CH III: Formation/Organization

Lyceum v CA: (1993)

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Feb 1984: Lyceum institued proceedings before the SEC to compel private respondent educational
institutiosn to delete the word Lyceum from their corporate names and permanently enjoin them from
using Lyceum
o
Lyceum earlier filed a case against L. Baguio to require it to change its corporate name and adopt
another not similar to or identical with Lyceums
o
April 1977 decision by Associate Commissioner jUlio Sulit: substantially identical names because
of presence of dominant word Lyceum, geographical location of campus being only word
distinguishing one from the other corporate name + Lyceum had registered before L.Baguio Inc
o
LBaguios MR + petition for review was denied by Court for lack of merit
Lyceum used said decision to write to all educational instutitons with Lyceum as part of corporate name
and asked for discontinuance of said name; when they refused, Lyceum institued with SEC to enforce
claims as its proprietary right to use Lyceum
o
SEC hearing officer: sustained Lyceums claim to exclusive right to use the word, relying on ruling
in L Baguio case + word Lyceum was capable of appropriation + Lyceum had acquired
enforceable exclusive right to use of said word
o
On appeal, SEC en banc reversed and set aside the decision, not onsidering Lyceum to have
become so identified with Lyceum to render use by other institutions confusing as to identity of
schools attachment of geographical names sufficient to distinguish especially in view of
physical remoteness of respective campuses
o
CA: affirmed En Banc, hence this petition
Issue: WON by use of Lyceum has petitioner done so for such a length of tme and with such exclusivity
as to have become associated or identified with petitioner institution in the mind of the general public.
No.
o
Articles of Incorporation of a Corp must set out name of corporation.

Sec 18: prohibits use of name that is identical/deceptively or confusingly similar to

existing corporation/patently deceptive

Policy: avoidance of fraud upon the public, evasion of legal obligations and duties,
reduction of difficulties of administration and supervision over corporations
o
Corporate name of Lyceum NOT identical etc with that of respondet institusions confusing and
deception are effectively precluded by appending of geographic names

Lyceum etymologically: latin for Greek Lykeion which referred to a locality on the river
Illissius in Athens = enclosure dedicated to Apollo and adorned with fountains and
buildings erected by Pisistratus, Pericles, and Lycurgus, frequented by youth for exercise
and by philosopher Aristotle and followers for teaching
associated with schools = generally refers to a schools, frequently used by Roman Catholic
Schools, sometimes substituted for university or to denote a secondary school or a
college
Doctrine of secondary meaning:
o
Originated in trademark law + extende to corporate names, since right to use
corporate name to exclusion of others is bsed on same principle which underlies
right to use a particular trademark or tradname = word or phrase originally
incapable of exclusive appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might nevertheless have een
used so long and so exclusively by one producer with reference ot 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 rpoduct
o
no evidence was presneed in hearing before Commission proving Lyceum had acquired
secondary meaning in favor of Lyceum only that Lyceum has used it for long period of time, but
not exclusively; other Roman Catholic educational instutions have been using similar words

at least one of the respondents (Western Pangasinan Lyceum Inc) used the term 17
years before Lyceum registered its own corporate name with SEC

the fact that Western Pangasinan registered only after Lyceum filed registration in Sept
1950 and did not reconstruct records before SEC when destroyed durin WWII, this is only
a secondary point to main point that petitioner does not have exclusive use of contested
term
HELD: Petitioner isntituion is not entitled to a legally enforceable exclusive right to the word Lyceum in its
corporate name; to determinate whether the corporate name is deceptively similar, evaluate corporate
names in their entirety and when the name of petioner is juxtaposed, they are not reasonably regarded as
identical. Petition for review DENIED, CA decision AFFIRMED.

