino has undertaken the management of some parcels of improved real
estate situated in Manila not under mortgage to it, but owned by shareholders, and has
held itself out by advertisement as prepared to do so. The number of properties so
managed during the years 1921 to 1925, inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the persons whose properties are
so managed for them became shareholders only to enable them to take advantage
thereof.
The services rendered in the management of such improved real estate by El Hogar
Filipino consist in the renting of the same, the payment of real estate taxes and
insurance for the account of the owner, causing the necessary repairs for upkeep to be
made, and collecting rents due from tenants. For the services so rendered in the
management of such properties El Hogar Filipino receives compensation in the form of
commissions upon the gross receipts from such properties at rates varying from two
and one-half per centum to five per centum of the sums so collected, according to the
location of the property and the effort involved in its management.
The work of managing real estate belonging to non-borrowing shareholders
administered by El Hogar Filipino is carried on by the same members of the staff who
attend to the details of the management of properties administered by the manager of
El Hogar Filipino under the provisions of paragraph 8 of the standard mortgage form,
and of properties bought in on foreclosure of mortgage.
The practice described in the passage above quoted from the agreed facts is in our opinion
unauthorized by law. Such was the view taken by the bank examiner of the Treasury Bureau in
his report to the Insular Treasurer on December 21, 1925, wherein the practice in question was
criticized. The administration of property in the manner described is more befitting to the business
of a real estate agent or trust company than to the business of a building and loan association.
The practice to which this criticism is directed relates of course solely to the management and
administration of properties which are not mortgaged to the association. The circumstance that
the owner of the property may have been required to subscribe to one or more shares of the
association with a view to qualifying him to receive this service is of no significance. It is a general
rule of law that corporations possess only such express powers. The management and
administration of the property of the shareholders of the corporation is not expressly authorized
by law, and we are unable to see that, upon any fair construction of the law, these activities are
necessary to the exercise of any of the granted powers. The corporation, upon the point now under
the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not
result that the dissolution of the corporation is in order, and it will merely be enjoined from further
activities of this sort.
Fourth cause of action. It appears that among the by laws of the association there is an article
(No. 10) which reads as follows:
The board of directors of the association, by the vote of an absolute majority of its
members, is empowered to cancel shares and to return to the owner thereof the balance
resulting from the liquidation thereof whenever, by reason of their conduct, or for any
other motive, the continuation as members of the owners of such shares is not
desirable.
This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section
187 of the Corporation Law, which expressly declares that the board of directors shall not have
the power to force the surrender and withdrawal of unmatured stock except in case of liquidation
of the corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the
by-laws has never been enforced, and in fact no attempt has ever been made by the board of
directors to make use of the power therein conferred. In November, 1923, the Acting Insular
Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and
expressing the view that said article was invalid. It was therefore suggested that the article in
question should be eliminated from the by-laws. At the next meeting of the board of directors the
matter was called to their attention and it was resolved to recommend to the shareholders that in
their next annual meeting the article in question be abrogated. It appears, however, that no annual
meeting of the shareholders called since that date has been attended by a sufficient number of
shareholders to constitute a quorum, with the result that the provision referred to has no been
eliminated from the by-laws, and it still stands among the by-laws of the association,
notwithstanding its patent conflict with the law.
It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of
the association is a misdemeanor on the part of the respondent which justifies its dissolution. In
this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could
not be enforced even if the directors were to attempt to do so. There is no provision of law making
it a misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there
were such, the hazards incident to corporate effort would certainly be largely increased. There is
no merit in this cause of action.
Fifth cause of action. In section 31 of the Corporation Law it is declared that, "at all elections of
directors there must be present, either in person or by representative authorized to act by written
proxy, the owners of the majority of the subscribed capital stock entitled to vote. . . ." Conformably
with this requirement it is declared in article 61 of the by-laws of El Hogar Filipino that, "the
attendance in person or by proxy of shareholders owning one-half plus one of the shareholders
shall be necessary to constitute a quorum for the election of directors. At the general annual
meetings of the El Hogar Filipino held in the years 1911 and 1912, there was a quorum of shares
present or represented at the meetings and directors were duly elected accordingly. As the
corporation has grown, however, it has been fond increasingly difficult to get together a quorum
of the shareholders, or their proxies, at the annual meetings; and with the exception of the annual
meeting held in 1917, when a new directorate was elected, the meetings have failed for lack of
quorum. It has been foreseen by the officials in charge of the respondent that this condition of
affairs would lead to embarrassment, and a special effort was made by the management to induce
a sufficient number of shareholders to attend the annual meeting for February, 1923. In addition
to the publication of notices in the newspapers, as required by the by-laws, a letter of notification
was sent to every shareholder at his last known address, together with a blank form of proxy to
be used in the event the shareholder could not personally attend the meeting. Notwithstanding
these special efforts the meeting was attended only by shareholders, in person and by proxy,
representing 3,889 shares, out of a total of 106,491 then outstanding and entitled to vote.
Owing to the failure of a quorum at most of the general meetings since the respondent has been
in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing
suitable persons from among the stockholders. This custom finds its sanction in article 71 of the
by-laws, which reads as follows: 1912 .................................. 10,511.87 29 362.47
ART. 71. The directors shall elect from among the shareholders members to fill the
1913 .................................. 15,479.29 27 573.30
vacancies that may occur in the board of directors until the election at the general
meeting.
1914 .................................. 19,164.72 27 709.80
The person thus chosen to fill vacancies in the directorate have, it is admitted, uniformly been
experienced and successful business and professional men of means, enjoying earned incomes
1915 .................................. 24,032.85 25 961.31
of from P12,000 to P50,000 per annum, with an annual average of P30,000 in addition to such
income as they derive from their properties. Moreover, it appears that several of the individuals
1916 .................................. 27,539.50 28 983.55
constituting the original directorate and persons chosen to supply vacancies therein belong to
prominent Filipino families, and that they are more or less related to each other by blood or
1917 .................................. 31,327.00 26 1,204.88
marriage. In addition to this it appears that it has been the policy of the directorate to keep thereon
some member or another of a single prominent American law firm in the city.
1918 .................................. 32,858.35 20 1,642.91
It is supposed in the statement of the fifth cause of action in the complaint that the failure of the
corporation to hold annual meetings and the filling of vacancies in the directorate in the manner 1919 .................................. 36,318.78 21 1,729.46
described constitute misdemeanors on the part of the respondent which justify the resumption of
the franchise by the Government and dissolution of the corporation; and in this connection it is 1920 .................................. 63,517.01 28 2,268.46
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 1921 .................................. 36,815.33 25 1,472.61
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 their 1922 .................................. 43,133.73 25 1,725.34
non-attendance at such meetings is doubtless to be interpreted in part as expressing their
satisfaction of the way in which things have been conducted. Upon failure of a quorum at any 1923 .................................. 39,773.61 27 1,473.09
annual meeting the directorate naturally holds over and continues to function until another
directorate is chosen and qualified. Unless the law or the charter of a corporation expressly 1924 .................................. 38,651.92 26 1,486.61
provides that an office shall become vacant at the expiration of the term of office for which the
officer was elected, the general rule is to allow the officer to holdover until his successor is duly 1925 .................................. 35,719.27 26 1,373.81
qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing
officers nor dissolve the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550; It will be note that the compensation above indicated as accruing to the directorate as a whole has
Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch been divided among the members actually present at the different meetings. As a result of this
vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, 180 practice, and the liberal measure of compensation adopted, we find that the attendance of the
Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine membership at the board meetings has been extraordinarily good. Thus, during the years 1920 to
above stated finds expressions in article 66 of the by-laws of the respondent which declares in so 1925, inclusive, when the board was composed of nine members, the attendance has regularly
many words that directors shall hold office "for the term of one year on until their successors shall been eight meeting with the exception of two years when the average attendance was seven. It is
have been elected and taken possession of their offices." insisted in the brief for the Attorney-General that the payment of the compensation indicated is
It result that the practice of the directorate of filling vacancies by the action of the directors excessive and prejudicial to he interests of the shareholders at large. For the respondent, attention
themselves is valid. Nor can any exception be taken to then personality of the individuals chosen is directed to the fact that the liberal policy adopted by the association with respect to the
by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that they have compensation of the directors has had highly beneficial results, not only in securing a constant
chosen competent businessmen of financial responsibility instead of electing poor persons to so attendance on the part of the membership, but in obtaining their intelligent attention to the affairs
responsible a position. The possession of means does not disqualify a man for filling positions of of the association. Certainly, in this connection, the following words from the report of the
responsibility in corporate affairs. government examiners for 1918 to the Insular Treasurer contain matter worthy of consideration:
Sixth cause of action. Under the sixth cause of action it is alleged that the directors of El Hogar The management of the association is entrusted to men of recognized ability in financial affairs
Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, as the and it is believed that they have long foreseen all possible future contingencies and that under
complaint supposes would be proper, have been receiving large compensation, varying in such men the interests of the stockholders are duly protected. The steps taken by the directorate
amount from time to time, out of the profits of the respondent. The facts relating to this cause of to curtail the influx of unnecessary capital into the association's coffers, as mentioned above,
action are in substance these: reveals how the men at grasp the situation and to apply the necessary remedy as the
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the circumstances were found in the same excellent condition as in the previous examination.
