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The Government of the Philippine Islands vs. El Hogar Filipino G.R. No.

L-26649 July 13, 1917 FACTS: The Philippine Commission enacted Act No. 1459, also known as the Corporation Law, on March 1, 1906. El Hogar Filipino, organized in 1911 under the laws of the Philippine Islands, was the first corporation organized under Sec. 171-190 Act No. 1459, devoted to the subject of building and loan associations, their organization and administration. In the said law, the capital of the corporation was not permitted to exceed P3M, but Act No. 2092 amended the statute, permitting capitalization to the amount of ten millions. El Hogar took advantage of the amendment of Act No. 1459 and amended its AOI as a result thereof, stating that the amount of capital must not exceed what has been stated in Act No. 2092. This resulted to El Hogar having 5,826 shareholders, 125,750 shares with paid-up value of P8.7M. The corporation paid P7.16M to its withdrawing stockholders. The Government of the Philippine Islands filed an action against El Hogar due to the alleged illegal holding title to real property for a period exceeding five (5) years after the same was bought in a foreclosure sale. Sec. 13(5) of the Corporation Law states that corporations must dispose of real estate obtained within 5 years from receiving the title. The Philippine Government also prays that El Hogar be excluded from all corporate rights and privileges and effecting a final dissolution of said corporation. It appears from the records that El Hogar was the holder of a recorded mortgage on the San Clemente land as security for a P24K loan to El Hogar. However, shareholders and borrowers defaulted in payment so El Hogar foreclosed the mortgage and purchased the land during the auction sale. A deed of conveyance in favor of El Hogar was executed and sent to the Register of Deeds of Tralac with a request that the certificate of title be cancelled and a new one be issued in favor of El Hogar from the Register of Deeds of Tarlac. However, no reply was received. El Hogar filed a complaint with the Chief of the General Land Registration Office. The certificate of title to the San Clemente land was received by El Hogar and a board resolution authorizing Benzon to find a buyer was issued. Alcantara, the buyer of the land, was given extension of time to make payment but defaulted so the contract treated rescinded. Efforts were made to find another buyer. Respondent acquired title in December 1920 until the property was finally sold to Felipa Alberto in July 1926. The interval exceeded 5 years but the period did not commence to run until May 7, 1921 when the register of deeds delivered the new certificate of title. It has been held that a purchaser of land registered under the Torrens system cannot acquire the status of an innocent purchaser for value unless the vendor is able to place the owners duplicate in his hands showing the title to be in the vendor. During the period before May 1921, El Hogar was not in a position to pass an indefeasible title to any purchaser. Therefore, El Hogar cannot be held accountable for this delay which was not due to its fault. Likewise, the period from March 25, 1926 to April 20, 1926 must not be part of the five-year period because this was the period where

respondent was under the obligation to sell the property to Alcantara prior to the contracts rescission due to Alcantaras non-payment. Another circumstance causing the delay is the fact that El Hogar purchased the property in the full amount of the loan made by the former owner which is nearly P24K when it was subsequently found that the property was not salable and later sold for P6K notwithstanding El Hogars efforts to find a purchaser upon better terms. ISSUE: Whether the acts of respondent corporation merit its dissolution or deprivation of its corporate franchise and to exclude it from all corporate rights and privileges HELD: SUSTAINED only as to administering of real property not owned by it and when permitted by contract. Causes of action: 1) Alleged illegal holding of real property for a period exceeding five years from receipt of title-Cause of delay is not respondents fault

2) That respondent is owning and holding a business lot with the


structure thereon in excess of its reasonable requirements and in contravention of Sec. 13(5) of Corpo. Law- WITHOUT MERIT Every corporation has the power to purchase, hold and lease such real property as the transaction would of the lawful business may reasonably and necessarily require.

3) That respondent is engaged in activities foreign to the purposes for


which the corporation was created and not reasonably necessary to its legitimate ends-VALID The administration of property, payment of real estate taxes, causing necessary repairs, managing real properties of nonborrowing shareholders is more befitting to the business of a real estate agent or a trust company than a building and loan association.

4) That the by-laws of the association stating that, the board of directors
by the vote of an absolute majority of its members is empowered to cancel shares and to return the balance to the owner by reason of their conduct or any other motive or liquidation is in direct conflict with Sec. 187 of the Corporation Law which provides that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation or forfeiture of stock for delinquency-WITHOUT MERIT There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of a

corporation; and if there were such, the hazards incident to corporate effort would be largely increased.

8) That Art. 70 of El Hogars by-laws, requiring persons elected as board


of directors to be holders of shares of the paid up value of P5,000 which shall be held as security, is objectionable since a poor member or wage earner cannot serve as a director irrespective of other qualifications- NOT SUSTAINED Corpo. Law expressly gives the power to the corporation to provide in its by-laws for the qualification of its directors and the requirement of security from them for the proper discharge of the duties of their pffice in the manner prescribed in Art. 70 is highly prudent and in conformity with good practice.