PC Javier & Sons v CA: (2005)

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May 1984: PC Javier and Sons and Spouses Javier filed a complaint for annulment of mortgage and
foreclosure with prelim injunction against PAIC Savings and Mortgage Bank + supplemental complaint to
include defendants (sheriffs)
Feb 1981: PC Javier and Sons applied with First Summa Savings and Mortgage Bank later renamed PAIC
Savings a loan accommodation under Industrial Guarantee Loan Fund (P1.5M)

March 1981: Javier was advised that loan application was approved and same to be forwarded to
Central Bank for processing and release
o
CB released loan to PAIC in two tranches of P750k each released to Javier Corp, but from second
tranche release, P250k was deducted and deposited in name of Javier Corp under time deposit
o
Javier Corp claims loan releases were delayed, P250k was deducted from IGLF loan and placed
under time deposit + they were never allowed to withdraw the proceeds of the itme deposit
because PAIC intended this time deposit as automatic payments on accrued principal and
interest due on loan
o
PAIC clais only final proceeds of the loan was delayed, because of shortfall in collateral cover of
Javier Corps loan second tranche was then relased after firm commitment by Javier Corp to
cover collateral deficiency through opening time deposit using portion of loan proceeds (P250k)
and in compliance with their commitment to submit additional security and open time deposit,
Javier executed chattel mortgage over some machineries in favor of PIAC + when Javier Corp
defaulted in payment of its loan, PAIC sent demand letter; sent a second, informing foreclosure;
finally initiated extrajudicial foreclosure of real estate mortgage and accordingly auction sale was
executed by sheriffs
o
Instant complaint to forestall extrajudicial foreclosure of sale of piece of land = temporarily
restrained by RTC
o
RTC: declared First Summa nd PAIC as one and the same + Javier Corp liable to bank for unpaid
balance of loans + extrajudicial foreclosure justified because loans were due and demandable
when foreclosure proceedings commenced in April 1984, hence this appeal by certiorai.
Issue: WON First Summa Savings and Mortgage Bank and PAIC Savings are one and the same entity;
whether their obligation is already due and demandable at the time commencement of extrajudicial
foreclosure took place.
o
Is Javier corp legally justified in withholding amortized payments to respondent bank until they
have been properly notified of change in corporate name? (claim never having received formal
notice of alleged change of name + first notice of change of name was when bank presented
witness Michael Caguioa on April 1990, where he presented SEC Certificate of Filing Amended
Articles of Incorporation of respondent bank)? NOPE.

There exists no requirement under law or regulation ordering a bank that changes its
corporate name to formally notify all its debtors

Court cannot impose on bank that changes in corporate name must notify debtor of
such change = tantamount to judicial legislation; such notification is discretionary on
bank

Although no evidence showing bank furnished Javier Corp with official documents of
change of name, evidence abound that they ha dnotice
Letter of accountant of Javier Corp addressed to bank: we obtained from the FORMER First
Summa
Board of resolution of Javier Corp signed by Pablo Javier Sr auhorizing him to execute a
chattle mortgage over certain machinery in favor of PAIC Savings and Mortgage Bank
Secretarys certificate signed by Fortunato Gabriel, Corp Secretary of Javier Corp, certifying
that a board resolution was passed authorizing Pablo Javier Sr to execute a chattel
mortgage on corporations equipment to serve as collateral to cover IGLF Loan with PAIC
Saivings
Undated letter signed by Pablo Javier Sr and addressed to PAIC Savings authorzing Mr Victor
Javier, Gen Manager, to secure from PAIC Savings certain documents for his signature

DOCTRINE: 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
diff name, and its character is in no respect changed.
Issue: WON CA correctly sustained collection of entire proceeds of IGLF loans amounting to 1.5M despite
withholding of P250k. YES.
o
Javier Corp was required to place P250k loan in time deposit with respondet bank for simple
reason that collateral it put up was insufficient ot cover IGLF loans it received; even admitted
shortfall of its collateral when it authorized PabloJavier via board resolution to execute chattel
mortgage over certain machinery in favor of PAIC Savings.