annual balance sheet is distributed to the directors in proportion to their attendance at meetings In so far as this court is concerned the question here before us is not one concerning the propriety
of the board. The compensation paid to the directors from time to time since the organization was and wisdom of the measure of compensation adopted by the respondent but rather the question
organized in 1910 to the end of the year 1925, together with the number of meetings of the board of the validity of the measure. Upon this point there can, it seems to us, be no difference of
held each year, is exhibited in the following table: 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
Compensation Number of Rate per left to the corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this
Year paid directors meetings meeting authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its
as a whole held as a whole 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
1911 .................................. P 4,167.96 25 P 166.71 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 Seor Melian in the event of his death; And
provided further, that the performance of all the obligations assumed by Seor Melian
in favor of the association, in accordance with this contract, shall and does constitute a
condition precedent to the acquisition by Seor Melian of the right to the said
participation in the profits of the association, unless the non-performance of such
obligations shall be due to a fortuitous event or force majeure.
In conformity with this agreement there was inserted in section 92 of the by-laws of the association
a provision recognizing the rights of Melian, as founder, to 5 per centum of the net profits shown
by the annual balance sheet, payment of the same to be made to him or his heirs during the life
of the association. It is declared in said article that this portion of the earnings of the association
is conceded to him in compensation for the studies, work and contributions made by him for the
organization of El Hogar Filipino and the performance on his part of the contract of January 11,
1911, above quoted. During the whole life of the association, thus far, it has complied with the
obligations assumed by it in the contract above- mentioned; and during the years 1911 to 1925,
inclusive, it paid to him as founder's royalty the sum of P459,011.19, in addition to compensation
received from the association by him in to remuneration of services to the association in various
official capacities.
As a seventh cause of action it is alleged in the complaint that this royalty of the founder is
"unconscionable, excessive and out of all proportion to the services rendered, besides being
contrary to and incompatible with the spirit and purpose of building and loan associations." It is
not alleged that the making of this contract was beyond the powers of the association (ultra vires);
nor it alleged that it is vitiated by fraud of any kind in its procurement. Nevertheless, it is pretended
that in making and observing said contract the respondent committed an offense requiring its
dissolution, or, as is otherwise suggested, that the association should be enjoined from performing
the agreement.
It is our opinion that this contention is entirely without merit. Stated in its true simplicity, the primary
question here is whether the making of a (possibly) indiscreet contract is a capital offense in a
corporation, a question which answers itself. No possible doubt exists as to the power of a
corporation to contract for services rendered and to be rendered by a promoter in connection with
organizing and maintaining the corporation. It is true that contracts with promoters must be
characterized by good faith; but could it be said with certainty, in the light of facts existing at the
time this contract was made, that the compensation therein provided was excessive? If the amount
of the compensation now appears to be a subject of legitimate criticism, this must be due to the
extraordinary development of the association in recent years.
If the Melian contract had been clearly ultra vires which is not charged and is certainly untrue
its continued performance might conceivably be enjoined in such a proceeding as this; but if
the defect from which it suffers is mere matter for an action because Melian is not a party. It is
rudimentary in law that an action to annul a contract cannot be maintained without joining both the
contracting parties as defendants. Moreover, the proper party to bring such an action is either the
corporation itself, or some shareholder who has an interest to protect.
The mere fact that the compensation paid under this contract is in excess of what, in the full light
of history, may be considered appropriate is not a proper consideration for this court, and supplies
no ground for interfering with its performance. In the case of El Hogar Filipino vs. Rafferty (37
Phil., 995), which was before this court nearly ten years ago, this court held that the El Hogar
Filipino is contract with Mr. Melian did not affect the association's legal character. The inference
is that the contract under consideration was then considered binding, and it occurred to no one
that it was invalid. It would be a radical step indeed for a court to attempt to substitute its judgment
for the judgment of the contracting parties and to hold, as we are invited to hold under this cause
of action, that the making of such a contract as this removes the respondent association from the
pale of the law. The majority of the court is of the opinion that our traditional respect for the sanctity
of the contract obligation should prevail over the radical and innovating tendencies which find
acceptance with some and which, if given full rein, would go far to sink legitimate enterprise in the
Islands into the pit of populism and bolshevism. The seventh count is not sustainable.
Eight cause of action. Under the fourth cause of action we had case where the alleged ground
for the revocation of the respondent's charter was based upon the presence in the by-laws of
article 10 that was found to be inconsistent with the express provisions of law. Under the eight
cause of action the alleged ground for putting an end to the corporate life of the respondent is
found in the presence of other articles in the by-laws, namely, articles 70 and 76, which are alleged
to be unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-laws in
effect requires that persons elected to the board of directors must be holders of shares of the paid
up value of P5,000 which shall be held as security may be put up in the behalf of any director by
some other holder of shares in the amount stated. Article 76 of the by-laws declares that the
directors waive their right as shareholders to receive loans from the association.
It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the
requirement for security, a poor member, or wage-earner, cannot serve as director, irrespective
of other qualifications and that as a matter of fact only men of means actually sit on the board.
Article 76 is criticized on the ground that the provision requiring directors to renounce their right to
loans unreasonably limits their rights and privileges as members. There is nothing of value in
either of theses suggestions. Section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors; and the requirement of
security from them for the proper discharge of the duties of their office, in the manner prescribed
in article 70, is highly prudent and in conformity with good practice. Article 76, prohibiting directors
from making loans to themselves, is of course designed to prevent the possibility of the looting of
the corporation by unscrupulous directors. A more discreet provision to insert in the by-laws of a
building and loan association would be hard to imagine. Clearly, the eighth cause of action cannot
be sustained.
Ninth cause of action. The specification under this head is in effect that the respondent has
abused its franchise in issuing "special" shares. The issuance of these shares is allege to be illegal
and inconsistent with the plan and purposes of building and loan associations; and in particular, it
is alleged and inconsistent with the plan and purposes of building and loan associations; and in
particular, it is alleged that they are, in the main, held by well-to-wage-earners for accumulating
their modest savings for the building of homes.
In the articles of incorporation we find the special shares described as follows:
"Special" shares shall be issued upon the payment of 80 per cent of their par value in
cash, or in monthly dues of P10. The 20 per cent remaining of the par value of such
shares shall be completed by the accumulation thereto of their proportionate part of the
profits of the corporation. At the end of each quarter the holders of special shares shall
be entitled to receive in cash such part of the net profits of the corporation corresponding
to the amount on such date paid in by the holders of special shares, on account thereof,
as shall be determined by the directors, and at the end of each year the full amount of
the net profits available for distribution corresponding to the special shares. The
directors shall apply such part as they deem advisable to the amortization of the
subscription to capital with respect to shares not fully paid up, and the remainder of the
profits, if any, corresponding to such shares, shall be delivered to the holders thereof in
accordance with the provision of the by-laws.