5) Art. 61 of El Hogars by-laws which states that attendance in person


or by proxy by shareholders owning one-half plus one of the shareholders shall be necessary to constitute a quorum for the election of directors is contrary to Sec. 31 of the Corpo Law which provides that owners of the majority of the subscribed capital stock entitled to vote must be present either in person or by proxy at all elections of directors- WITHOUT MERIT No fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings and their non-attendance in meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted. Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation. The general rule is to allow the officer to holdover until his successor is duly qualified.

9) That respondent abused its franchise in issuing special shares


alleged to be illegal and inconsistent with the plan and purposes of building and loan associations- WITHOUT MERIT The said special shares are generally known as advance payment shares which were evidently created for the purpose of meeting the condition caused by the prepayment of dues that is permitted. Sec. 178 of Corpo Law allows payment of dues or interest to be paid in advance but the corporation shall not allow interest on advance payment grater than 6% per annum nor for a period longer than one year. The amount is satisfied by applying a portion of the shareholders participation in the annual earnings.The mission of special shares does not involve any violation of the principle that the shares must be sold at par.

6) That the directors of El Hogar, instead of receiving nominal pay or


serving without pay, have been receiving large compensation, varying in amount from time to time, out of respondents profits- WITHOUT MERIT With the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would probably be necessary is a matter that cannot be corrected in this action. Nor can it properly be made a basis for depriving respondent of its franchise or enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, the remedy is to lie rather in publicity and competition.

10) That in making purchases at foreclosure sales constituting as security


for 54 of the loans, El Hogar bids the full amount after deducting the withdrawal value, alleged to be pusuing a policy of depreciating at the rate of 10 percent per annum, the value of the real properties it acquired and that this rate is excessive-UNSUSTAINABLE The board of directors possess discretion in this matter. There is no provision of law prohibiting the association from writing off a reasonable amount for depreciation on its assets for the purpose of determining its real profits. Art. 74 of its by-laws expressly authorizes the board of directors to determine each year the amount to be written down upon the expenses for the installation and the property of the corporation. The court cannot control the discretion of the board of directors about an administrative matter as to which they have no legitimate power of action.

7) That the promoter and organizer of El Hogar was Mr. Antonio Melian
and that in the early stages of the organization of the association, the board of directors authorized the association to make a contract with him and that the royalty given to him as founder is unconscionable, excessive and out of proportion to the services rendered-NOT SUSTAINED The mere fact that compensation is in excess of what may be considered appropriate is not a proper consideration for the court to resolve. That El Hogar is in contact with its promoter did not affect the associations legal character. The court is of the opinion that the traditional respect for the sanctity of the contract obligation should prevail over the radical and innovating tendencies.

11) That respondent maintains excessive reserve funds-UNFOUNDED

The function of this fund is to insure stockholders against losses. When the reserves become excessive, the remedy is in the hands of the Legislature. No prudent person would be inclined to take a policy in a company which had 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 securities or increase of mortality would render it insolvent and subject to be placed in the hands of a receiver. 12) That the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 percent per centum regardless of losses suffered and profits made by the corporation, in contravention with the requirements of Sec. 188 of the Corpo law- UNFOUNDED As provided in the previous cause of action, 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 of the welfare of the association. The law contemplates distribution of earnings and losses after legitimate obligations have been met. 13) That El Hogar has made loans to the knowledge of its officers which were intended to be used by the borrowers for other purposes than the building of homes and no attempt has been made to control the borrowers with respect to the use made of the borrowed funds- UNFOUNDED There is no statute expressly declaring that loans may be made by these associations SOLELY for the purpose of building homes. The building of himes in Sec. 171 of Corpo Law is only one among several ends which building and loan associations are designed to promote and Sec. 181 authorizes the board of directors of the association to fix the premium to be charged. 14) That the loans made by defendant for purposes other than building or acquiring homes have been extended in extremely large amounts and to wealthy persons and large companies- WITHOUT MERIT The question of whether the making of large loans constitutes a misuser of the franchise as would justify the court in depriving the association of its corporate life is a matter confided to the discretion of the board of directors. The law states no limit as to the size of the loans to be made by the association. Resort should be had to the legislature because it is not a matter amenable to judicial control

15) That when the franchise expires, supposing the corporation is not reorganized, upon final liquidation of the corporation, a reserve fund may exist which is out of all proportion to the requirements that may fall upon it in the liquidation of the company-NO MERIT This matter may be left to the discretion of the board of directors or to legislative action if it should be deemed expedient to require the gradual suppression of reserve funds as the time for dissolution approaches. It is no matter for judicial interference and much less could the resumption of the franchise be justified on this ground. 16) That various outstanding loans have been made by the respondent to corporations and partnerships and such entities subscribed to respondents shares for the sole purpose of obtaining such loans-NO MERIT Sec. 173 of Corpo Law declares that any person may become a stockholder in building and loan associations. The phrase ANY PERSON does not prevent a finding that the phrase may not be taken in its proper and broad sense of either a natural or artificial person. 17) That in disposing real estate purchased by it, some of the properties were sold on credit and the persons and entities to which it was sold are not members nor shareholders nor were they made members or shareholders, contrary to the provision of Corpo Law requiring requiring loans to be stockholders only- NOT SUSTAINED The law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can be made upon the terms and conditions approved by the parties. 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.