Hon Mendoza found in his order tha lonable value of lands, buildings, machinery and
equipment amounted only to P934k final proceeds were released in November
because the collateral covered by lands and buildings then subject of existing
mortgages had loanable value of P934k and only after commitment by Javier Corp to
correct collateral deficiency thru execution of chattel mortgage on additional
machineries id PACI use protion of loan proeeds to open time deposit to answer for
obligaton to defenant bank

Mere allegation of overcollateralization by JavierCorp does not invalidate the above

Collection of P250k is not a case of unjust enrichment. Elements of unjust enrichment

(enrichment on part of defendant, impoverishment of plaintiff, lack of cause, prevent
enrichment of one at expense of another/profit inequitably at the anothers expense)
does not apply
o

Questioning of propriety of placing of P250k in time deposits with respondent bank as

additional collateral was belatedly made; requirement to give additional collateral was
warranted because of deficiency in collateral by Javier Corp if latter really meant to
question the same, should have done so immediately after making time deposits in Nov
1981; too late for Javier Corp to question placing of P250k in time deposits after it failed
to pay its loan obligations

From amortization schedule attached to promissory ynotes, Javier orp clearly defaulted
on loan obligations when Bank gave notice of foreclosure proceedings + terms in
promissory note: failure to pay an installment when due shal entitle the bank or its
assign to declare all the obligations as immediately due and payable
Issue: WON damages should be awarded, even if Javier Corp claims there was no malice or bad faith on
their part. YES. Malice and bad faith is evident in the case before the Corut.
o
Javier Corp was well aware that First Summa had changed its name, yet pretended otherwise
purported ignorance as excuse to renege on obligations = bad faith
o
Good faith, Javier Corp should have made valid consignation in court + if dobuted as to whom
payment should be made, could have inquired from SEC + resondent Bank demanded
paymentfor loans already due and demandable is sufficient to make Jaiier Corp wonder why this
is so, but latter never took intiative + actual damages for Defendant Bank for having been
prevented from foreclosing on mortgages at least 4 times
Held: CA decision affirmed.

Zuellig Freight and Cargo Systems v NLRC: (2013)

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San Miguel brought a complaint for unfair labor practice, illegal dismissal, non-payment of salaries and
moral damages against formerly Zeta Brokerage Corporation (Zeta) now Zuelig Freight and Cargo Systems
(Zuellig), alleging that he had been a checker/customs rep of Zeta since Dec 1985 + in Jan 9194, he and
other EEs of Zeta were informed of ceasing operations that affected all EEs who would be separted _ was
informed of termination effective March 1994 _ reluctantly accepted separation pay subject standing offer
to be hired to former position + April 1994, summarily terminated w/o valid cause and due process
o
San Miguel contends that amendments of articles of incorporation of Zeta were for purpose of
changing corporate name, broadening primary functions, and increasing capital stock, but NOT
that Zeta had been dissolved
o
Zeta argues that San Miguels termination had been for cause authorized by Labor Code + nonacceptance was not irregular + had complied with requirements or terminatin due to cessation of
business operations + no obligation to employ San Miguel in exercise of valid management
prerogative + all EEs had been given sufficient time to make their decision whether to accept its
offer of employment or not, but he had not responded + due to failure to meet deadline, offer
had expired + had been hired on temporary basis + picking other EE over San Miguel was not
arbitrary but due to seniority considerations
LA: San Miguel had been illegally dismissed
o
Mere change of business name and primary purpose andupgrade of stocks of corp
o
Zuellig and Zeta are legally the same person and entity (as admitted by Zuelligs counsel in letter
ot VAT Dept of BIR)
o
Termination of San Miguels services due to alleged cessation of business operations is deemed
illegal
o
Ordered Zuellig to pay San Miguel backwages
NLRC affirmed LA
CA: affirmed NLRC
o
Closure of business ops not validly made

Certificate of filing of amended articles of incorporation show zuellig is former zeta

Certificate of filing of amended by-laws = show the same

Amendment of articles of incorp merely changed corporate name, broadned primary

purpose, increased authorized capital stocks

Reqirements in Art 283, Labor Code, were not satisfied = good faith not established by
mere registration with SEC of amended articles of incorporation

Fact of verbally informing EEs of the termination and requirement to sign employment
contract to ensure smooth operations of new company is irrelevant no valid closure o
business operations means San Miguels dismissal on alleged authorized cause of
cessation of business pursuant to Art 283 was utterly illegal
Issue: WON cessation fo business by Zeta was a bona fide closure to be regarded as valid ground for
termination of employment of San Miguel under Art 283. NO.
o
Art 283: Valid grounds for termination: installation of labor-saving devices, redundancy,
retrenchment ot prevent losses, or closing or cessation of operation of establishment or
undertaking unless cosing is for purpose of circumnveting provisions of title