The ground for supposing the issuance of the "special" shares to be unlawful is that special shares
are not mentioned in the Corporation Law as one of the forms of security which may be issued by
the association. In the agreed statement of facts it is said that special shares are issued upon two
plans. By the second, the shareholder, upon subscribing, pays in cash P10 for each share taken,
and undertakes to pay P10 a month, as dues, until the total so paid in amounts to P160 per share.
On December 31, 1925, there were outstanding 20,844 special shares of a total paid value
(including accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since 1915, has
been to accumulate to each special share, at the end of the year, one-tenth of the divident declared
and to pay the remainder of the divident in cash to the holders of shares. Since the same year
dividend have been declared on the special and common shares at the rate of 10 per centum per
annum. When the amount paid in upon any special share plus the accumulated dividends accruing
to it, amounts to the par value of the share (P200), such share matures and ceases to participate
further in the earning. The amount of the par value of the share (P200) is then returned to the
shareholder and the share cancelled. Holders of special and ordinary shares participate ratably in
the dividends declared and distributed, the part pertaining to each share being computed on the
basis of the capital paid in, plus the accumulated dividends pertaining to each share at the end of
the year. The total number of shares of El Hogar Filipino outstanding on December 31, 1925, was
125,750, owned by 5,826 shareholders, and dividend into classes as follows:
Preferred shares .................................. 1,503
Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special shares by El Hogar Filipino has been before
this court in two earlier cases, in both of which the question has received the fullest consideration
from this court. In El Hogar Filipino vs. Rafferty (37 Phil., 995), it was insisted that the issuance of
such shares constituted a departure on the part of the association from the principle of mutuality;
and it was claimed by the Collector of Internal Revenue that this rendered the association liable
for the income tax to which other corporate entities are subject. It was held that this contention
was untenable and that El Hogar Filipino was a legitimate building and loan association
notwithstanding the issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R. No. 24926),2
and the related cases of Gervasio Miraflores and Gil Lopes against the same entity, it was asserted
by the plaintiffs that the emission of special shares deprived the herein responded of the privileges
and immunities of a building and loan association and that as a consequence the loans that had
been made to the plaintiffs in those cases were usurious. Upon an elaborate review of the
authorities, the court, though divided, adhered to the principle announced in the earlier case and
held that the issuance of the special shares did not affect the respondent's character as a building
and loan association nor make its loans usurious. In view of the lengthy discussion contained in
the decisions above-mentioned, it would appear to be an act of supererogation on our part to go
over the same ground again. The discussion will therefore not be repeated, and what is now to be
said should be considered supplemental thereto.
Upon examination of the nature of the special shares in the light of American usage, it will be
found that said shares are precisely the same kind of shares that, in some American jurisdictions,
are generally known as advance payment shares; in if close attention be paid to the language
used in the last sentence of section 178 of the Corporation Law, it will be found that special shares
where evidently created for the purpose of meeting the condition cause by the prepayment of dues
that is there permitted. The language of this provision is as follow "payment of dues or interest
may be made in advance, but the corporation shall not allow interest on such advance payment
at a greater rate than six per centum per annum nor for a longer period than one year." In one sort
of special shares the dues are prepaid to the extent of P160 per share; in the other sort
prepayment is made in the amount of P10 per share, and the subscribers assume the obligation
to pay P10 monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that interest shall not be allowed on the advance
payments at a greater rate than six per centum per annum nor for a longer period than one year.
The word "interest " as there used must be taken in its true sense of compensation for the used
of money loaned, and it not must not be confused with the dues upon which it is contemplated that
the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no
interest is ever paid by the association in any amount for the advance payments made on these
shares; and the reason is to be found in the fact that the participation of the special shares in the
earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently
compensates the shareholder for the advance payments made by him; and no other incentive is
necessary to induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value of each special share is not paid
for by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion
of the shareholder's participation in the annual earnings. But as the right of every shareholder to
such participation in the earnings is undeniable, the portion thus annually applied is as much the
property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission
of the special shares does not involve any violation of the principle that the shares must be sold
at par.
From what has been said it will be seen that there is express authority, even in the very letter of
the law, for the emission of advance-payment or "special" shares, and the argument that these
shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in
Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly
authorized such shares, yet the association has implied authority to issue them. The complaint
consequently fails also as regards the stated in the ninth cause of action.
Tenth cause of action. Under this head of the complaint it is alleged that the defendant is
pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of the real
properties acquired by it at its sales; and it is alleged that this rate is excessive. From the agreed
statement it appears that since its organization in 1910 El Hogar Filipino, prior to the end of the
year 1925, had made 1,373 loans to its shareholders secured by first mortgages on real estate as
well as by the pledge of the shares of the borrowers. In the same period the association has
purchased at foreclosure sales the real estate constituting the security for 54 of the aforesaid
loans. In making these purchases the association has always bid the full amount due to it from the
debtor, after deducting the withdrawal value of the shares pledged as collateral, with the result
that in no case has the shareholder been called upon to pay a deficiency judgement on
foreclosure.
El Hogar Filipino places real estate so purchased in its inventory at actual cost, as determined by
the amount bid on foreclosure sale; and thereafter until sold the book value of such real estate is
depreciated at the rate fixed by the directors in accordance with their judgment as to each parcel,
the annual average depreciation having varied from nothing to a maximum of 14.138 per cent.
The sales thereof, but sales are made for the best prices obtainable, whether greater or less than
the book value.
It is alleged in the complaint that depreciation is charged by the association at the rate of 10 per
centum per annum. The agreed statement of facts on this point shows that the annual average
varies from nothing to a maximum of something over 14 per centum. We are thus left in the dark
as to the precise depreciation allowed from year to year. It is not claimed for the Government that
the association is without power to allow some depreciation; and it is quite clear that the board of
directors possesses a discretion in this matter. There is no positive provision of law prohibiting the
association from writing off a reasonable amount for depreciation on its assets for the purpose of
determining its real profits; and article 74 of its by-laws expressly authorizes the board of directors
to determine each year the amount to be written down upon the expenses of installation and the
property of the corporation. There can be no question that the power to adopt such a by-law is
embraced within the power to make by-laws for the administration of the corporate affairs of the
association and for the management of its business, as well as the care, control and disposition
of its property (Act No. 1459, sec. 13 [7]). But the Attorney-General questions the exercise of the
direction confided to the board; and it is insisted that the excessive depreciation of the property of
the association is objectionable in several respects, but mainly because it tends to increase unduly
the reserves of the association, thereby frustrating the right of the shareholders to participate
annually and equally in the earnings of the association.
This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court
may do in determining the internal policy of a business corporation. If the criticism contained in
the brief of the Attorney-General upon the practice of the respondent association with respect to
depreciation be well founded, the Legislature should supply the remedy by defining the extent to
which depreciation may be allowed by building and loan associations. Certainly this court cannot
undertake to control the discretion of the board of directors of the association about an
administrative matter as to which they have legitimate power of action. The tenth cause of action
is therefore not well founded.
Eleventh and twelfth causes of action. The same comment is appropriate with respect to the
eleventh and twelfth causes of action, which are treated together in the briefs, and will be here
combined. The specification in the eleventh cause of action is that the respondent maintains
excessive reserve funds, and in the twelfth cause of action that the board of directors has settled
upon the unlawful policy of paying a straight annual dividend of 10 per centum, regardless of
losses suffered and profits made by the corporation and in contravention of the requirements of
section 188 of the Corporation Law. The facts relating to these two counts in the complaint, as set
forth in the stipulation, are these:
In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the net profits
earned each year, as shown by the annual balance sheet shall be carried to a reserve fund. The
fund so created is called the General Reserve. Article 93 of the by-laws authorizes the directors
to carry funds to a special reserve, whenever in their judgment it is advisable to do so, provided
that the annual dividend in the year in which funds are carried to special reserve exceeds 8 per
centum. It appears to have been the policy of the board of directors for several years past to place
in the special reserve any balance in the profit and loss account after the satisfaction of preferential
charges and the payment of a dividend of 10 per centum to all special and ordinary shares (with
accumulated dividends). As things stood in 1926 the general reserve contained an amount
equivalent to about 5 per centum of the paid-in value of shared. This fund has never been drawn
upon for the purpose of maintaining the regular annual dividend; but recourse has been had to the
special reserve on three different occasions to make good the amount necessary to pay dividends.