Amendments of the articles of incorporation of Zeta to change corporate name to

Zuellig Freight did not produce the idssolution of Zeta as a corporation

Corporation Code defined and delineated the diff modes of dissolving a

corporation, and amendment of articles of incorporation was not one of such
modes

Effect of change of name (Ph First Insurance Inc v Hartigan): no more the
creation of a corporation than the change of the name of a natural person is
begetting of a natural person change of NAME is NOT a change of BEING

Consequences of change of name (PC Javier and Sons v CA): 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 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 diff name, and its character is in no respect changed.
DOCTRINE: 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.
AS APPLIED:

Zeta and Zuelling remained the same corp

Change of name did not give Zuellig license to terminate EEs of Zeta

NOT similar to situation where buying business of another company means purchasing
company has no obigation to rehire terminated EEs

Zuellig despite new name was mere continuation of Zetas corporate being + still held
obligation to honor all of Zetas obligatons, one of which was to respect San Migeuls
security of tenure
CA also rightfully upheld NLRCs affirmance of grant of attorneys fees San Miguelw was
compelled to litigate to protect his interest.
decision appealed from AFFIRMED.

o
o

o
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HELD:

Malabang v Benito: (1969)

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Amer balindong is mayor of Malabang, Lanao del Sur, while Pangandupan Bonito is mayor of Balabagan,
Lanao del sur, which was formerly part of of Malabang, having been created by EO 386 of Pres Garcia
o
Balindong brought action for prohibition to nullify EO 386 and restrain Bonito and Co from
performing the functions of their respective office, relying on Pelaez v Auditor General and
Municipality of San Joaquin v Siva

Pelaez: RA 2370 vesting power to create barrios in Provincial Board is statutory denial of
presidential autohority to create new barrio + Administrative Codes Sec 68 is
unconstitutional for giving President power to create municipalities, as undue delegation
of legislative power and against Art VII limiting Presidents power to mere supervision
o
Bonito and Co on the other hand argue that Pelaez has no application because unlike the
municipalities in Pelaez, Balabagan is at least a DE FACTO Corporation, having been organized
under color of statute before this was declared unconstitutional, its officers having been
elected/appointed and municipality itself having discharged corporate functions for the past 5
years preceding the isntituion of this action

Thus as de facto corporation, existence cannot be collaterally attacked, athough it may

be inquired into directly OR in an anction quo warranto at the instance of the State
Court concedes that inquiry into legal existence of a municipality is reserved to the State in a proceeding
quo warranto or other direct proceeding + only in a few exceptions may a private person exercise this
function of voernment, BUT the rule disallowing collateral attacks applies ONLY where municipal
corporation is at least de facto corporation if corporation isa NULLITY, its existence may be questioned in
any manner
ISSUE: Whether the municipality of Balabagan is a de facto corporation (considering it was organized
before the promulgation of the decision Pelaez)
o
Can a statute lend the color of validity to an attempted organization despite the fact that such
statute is subsequently declared unconstitutional?
Two positions: de facto corp cannot exist where the statute or charter creating it is
unconstitutional (there can be no de facto corporation where there can be no de jure
one) while statute is binding until condemned as unconstitutional)
Yale Law Journal: true basis for denying a corporation de facto status lies in absence of any
legislative act to give vitality to its creation in cases where a de facto office can exist
under color of an unconstitutional statute is simply because other valid acts or the
ocnsittution itself gave life to said corporation
Principles:
o
Color of authority requisite to organization of de facto municipal corporation may
be valid law enacted by legislature OR an unconstitutional law, valid on its face,
which has either been upheld for a time or not yet been delared void PROVIDED
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
o
There can be no de facto municipal corp unless either directly or potentially, such a
de jure corp is authorized by some legislative fiat

There can be no color of authority in an unconstitutional statute alone, the

invalidity of which is apparent on its face
o
There can be no de facto corp created to take place of existing de jure corp, as
such org would clearly be a usurper