It appears that in the last five years the reserves have declined from something over 9 per cent to
something over 7.
It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is
unnecessary in the case of building and loan associations, and at any rate the keeping of reserves
is inconsistent with section 188 of the Corporation Law. Moreover, it is said that the practice of the
association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association
of a fixed dividend which is contrary to the intention of the statute.
Upon careful consideration of the questions involved we find no reason to doubt the right of the
respondent to maintain these reserves. It is true that the corporation law does not expressly grant
this power, but we think it is to be implied. It is a fact of common observation that all commercial
enterprises encounter periods when earnings fall below the average, and the prudent manager
makes provision for such contingencies. To regard all surplus as profit is to neglect one of the
primary canons of good business practice. Building and loan associations, though among the most
solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend
rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends,
continued over long periods, supplies the surest foundations of public confidence.
The question now under consideration is not new in jurisprudence, for the American courts have
been called upon more than once to consider the legality of the maintenance of reserves by
institutions of this or similar character.
In Greeff vs. Equitable Life Assurance Society, the court had under consideration a charter
provision of a life insurance company, organized on the mutual plan, in its relation to the power of
the company to provide reserves. There the statute provided that "the officers of the company,
within sixty days from the expiration of the first five years, from December 31, 1859, and within
the first sixty days of every subsequent period of five years, shall cause a balance to be struck of
the affairs of the company, which shall exhibit its assets and liabilities, both present and
contingent, and also the net surplus, after deducting a sufficient amount to cover all outstanding
risks and other obligations. Each policy holder shall be credited with an equitable share of the said
surplus."
The court said:
No prudent person would be inclined to take a policy in a company which had so
improvidently conducted its affairs that it only retained a fund barely sufficient to pay its
present liabilities, and, therefore, was in a condition where any change by the reduction
of interest upon, or depreciation in, the value of its securities, or any increase of
mortality, would render it insolvent and subject to be placed in the hands of a receiver.
The evident purpose of the provisions of the defendant's charter and policy relating to
this subject was to vest in the directors of the corporation a discretion to determine the
proportion of its surplus which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman Bldg. and Loan
Association vs. Knolt, the court, in commenting on the nature of these reserves, said:
The apparent function of this fund is to insure the stockholders against losses. Its
purpose is not unlike that of the various forms of insurance now in such common use.
This contribution is as legitimate an item of expense as are the premiums paid on any
insurance policy. (See Clarks and Chase, Building and Loan Association, footnote, page
344.)
In commenting on the necessity of such funds, Sundheim says:
It is optional with the association whether to maintain such a fund or not, but justice and
good business policy seem to require it. The retiring stockholder must be paid the value
of his stock in cash and leave for those remaining a large number of securities and
perhaps some real estate purchased to protect the associations interest. How much will
be realized on these securities, or real estate, no human foresight can tell. Further, the
realizing on these securities may entail considerable litigation and expense. There are
many other contingencies which might cause a shrinkage in the association's assets,
such as defective titles, undisclosed defalcations on the part of an officer, a
miscalculation of assets and liabilities, and many other errors and omissions which must
always be reckoned within the conduct of human affairs.
The contingent fund is merely insurance against possible loss. That losses may occur
from time to time seems almost inevitable and it is, therefore, inequitable that the
remaining stockholders should be compelled to accept all securities at par, so, to say
the least, the maintenance of this fund is justified. The association teaches the duty of
providing for the proverbial rainy day. Why should it not provide for the hour of
adversity? The reserve fund has protected the maturing or withdrawing member during
the period of his membership. In case of loss it has or would have reimbursed him and,
at all times, it has protected him and given strength and standing to the association.
Losses may occur, after his membership ceases, that arose from some mistake or
mismanagement committed during the period of his membership, and in fairness and
equity the remaining members should have some protection against this. (Sundheim,
Law of Building and Loan Association, sec. 53.)
The government insists, we thing, upon an interpretation of section 188 of the Corporation Law
that is altogether too strict and literal. From the fact that the statute provides that profits and losses
shall be annually apportioned among the shareholders it is argued that all earnings should be
distributed without carrying anything to the reserve. But it will be noted that it is provided in the
same section that the profits and losses shall be determined by the board of directors: and this
means that they shall exercise the usual discretion of good businessmen in allocating a portion of
the annual profits to purposes needful to the welfare of the association. The law contemplates the
distribution of earnings and losses after other legitimate obligations have been met.
Our conclusion is that the respondent has the power to maintain the reserves criticized in the
eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves
referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper
function of the court to arrogate to itself the control of administrative matters which have been
confided to the discretion of the board of directors. The causes of action under discussion must
be pronounced to be without merit.
Thirteenth cause of action. The specification under this head is, in effect, that the respondent
association has made loans which, to the knowledge of the associations officers were intended to
be used by the borrowers for other purposes than the building of homes. In this connection it
appears that, though loans have been made by the association exclusively to its shareholders, no
attempt has been made by it to control the borrowers with respect to the use made of the borrowed
funds, the association being content to see that the security given for the loan in each case is
sufficient. On December 31, 1925, the respondent had five hundred forty-four loans outstanding
secured by mortgages upon real estate and by the pledge of the borrowers' shares in an amount
sufficient at maturity to amortize the loans. With respect to the nature of the real estate upon which
these loans were made it appears that three hundred fifty-one loans were secured by mortgages
upon city residences, seven by mortgages upon commercial building in cities, and three
mortgages upon unimproved city lots. At the same time one hundred eighty-three of the loans
were secured by mortgages upon groves, sugar land, and rice land, with a total area of about
7,558 hectares. From information gathered by the association from voluntary statements of
borrowers given at the time of application with respect to the use intended to be made of the
borrowed funds, it appears that the amount of P693,200 was borrowed to redeem real property
from existing mortgages or pactos de retro, P280,800 to buy real estate, P449,100 to erect
buildings, P24,000 to improve and repair buildings, P1,480,900 for agricultural purposes, while
the amount of P5,763,700 was borrowed for purposes not disclosed.
Upon these facts an elaborate argument has been constructed in behalf of the plaintiff to the effect
that in making loans for other purposes than the building of residential houses the association has
illegally departed from its character and made itself amenable to the penalty of dissolution. Aside
from being directly opposed to the decision of this court in Lopez and Javelona vs. El Hogar Filipino
and Registrar of Deeds of Occidental Negros (47 Phil., 249), this contention finds no substantial
support in the prevailing decisions made in American courts; and our attention has not been
directed to a single case wherein the dissolution of a building and loan association has been
decreed in a quo warranto proceeding because the association allowed its borrowers to use the
loans for other purposes than the acquisition of homes.
The case principally relied upon for the Government appears to be Pfeister vs. Wheeling Building
Association (19 W. Va., 676, 716),which involved the question whether a building and loan
association could recover the full amount of a note given to it by a member and secured by a
mortgage from a stranger. At the time the case arose there was a statute in force in the State of
West Virginia expressly forbidding building and loan associations to use or direct their funds for or
to any other object or purpose than the buying of lots or houses or in building and repairing houses,
and it was declared that in case the funds should be improperly directed to other objects, the
offending association should forfeit all rights and privileges as a corporation. Under the statute so
worded the court held that the plaintiff could only recover the amount actually advanced by it with
lawful interest and fines, without premium; and judgment was given accordingly. The suggestion
in that case that the result would have been the same even in the absence of statute was mere
dictum and is not supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley vs. Building & Saving Association.
The statute in force in the State of Tennessee at the time this action arose provided that all loans
should be made to the members of the association at open stated meetings and that the money
should be lent to the highest bidder. Inconsistently with this provision, there was inserted in the
by-laws of the association a provision to the effect that no loan should be made at a greater
premium than 30 per cent, nor at a less premium than 29 7/8 per cent. It was held that this by-law
made free and open competition impossible and that it in effect established a fixed premium. It
was accordingly held, in the case cited, that an association could not recover such part of the loan
as had been applied by it to the satisfaction of a premium of 30 per centum.
We have no criticism to make upon the result reached in either of the two decisions cited, but it is
apparent that much of the discussion contained in the opinions in those cases does not reflect the
doctrine now prevailing in the United States; and much less are those decisions applicable in this
jurisdiction. There is no statute here expressly declaring that loans may be made by these
associations solely for the purpose of building homes. On the contrary, the building of homes is
mentioned in section 171 of the Corporation Law as only one among several ends which building
and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law
expressly authorities the Board of directors of the association from time to time to fix the premium
to be charged.
In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated
in which the idea is developed that the primary design of building and loan associations should be
to help poor people to procure homes of their own. This beneficent end is undoubtedly served by
these associations, and it is not to be denied that they have been generally fostered with this end
in view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of
building and loan associations in an exclusive manner, and the exercise of the broader powers
must in the end approve itself to the business community. Judging from the past history of these
institutions it can be truly said that they have done more to encourage thrift, economy and saving
among the people at large than any other institution of modern times, not excepting even the
saving banks. In this connection Mr. Sundheim, in a late treatise upon the subject of the law of
building and loan associations, makes the following comment:
They have grown to such an extent in recent years that they no longer restrict their
money to the home buyer, but loan their money to the mere investor or dealer in real
estate. They are the holder of large mortgages secured upon farms, factories and other
business properties and rows of stores and dwellings. This is not an abuse of their
powers or departure from their main purposes, but only a natural and proper expansion
along healthy and legitimate lines. (Sundheim, Building and Loan Associations, sec. 7.)
Speaking of the purpose for which loans may be made, the same author adds:
Loans are made for the purpose of purchasing a homestead, or other real estate, or for
any lawful purpose or business, but there is no duty or obligation of the association to
inquire for what purpose the loan is obtained, or to require any stipulation from the
borrower as to what use he will make of the money, or in any manner to supervise or
control its disbursement. (Sundheim, Building and Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros, this
court had before it the question whether a loan made by the respondent association upon the
security of a mortgage upon agricultural land, where the loan was doubtless used for
agricultural purposes, was usurious or not; and the case turned upon the point whether, in
making such loans, the association had violated the law and departed from its fundamental
purposes. The conclusion of the court was that the loan was valid and could be lawfully enforced
by a nonjudicial foreclosure in conformity with the terms of the contract between the association
and the borrowing member. We now find no reason to depart from the conclusion reached in that
case, and it is unnecessary to repeat what was then said. The thirteenth cause of action must
therefore be pronounced unfounded.
Fourteenth cause of action. The specification under this head is that the loans made by the
defendant for purposes other than building or acquiring homes have been extended in extremely
large amounts and to wealthy persons and large companies. In this connection attention is
directed to eight loans made at different times in the last several years to different persons or
entities, ranging in amounts from P120,000 to P390,000 and to two large loans made to the Roxas
Estate and to the Pacific Warehouse Company in the amounts of P1,122,000 and P2,320,000,
respectively. In connection with the larger of the two after this loan was made the available funds
of El Hogar Filipino were reduced to the point that the association was compelled to take
advantage of certain provisions of its by-laws authorizing the postponement of the payment of
claims resulting from withdrawals, whereas previously the association had always settled these
claims promptly from current funds. At no time was there apparently any delay in the payment of
matured shares; but in four or five cases there was as much as ten months delay in the payment
of withdrawal applications.
There is little that can be said upon the legal aspects of this cause of action. In so far, as it relates
to the purposes for which these loans were made, the matter is covered by what was said above
with reference to the thirteenth cause of action; and in so far as it relates to the personality of the
borrowers, the question belongs more directly to the discussion under the sixteenth cause of
action, which will be found below. The point, then, which remains for consideration here is whether
it is a suicidal act on the part of a building and loan association to make loans in large amount. If
the loans which are here the subject of criticism had been made upon inadequate security,
especially in case of the largest two, the consequences certainly would have been disastrous to
the association in the extreme; but no such fact is alleged; and it is to be assumed that none of
the ten borrowers have defaulted in their contracts.
Now, it must be admitted that two of these loans at least are of a very large size, considering the
average range of financial transaction in this country; and the making of the largest loan was
followed, as we have already see, with unpleasant consequences to the association in dealing
with current claims. Nevertheless the agreed statement of facts shoes that all of the loan referred
to are only ten out of a total of five hundred forty-four outstanding on December 31, 1925; and the
average of all the loans taken together is modest enough. It appears that the chief examiner of
banks and corporations of the Philippine Treasury, after his examination of El Hogar Filipino at the
end of the year 1925, made a report concerning this association as of January 31, 1926, in which
he criticized the Pacific Warehouse Company loan as being so large that it temporarily crippled
the lending power of the association for some time. This criticism was apparently justified as
proper comment on the activities of the association; but the question for use here to decide is
whether the making of this and the other large loans constitutes such a misuser of the franchise
as would justify us in depriving the association of its corporate life. This question appears to us to
be so simple as almost to answer itself. The law states no limit with respect to the size of the loans
to be made by the association. That matter is confided to the discretion of the board of directors;
and this court cannot arrogate to itself a control over the discretion of the chosen officials of the
company. If it should be thought wise in the future to put a limit upon the amount of loans to be
made to a single person or entity, resort should be had to the Legislature; it is not a matter
amenable to judicial control. The fourteenth cause of action is therefore obviously without merit.
Fifteenth cause of action. The criticism here comes back to the supposed misdemeanor of the
respondent in maintaining its reserve funds, a matter already discussed under the eleventh and
twelfth causes of action. Under the fifteenth cause of action it is claimed that upon the expiration
of the franchise of the association through the effluxion of time, or earlier liquidation of its business,
the accumulated reserves and other properties will accrue to the founder, or his heirs, and the
then directors of the corporation and to those persons who may at that time to be holders of the
ordinary and special shares of the corporation. In this connection we note that article 95 of the by-
laws reads as follows:
ART. 95. The funds obtained by the liquidation of the association shall be applied in the
first place to the repayment of shares and the balance, if any, shall be distribute in
accordance with the system established for the distribution of annual profits.
It will be noted that the cause of action with which we are now concerned is not directed to any
positive misdemeanor supposed to have been committed by the association. It has exclusive
relation to what may happen some thirty-five years hence when the franchise expires, supposing
of course that the corporation should not be reorganized and continued after that date. There is
nothing in article 95 of the by-laws which is, in our opinion, subject to criticism. The real point of
criticism is that upon the final liquidation of the corporation years hence there may be in existence
a reserve fund out of all proportion to the requirements that may then fall upon it in the liquidation
of the company. It seems to us that this is matter that may be left to the prevision of the directors
or to legislative action if it should be deemed expedient to require the gradual suppression of the
reserve funds as the time for dissolution approaches. It is no matter for judicial interference, and
much less could the resumption of the franchise on this ground be justified. There is no merit in
the fifteenth cause of action.
Sixteenth cause of action. This part of the complaint assigns as cause of action that various
loans now outstanding have been made by the respondent to corporations and partnerships, and
that these entities have in some instances subscribed to shares in the respondent for the sole
purpose of obtaining such loans. In this connection it appears from the stipulation of facts that of
the 5,826 shareholders of El Hogar Filipino, which composed its membership on December 31,
1925, twenty-eight are juridical entities, comprising sixteen corporations and fourteen
partnerships; while of the five hundred forty-four loans of the association outstanding on the same
date, nine had been made to corporations an five to partnerships. It is also admitted that some of
these juridical entities became shareholders merely for the purpose of qualifying themselves to
take loans from the association, and the same is said with respect to many natural persons who
have taken shares in the association. Nothing is said in the agreed statement of facts on the point
whether the corporations and partnerships that have taken loans from the respondent are qualified
by law governing their own organization to enter into these contracts with the respondent.