As applied:
o
mere fact that Balabagan was organized at time when the statue had not been
invalidated cannot conveivably make it a de facto corporation, as independently of
the administrative code, there is no other valid statute to give color of authority to
its creation
o
Norton v Sheby Count: an unconstitutional act is not a law; it confers no rights,
imposes no duties, affords no protection, creates no office; in legal contemplation,
is as inoperative as though it had never been passed
HELD: Petition granted, EO 386 declared void, respondents permanently restrained from performing duties
and functions of respective offices.
o

Harril v Davis: (168 F. 187; 1909)

The constitutive documents were filed with the clerk of the Court of ppeals !ut not withthe clerk of court in
the judicial district where the !usiness was located. rkansas law re"uiresfiling in !oth offices. #as there
$colora!le compliance enough to give the supposed corporation at least thestatus of a $de facto corporation
% &o. &either the hope' the !elief' nor the statement !y parties that they are incorporated'nor the signing of
the articles of incorporation which are not filed' where filing is re"uisite tocreate the corporation' nor the use of
the pretended franchise of the nonexistent corporation' willconstitute such a corporation de facto as will
exempt those who actively and knowingly use sname to incur legal o!ligations from their individual lia!ility to
pay them. There could !e noincorporation or color of it under the law until the articles were filed (re"uisites for
validincorporation.
Cranson v Intl Bus Machines: (1964)
Salvatierra v Garlitos: (1958):
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Manuela Vda de Salvatierra appeared to be owner of a parcel of land in Maghobas Poblacion, Leyte.
o
March 1954: entered into contract of lease w/ Ph Fibers Producers Co Inc, allegedly, a corporation
duly organized and existing uner the laws of the Ph, domiciled at Barauen Leyte, represented by
Mr Refuerzo, Pres; terms:

Lifetime of lease = 10 years

Land would be planted to kenaf, ramie or other crops suitable to the soil

Lessor entitled to 30% of net income accruing from harvest of any crop w/o being
responsible for cost of production thereof

After every harvest, lessee bound to declare at earliest possible time the income derived
therefrom and to deliver corresponding share due the lesor
o
April 1955: Manuela filed with CFI Leyte complaint against Ph Fibers for accounting, rescission
and damages, verring that:

Ph Fiers had planted kenaf on 3 ha of leased property which crop was at time of
commencement of action already harvested, processed and sold b Ph Fibers

Ph Fibers refused to render accounting of income derived therefrom

Stimated gross income = P4,500 and deductible expenses amount to P1k

H Fibers refusal to undertake accounting was in violation of terms of covenant

o
Ph Fibers failed to file answer; Court declared them in default; rendered judgment granting
Manuelas prayer, requiring Ph Fibers to render complete accounting of harvest of land within 15
days from receipt of decision + deliver 30% of net income realized from last harvest with legal
interest + upon Ph Fibers failure to abide by requirement, gross income would be fixed at
P4,200 or net income of P3,200 after deducting expenses of production, 30% of which was held
to be due Manuela due to contract of lease which was declared rescinded
o
No appeal taken, so Court on Manuelas motion issued writ of execution, cuains gprovincial sheriff
to attach 3 parcels of land registered under Segundino Refuerzo

No property found available for attachment

o
Jan 1956: Segundino Refuerzo filed motion claiming that decision rendered in Civil Case was null
and void with respect ot him, there being no allegation in the complaint pointing to his personal
laibiltiy + pryed that order be issued limiting liability to defendant Corp
o
Corp granted the same ordered provincial sheriff to release all properties that might have
already been attached after finding that evidence on record made no mention to any fact which
might hold movant personally liable
Manueal institued instant action asserting trial judge acted in grave abuse of discretion in granting
Segurindos motion
Issue: WON Refuerzo is personally liable. Yes.
o
Refuerzos motion was pursuant to Rule 38:

Petition provided for in either of the preceding sections of this rule must be verified, filed
within sixty days after petitioner learns of judgment, order or other proceeding to be set
aside, and not more than 6 months after such judgment or order was entered, or such
proeeding was taken, and must be accompanied with affidavit showing fraud, accident,

mistake or excusable negligence relied upon, and facts constituting the petitioner is
good and substantial cause ofa tion or defense, as the case may be which he may prove
if his petition be granted
2 periods: 60 days after petitioner learns of judgment, and not more than 6 months after
judgment or order was rendered
decision in case at bar was under June 8 1955 , whereas Refuerzos motion was dated Jan
31 1956 or after lapse of 7 months and 23 days clearly beoyn dprescriptive period
o
policy of remedy: allow party adversely affected by decision to protect his interest
o
periods fixed by said rule are non-extendible and never interrupted nor subject to
any contingency
o
Court nevertheless deemd it wise to pass upon the merits of the case
o
Rs defense: complaint filed with lower court contained no allegation which would hold him liable
personally while it stated he was signatory to the lease contract, he did so in capacity s
president of the corporation found to be supported by records, as found by lower court;
Manuela argues that failure to specify Refuerzos personal liability was due to fact that all the
time she was under the impression that Ph fibrs represented by Refuerzo was a duly registered
corporation as apearin gin the contract, but a subsequent inquiry into SEC 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 denyin gth
esame in an action arising out of such transaction or dealing, this doctrine may not be
held to be applicable where fraud takes a part in said transaction

As applied: manuea was made to believe that corp was organized in accordance with
law ie she was unawre that Ph Fibers had no juridical personality
o
A registered corporation 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, and conversely, a stockholder or member cannot be held personally laible
for any financial obligation of the corporation in excess of his unpaid subcription

This rule refers only to REGISTERED corporations and NOT APPLICABLE to

LIABILITY OF MEMBERS of UNINCORPORATED ASSOCIATION

Ratio: an organization which before the law is non-existent has no personality

+ would be incompetent to act and appropriate for itself the powers and
attributes of a corporation as provide by law + cannot create agents or confer
authority on another to act in its behalf + those who act or purport to act as
its representatives or agents do so without authority and at their own risk

A person who acts as an agent w/o authority or w/o 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
corporaton whch has no valid existence assumes such privileges and
obligations and comes personally liable for contracts entered into or for other
performed acts as agent
o
AS APPLIED:

Rfuerzo, as pres of unregistered Ph Fibers, was the moving spirit behind the
consummation of the lease agreement by acting as its representative; his liability
cannot be limited or restricted

In acting on behalf of a corporation he knew to be unregistred, he assumed the risk of

reaping the consequential damages or resulting rights, if any, arising out of such
transaction
HELD: order amending previous decision and ordering provincial sheriff to release properties of refuerzo is
SET ASIDE; Refuerzo is liable.

Chiang Kai Sheck v CA: (1989)

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when Fausta Oh reported for work at Chiang Kai Shek in Sorsogon on the first week of July 1968, she was
shocked to be told she had no assignment for next semester, having taught since 1932 for a continuous
period of almost 33 years
o
Oh sued for separation pay, social security benefits, salary differentials, maternity benefits and
moral and exemplary damages:

Original defendant: Chiang Kai Shek; complaint amended to implead officers ot make
them solidarily liable
o
CFI Sorsogon dismissed the complaint; CA reversed and held school suable and liable while
absolving other defendants; CKSs MR reversed, hence this petition.
Issue: WON a school that has not been incorporated may be sued by reason alone of its long continued
existence and recognition by the govt. YES.
o
While Rule 3, Sec 1 of Rules of Court do provide that only natura or judicial persons may be
parties in a civil action it is not denied and that the school has not been incorporated, as a
school, CKS was nevertheless governed by Act 2706 amended by CA 180, providing: unless
exempted for special reasons by the Sec of Public Instruction, any private schoolor collece
recognized by the govt shall be incorporated under the provisions of Act 1459 known as the
Corporation Law, within 90 days after the date of recognition, and shall file with the Sec of Public
instruction a copy of its incorporation papers and by-laws.