In section 173 of the Corporation Law it is declared that "any person" may become a stockholder
in building and loan associations. The word "person" appears to be here used in its general sense,
and there is nothing in the context to indicate that the expression is used in the restricted sense
of both natural and artificial persons, as indicated in section 2 of the Administrative Code. We
would not say that the word "person" or persons," is to be taken in this broad sense in every part
of the Corporation Law. For instance, it would seem reasonable to say that the incorporators of a
corporation ought to be natural persons, although in section 6 it is said that five or more "persons",
although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a private
corporation. But the context there, as well as the common sense of the situation, suggests that
natural persons are meant. When it is said, however, in section 173, that "any person" may
become a stockholder in a building and loan association, no reason is seen why the phrase may
not be taken in its proper broad sense of either a natural or artificial person. At any rate the
question whether these loans and the attendant subscriptions were properly made involves a
consideration of the power of the subscribing corporations and partnerships to own the stock and
take the loans; and it is not alleged in the complaint that they were without power in the premises.
Of course the mere motive with which subscriptions are made, whether to qualify the stockholders
to take a loan or for some other reason, is of no moment in determining whether the subscribers
were competent to make the contracts. The result is that we find nothing in the allegations of the
sixteenth cause of action, or in the facts developed in connection therewith, that would justify us
in granting the relief.
Seventeenth cause of action. Under the seventeenth cause of action, it is charged that in
disposing of real estates purchased by it in the collection of its loans, the defendant has no various
occasions sold some of the said real estate on credit, transferring the title thereto to the purchaser;
that the properties sold are then mortgaged to the defendant to secure the payment of the
purchase price, said amount being considered as a loan, and carried as such in the books of the
defendant, and that several such obligations are still outstanding. It is further charged that the
persons and entities to which said properties are sold under the condition charged are not
members or shareholders nor are they made members or shareholders of the defendant.
This part of the complaint is based upon a mere technicality of bookkeeping. The central idea
involved in the discussion is the provision of the Corporation Law requiring loans to be
stockholders only and on the security of real estate and shares in the corporation, or of shares
alone. It seems to be supposed that, when the respondent sells property acquired at its own
foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the
purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate
which it acquires in connection with the collection of its loans within five years after receiving title
to the same, the law does not prescribe that the property must be sold for cash or that the
purchaser shall be a shareholder in the corporation. Such sales can of course be made upon
terms and conditions approved by the parties; and when the association takes a mortgage to
secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising
out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it
a loan on the books of the respondent make it a loan in law. The contention of the Government
under this head is untenable.
In conclusion, the respondent is enjoined in the future from administering real property not owned
by itself, except as may be permitted to it by contract when a borrowing shareholder defaults in
his obligation. In all other respects the complaint is dismissed, without costs. So ordered.
Avancea, C. J., Johnson, Villamor and Vila-Real, JJ., concur.
Separate Opinions
MALCOLM, J., with whom concur OSTRAND and JOHNS, JJ., dissenting:
For the second time in the history of the court so counsel for plaintiff inform us we must try
a corporation for the violation of a law which carries with it a death warrant so counsel for
defendant intimates. That the corporation at bar is wealthy and powerful should neither prejudice
us against it nor cause us to cringe before its might. The court has a duty to perform and should
perform it with fairness to the corporation and with justice to the public, whose interests are
involved. El Hogar Filipino, deserves exactly the same consideration as any other litigant. No
more, no less.
The proceeding is one of quo warranto, begun by the Government of the Philippine Islands under
authority of section 190-A of the Corporation Law, and of sections 197-216, 519 of the Code of
Civil Procedure. The complaint contains seventeen causes of action. To all of them, the defendant
has made answer. The facts have been covered by stipulation. The government asks for an order
of dissolution. Defendant tenaciously resists.
El Hogar de Filipino is a corporation organized as a mutual building and loan association under
the provisions of the Corporation Law (Act No. 1459). The law last mentioned, it may recalled, is
divided into two parts. Chapter one is entitled "General Provisions." In chapter two is entitled
"Special Provisions". In chapter two, section 171 to 190, inclusive, are found the special provisions
pertaining to building and loan corporations. Section 171 thereof is indicative of the legislative
purpose. It provides:
All corporations whose capital stock is required or is permitted to be paid in by the
stockholders in regular, equal, periodical payments and whose purpose is to
accumulate the savings of its stockholders, to repay to said stockholder their
accumulated savings and profits upon surrender of their stock, to encourage industry,
frugality, and home building among its stockholders, and to loan its funds and funds
borrowed for the purpose to stockholders on the security of unencumbered real estate
and the pledge of shares of capital stock owned by the stockholders as collateral
security, shall be known as building and loan corporation, and the words mutual building
and loan association shall form part of the name of every such corporation.
The articles of incorporation of El Hogar Filipino show that the purpose of the corporation are: (1)
The accumulation of the savings of its shareholders; (2) the return to said shareholders of their
accumulated savings and profits upon the surrender and cancellation of their shares; (3) the
encouragement of industry, frugality, and home building among its shareholders; (4) the loan of
its funds and funds borrowed for the purpose to its shareholders on the security of unencumbered
real estate and the pledge of shares of capital stock of the company owned by its shareholders as
collateral security; and (5) the borrowing of money upon the credit of the corporation and the
issuance of bonds or other documents evidencing the existence of such obligations. The capital
of the corporation is made not to exceed P10,000,000. At the end of 1925 it had 5,826
shareholders holding 125,750 shares, the total paid up value of which was P8,703,602.25.
El Hogar Filipino having been incorporated under Philippine law as a mutual building and loan
association, the primary inquiry should naturally be as to the nature, purposes, and operations of
mutual building and loan associations.
In the case of El Hogar Filipino vs. Rafferty ([1918] 37 Phil., 995),this court had presented the
question of whether El Hogar Filipino, as a building and loan association, was relieved from the
necessity of paying an income tax. It was held that it was. Mr. Justice Johnson, speaking for the
court, said:
A building and loan association is an organization created for the purpose of
accumulating a fund by the monthly subscription or saving of its members, to assist
them in building or purchasing for themselves dwellings or real estate, by loaning to
them the requisite money from the funds of the society. To all particular intent it may be
said to be to enable a number of associates to have and invest their savings to mutual
advantage, so that, from time to time, any individual among them may receive, out of
the accumulation of the pittances which each contributes periodically, a sum, by way of
loan, wherewith to build or pay for a home, and ultimately making it absolutely his own
by the payment of such small amounts from time to time. (Rhodes vs. Missouri Savings
& Loan Co., 173 Ill., 621; 42 L. R. A., 93.)
The same opinion quoted from Endlich on Building Associations, section 7, who was termed a
leading authority upon such associations, on the subject of the primary designs and general
operation of building associations, the following:
The idea which first gave rise to the institution of building associations, which furnished
their ostensible and legitimate raison d'etre, and which secured to them their popularity
and their, in many respects, exceptionally favored position before the law, is that of
enabling persons belonging to a class whose earning are small, and with whom the
slowness of the accumulation discourages the effort, to become by a process of gradual
and compulsory savings, either at the end of a certain period, or by anticipation of it, the
owners of homesteads. The operation of the scheme may be easily understood.
The same opinion quoted from Thornton and Blackledge in their work on Building and Loan
Associations, at page 6 the following:
Societies, known as building, loan fund, and savings association, are now recognized
as important factors in the social and economic development of this country. The
controlling idea is the massing of the separate earnings of wage-workers, and the
savings of persons of small means, in such a manner as to aid them in procuring homes.
It is the organization of thrift and self-help; a practical application of the maxim that in
"union there is strength." The effect of such a movement is to dignify the home; to foster
morality, and to make thoughtful, wise, and responsible citizens. It is for such reason
that the law and the courts, where such associations have been properly conducted,
have looked upon them with favor. Whether they shall retain the favorable estimation of
legislatures and courts will depend in large measure upon the wise forecast and
determined purpose of those who control such institutions. Those departures from the
original idea, intended to enhance the profits of investors, without in any degree aiding
those who are endeavoring to build homes, have been, and in the future probably will
be, severely censured by the courts.
In the case of Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental
Negros ([1925], 47 Phil., 249), the principal issue had to do with the relation of El Hogar Filipino
to the Usury Law permitting it to charge a higher rate of interest than persons or entities, charge
than similarly organized mutual building and loan associations. Mr. Justice Johns, in a vigorous
dissenting opinion, said:
There must be and is valid reason for the exception made in the statute which permits
building and loan associations to charge and receive 18 per cent per annum as interest,
and which limits all other loans made by any other person, firm or corporation to interest
at 12 per cent per annum.
All building and loan associations are founded, and exceptions made in their favor as to
the rate of interest, upon the theory that they will enable a person with small means or
small income who has a family to support, to build a home in which to live and to improve
his property and develop the country. When the exception was made by the Legislature,
it was never intended that the El Hogar Filipino or any other corporation, under the guise
of a building and loan association, should make a loan upon a sugar plantation of the
nature of the one in question.
xxx xxx xxx
It will be noted that the exception made in the statute above quoted is for mutual building
and loan societies incorporated under the Corporation Act. The use of the word mutual
is significant and important. Under the statute, it is not sufficient that the corporation
should be a building and loan association. It must be a mutual building and loan
association.
In the same dissent, reference was made to the case of El Hogar Filipino vs. Rafferty, supra, and
the remarks of Endlich, and Thornton and Blackledge on the purposes of mutual building and loan
associations. Fletcher, Cyclopedia of Corporation, volume 1, page 136, was also quoted from as
follows:
An incorporated building and loan association is a corporation for the purpose of raising,
by periodical subscriptions of members, a stock or fund to assist members by advances
or loans, generally on mortgage security, in building or purchasing homes. Such
corporations are different from corporations formed for pecuniary profit.
The term (building and loan association) does not generally include corporations unless
their purpose is to accumulate funds and lend the same to members to assists them in
purchasing or building homes . . . (Cases cited.) It does not include a corporation . . .
for the purpose of purchasing and improving real estate and advancing money on
mortgages . . . or a corporation merely for the purpose of loaning money.
In the same dissent, reference was made to what Corpus Juris, volume 9, page 920, contains on
the subject of the object and purpose of building and loan associations, namely:
As it is sometimes stated in the statutes relating to, and in the charters and constitutions
of, building and loan associations, the principal object of a building and loan association
is to create a loan fund for the benefit of its borrowing members, the underlying idea
being that, by means of the system of small periodical payments provided, people of
limited means will be enabled to become the owners of homes, and thrift, economy, and
good citizenship will thereby be promoted. By reason of the favorable results attending
the operation of these associations, and their beneficent purposes, they have,
 especially before they attained their present tremendous growth, been favored and
granted special privileges by the various legislatures, such as permission to charge high
rates of interest and exemption from taxation. . . ." In lieu of asterisk the next succeeding
sentence from Corpus Juris could also have been appropriately used: "However, with
the growth of these organizations, evils have crept in, the privileges granted have in
many instances been abused by unscrupulous officers, and, in recent years, the courts
have been compelled to subject their transactions to closer scrutiny.
Speaking of the purposes for which loans can be made by building and loan associations,
Rosenthal, in his work on Building, Loan and Savings Associations, third edition, page 108, says:
In our opinion, the object of building, loan and savings associations is to furnish funds
for homes rather than for mercantile or manufacturing improvements. Some of the larger
associations have granted loans of this character, and we consider it a dangerous
departure from the purposes for which these associations were created.
Thompson on Building Associations, page 5, 23, 24, 232 and 558, says:
The building association as now existing is a private corporation designed for the
accumulation, by the members, of their money, by periodical payments into its treasury,
to be invested from time to time in loans to the members upon real estate for home
purposes,
The building association is a home builder. The member by its system is enabled to
acquire a home, and to pay for it he pledges his future savings. . . . It enforces economy,
and awakens thoughts of citizenship in its better sense of offering homes. This is the
first purpose of these institutions. The language of the Supreme Court of Georgia is
timely: "The they have improved our towns by leading to the erection of a number of
new buildings, furnished many families with homes of their own, that could not otherwise
have possessed the, given a considerable impulse to mechanical enterprise, and in
many other ways promoted the prosperity and welfare of the communities where they
exist, is undoubtedly true. But whether they will continue to be entitled to the epithet of
the "poor man's exchequer," and whether they will, as they promise to do, enable every
man to become his own landlord, will depend entirely upon the manner in which they
conduct their business . . ."
These institutions are well known all over the United States to be depositories of money
savings, and investors of those savings in homes for members. The legislature has
created them in the interest of good citizenship, to enable the people to save their
money and acquire homes and become steady citizens. The ultimate legislative
purpose is home-building. If it was merely a depository of savings it would have no
strong reason for existence, because the savings banks furnish that; but it goes further,
and is designed by law to use those savings in procuring homes for its members. And
the courts should promptly curb any disposition to depart from the corporate purposes.
. . . But a building association is not an ordinary corporation; in fact, it exercises some
extraordinary privileges, particularly in not being amenable to the usury laws. It is
created for the declared purposes of accumulating money and lending the accumulation
to members to build or acquire homes for themselves. The legislature devised this plan
of cooperative accumulations for the purpose of assisting each member to become his
own landlord. The state has a selfish motive in the promotion of a building association,
as through its workings it is planting deeply the roots of citizenship. The drifting, thriftless
classes are offered a school of economy, and the earnest and economical classes are
given an opportunity. There is, then, the formation of a steady, energetic and
accumulating citizen. The cares of the state are lessened by decreasing poverty, and
its prosperity is increased by growing material wealth. We may clearly conceive, then,
that the intention of the legislature in the creation of building associations is, first, to
encourage savings; second, to secure homes for the savers.
In the case of Mandlin vs. American Savings and Loan Association ([1896],63 Minn., 358), the
court said:
So-called "building societies," operated on the plan of the defendant, have so often
become the instrument of oppression and extortion as to call down the censure of some
eminent courts. The original purpose of building societies, viz., to enable people of small
means to build or buy homes, is entirely wanting.
"Such a body" says Follet, J., in Seibel vs. Victoria Building Association (43 Ohio St.,
371, p. 373), "exists for the equal benefit of all its members, who are presumed to be
persons whose earnings are small, and who seek to use weekly savings in procuring
suitable homesteads. Every member is presumed to become after sometime a borrower
to the extent of his interest. Building associations are not intended to enable money
lenders to obtain extraordinary interest, but they are intended to help in securing homes
with the aid of small incomes." (Barry Law of Building Societies, p. 3, sec. 4.)
In case of North American Building Associaton vs. Sutton ([1860], 35 Pa., 463), the court said:
It is well known that the original design of the legislature was to encourage the erection
of buildings. The motive for the grant of the franchise was public improvement. But the
practical working of the associations formed under the law has not been what was
anticipated. Though called "building societies," they are, in truth, only agencies by which
a greater than legal interest is obtained from the necessitous and unwary.
In the case of Continental National Building and Loan Association vs. Miller ([1902], 44 Fla., 757),
the court said:
When local in their operations and prudently managed they have served a useful
purpose enabling the man of small means to build his modest homes or to make a safe
and profitable investment of his meager earnings; but when they branch out and forget
the original purposes and limitations that have given them this favored position, trouble
not infrequently arises.
In the case of St. Joseph and Kansas Loan and Building Association vs. Thompson ([1877], 19
Kansas, 321), the court said:
It was never intended that these corporations, organized as this one was for the purpose
of giving to its members through their savings an easy way to discharge encumbrances
and to build homes, should loan their funds to others than their own members.
In case of Parker vs. Fulton Loan and Building Association ([1872],46 Ga., 166), the court said:
Whether such a contract though legal upon its face, was, in fact, illegal, would depend
upon the object of the association. If it were, in truth, a mere devise to evade the usury
laws, then it would depend upon the object of the association. If it were, in truth, a mere
devise to evade the usury laws, then it would be illegal, if in fact more was taken for the
use of money than 7 per cent per annum. But if the organization were in fact and bona
fide a plan with the real intent and object of accumulating a fund by monthly
subscriptions or savings of the members thereof, to assist them in procuring for
themselves such real estates as they may deem proper,' then it would not be illegal.
The practical application of the resources of these institutions (building and loan
associations) to the building of homes and aiding their members to change their
conditions from rent-paying tenants to home-owning citizens has been recognized as a
work of vital importance and of the highest helpfulness to the interest of the state and
nation. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 73.)
The aim and purpose of a building association is to aid and encourage its members to
learn and practice thrift by regular systematic saving, and to provide ways and means
so that every family may procure home. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 9.)
The funds of the first associations were applied to aid its members to procure homes.
This was in fact the one outstanding feature of the plan and the high purpose for which
the association was organized. The wish and desire to own their own home, was, in fact
the primary, fundamental inspiration on which the first building association was formed,
and has ever continued to be the shining pole star which has guided and directed the
progress of these building associations to the present day. The desire to own a home
is one of the primary, natural instincts of every real man or woman. An institution
organized and operated on a fair and equitable plan which has for its object the
gratifying of that desire, is sure to make a strong appeal to all humanity. The constant
appeal which building associations have always made to this deep-seated human
desire, is the real secret of their great success. (Rosenthal Cyc. of Building, Loan &
Savings Association, p. 13.)
A recent president of the United States League of Local Building and Loan Associations
said the "Our associations are serving just two classes of customers: receiving the
savings of thrifty and farseeing people, and loaning these funds to members who wish
 to buy or build a home. Never was the need for building or owning a home greater than
in the past few years, and as you well know, lack of sufficient funds has been one of our
problems."
Building and Loan Associations started as neighborhood clubs in most parts of the
country. Neighbors wished to become home owners and began contributing a certain
sum monthly to a treasurer. The aggregate of these monthly payments was soon
sufficient to buy or build a home for one of the members. The fund was then loaned to
one of them, and as other funds accumulated, others could borrow. The joint purposes
of thrift and home ownership are inseparable and are of equal importance. There could
be no cooperative building and loan association without both. (Clark and Chase Building
and Loan Association, p. 4).
The Commissioner of Internal Revenue of the United States in article 515 of his new regulations,
outlines the particular associations entitled to exemption, under the Federal Law as follows:
In general, a building and loan association entitled to exemption is one organized
pursuant to the laws of any state, territory or the District of Colulmbia, which
accumulates funds to be loaned primarily to the shareholders for the purpose of building
or acquiring homes. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 94.)
The authorities could be piled up mountain high. They all disclose that mutual building and loan
associations are peculiar and special corporations. They can exercise only such powers as are
conferred by the legislative body creating them, either by express terms or by necessary
implication. Their basic and essential idea is mutuality. The primary object is to encourage thrift
and to assist in home building. "El Hogar Filipino" or as it is in English "The Filipino Home"
that is the magic thought which attracts small investors. But when pseudo associations branch out
and forget the original purposes and limitations that have given them their favored positions, it is
incumbent on the judiciary to place them back in their rightful places. We are frank to say that it is
these elementary principles, which, in our opinion, the majority have failed to grasp, which have
led them into error in the decision of this case.
Why are mutual building and loan associations granted special privileges? Why are mutual
building and loan associations exempted from taxation, as disclosed in El Hogar Filipino vs.
Rafferty, supra? Why are building and loan associations permitted to charge high rates of interest,
as disclosed in Lopez and Javelona vs. El Hogar Filipino, and Registrar of Deeds of Occidental
Negros, supra? Why? Need answers be given. If so, it is so that mutual building and loan
associations may with one hand accept favors rightfully theirs, and with the other hand grasp
favors properly belonging to strictly private corporations or loan societies.
El Hogar Filipino has offended against the law of its creation, and has departed from the
fundamental purposes of mutual building and loan associations in this:
A. In that it has engaged in business activities entirely foreign to and not reasonably necessary for
the purposes for which it was organized, such as the administration of properties and the
management of properties not mortgaged;
B. In that it has inserted in article 10 of its by-laws a provision giving the board of directors, by
majority vote, the unqualified right to cancel and forfeit shares by merely returning to their owners
the amount which may result from the accounting, in violation of the Corporation Law;
C. In that its board of directors has become a permanent and self- perpetuating body, since with
the exception of the years 1911, 1912, and 1917, there has been no election of directors and since
between 1912 and 1917, and from 1917 until the present, the membership of the board has not
been changed, except to fill vacancies which have been filled by the board itself, in violation of the
Corporation Law, and of the by-laws of the corporation;
D. In that the directors, instead of serving without pay or for nominal salaries, have been receiving
relatively large compensations out of the profits in accordance with article 92 of the by-laws,
providing that 5 percent of the annual profits shall be devoted to the compensation of the directors,
according to their attendance at the meetings;
E. In that the corporation has been giving to Antonio Melian, its founder, under provisions of article
92 of its by-laws 5 per cent of the yearly net profits, and will continue to do so, for the full fifty-year
period of life of the defendant, and under which Mr. Melian has received a total sum of P615,834;
F. In that articles 70 and 76 of its by-laws are contrary to law, since they only permit the election
or appointment to the board of directors of persons owning P5,000 worth of paid up shares, which
is made a condition precedent to eligibility to the board of directors;
G. In that it has issued so-called special shares, in violation both of the letter and spirit of the
Corporation Law;
H. In that it has maintained out of its profits an unnecessarily large reserve fund, classified into
general reserve fund and special reserve fund, instead of distributing its profits among its
members;
I. In that it has made large loans to persons and companies, such as a loan of P2,320,000 to the
Pacific Warehouse Company, which so depleted the funds of the corporation that for sometime it
was unable to act on applications for small loans and for the retirement of shares;
J. In that under articles 92 and 95 of the by-laws of the corporation, upon the expiration of its
period of life or upon earlier liquidation of its business, the accumulated reserves and other
properties will be distributed among and will benefit only its directors and its founder, together with
a few other persons;
K. In that its membership is in part composed of corporations, companies, and associations, for
instance of sixteen corporations and fourteen partnerships;
L. In that it has disposed of real estate purchased by it in the collection of its loans on credit,
thereafter accepting mortgages on the property transferred, in violation of the Corporation Law;
M. And, lastly, in the El Hogar Filipino has failed to carry our and fulfill the main purpose for which
it was created, and in consideration of which it has been granted special privileges and
exemptions.
The foregoing are not trivial or isolated infractions of the law to be brushed away with a wave of
the hand. They constitute grave abuses. They disclose El Hogar Filipino as an octopus whose
tentacles have reached out to embrace and stifle vital public interests. The court would be entirely
justified in peremptorily decreeing the dissolution of the corporation for misuse of its powers.
Section 190-A of the Corporation Law, inserted by section 3 of Act No. 2792, makes it the
imperative duty of the court to dissolve a corporation for any violation which it has committed. It is
believed, however, that counsel for the defendant is entirely correct in his argument to the effect
that the legislature is without power to diminish the jurisdiction of the court, and to direct a particular
judgment in a particular case. Rather would we prefer to follow the precedent in the case of the
Government of the Philippine Islands vs. Philippine Sugar Estates Development Company ([1918],
38 Phil., 15),wherein in was ordered that the corporation be dissolved and prohibited from
continuing to do business in the Philippine Islands unless it complied with the conditions
mentioned in the decision.
In amplification of the above suggestion, it must be said that El Hogar Filipino is the possessor of
important property rights which should not be disastrously disturbed. It must also be said that a
mutual building and loan association properly conducted is an institution which should be
encourage in the community. The result should, therefore, be to confine El Hogar Filipino to its
legitimate purposes and to force it to eliminate its illegitimate purposes and The government has
made out its case, but the defendant should be permitted a reasonable time to fulfill the conditions
laid down in this decision.
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.