Having been recognized by the govt, CSK had obligation to incorporation under the Corporation
law, within 90 days from such recognition having not done so at the time the complaint was
filed notwithstanding its existence even earlier than 1932, CSK cannot now invoke its own noncompliance with law as immunity from suit
o
Having contracted with Oh for 32 years and representing itself as possessed of juridical
personality, CSK is estopped from denying such personality to defeat Ohs claim against it (Art
1431: through estoppel an admssion or representation is rendered conclusive upon the person
making it and cannot be denied or disproved as against th person relying on it.)
Issue: WON a complaint filed against persons associated under a common name will justify a judgment
against the association itself and not its individual members. YES.
o
since the school may be sued in its own name, no need ot apply Rule 3 Sec 15 under which
persons joined in an association w/o any juridical personality may be sued with such association
it has been shown that individual members of board of trustees are not laible, having been
appointed only after Ohs dismissal
Issue: WON the collection of tuition fees and book rentals will make a school profit-making and not
charitable. NO.
o
But even assuming CSK is charitable, Oh was nonetheless entitled ot protection of Termination
Pay Law chartiable institusions are covered by labor laws
o
It has not ben established that CSK is a charitable isntution, considering it charges tuition fees an
collects book rentals from its students while this alone does not indicate that it is profit-makign,
it does weakn its claim that it is a non-profit entity
Issue: WON Termination Pay Law then in force was available to the private respondent who was
employed on a year-to-year basis.
o
even if CSK argues that ohs services were terminable at the end of each year at the discretion of
the school, after 32 years of services, Court held Oh to have become a permanent EE 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.
o
Applicable law is Termination Pay Law:

In cases of employment w/o definite period ER or EE may terminate at any time the
employment with just cause; or without just cause in the case of an EE by serving
written notice on ER at least one month in advance, or in case of Er by serving such
notice to EE at least 1 month in advance or 12 month for every year of service,
whichever is onger, a fraction of at least six months being considered as one whole year
ER upon whom no notice as served in case of termination of employement may hold EE
liable for damages
EE upon whom no notice was served in case of termination w/o just cause shall be entitled
to backwages in amount equivalent to salaries corresponding to required period of notice

Magna Carta for public Teachers further confer security of tenure on teachers upon
appointment as long as he psosess the required qualification and under policy of DepEd,
a teacher becomes permanent and automatically acquires security of tenure upon
completion of 3 years in the service
Issue: WON awards made by respondent court were warranted.
Held: appealed decision AFFIRMED except for award of separation ay reduced to P2880 (P90 x 32
months).
o

Lozano v delos Santos: (19967)

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Dec 1995: Reynaldo Lozano filed case for damages against Antonio Anda before MTC, Pampanga, alleging
that as president of Kapatiran Malbalacat-Angeles Jeepney Drivers Assosciaton In c9KAMAJDA) while Anda
was pres of Samahang Angeles-Mabalacat Jeepney Operators and Drivers Associaton (SAMAJODA)
o
That in Aug 1995, upon request of Sanggniang Bayan of Mabalacat, Lozano and Anda agreed to
consolidate associations and form Uniified Mabalacat-Angeles Jeepney Operators and Drivers
Association (UMAJODA)
o
Agreed to elect one set of officers who shall be given sole authority to collect daily dues from
members of consolidated association
o
Oct 1995: both Lozano and Anda ran for pres; Loano won; Anda protested and alleged fraud,
refusing to recognize election and abide by agreement, continued collecting dues from his
association
o
Hence Lozanos complaint
Anda moved to dismss for lack of jurisdciton, claiming jurisdiction was lodged with SEC; MCTC denied
motion and MR
Anda filed petition for certiorari before RTC; RTC found dispute to be intracorporate, hence subject to
jurisdiction of SEC, ordering MCTC to dismiss Civil Case accordingly; denied MR, hence lonzanos petition.
Issue: WON RTC acted with GAD in concluding that SEC has jurisdiction over case of damages between
heads of 2 associations who intended to consolidate their associations but had not yet been approved and
registered with SEC. Yes. SEC has no jurisdiction, there being no intracorporate relation nor
dispute between Anda and Lozano.
o
SECs jurisdiction: Sec. 5, PD 902-A:

Schemes of board, amounting to fraud, detrimental to public/stockholder/members/orgs

registered with SEC

Controversies arising out of intracorproate/partnership relations

Controversies in election/appointment of directors, trustees, officers or managers of
such corps

Petitions of corporations, partnerships or associatons to be declared in the state of

suspension of payments in cases where corporation, partnership or association
possesses sufficient property to cover all its debts but forsees impossibility of meeting
them when they fall due o rin cases where they have no sufficient assets to cover
liaibilities but are under management of rehabilitation receiver or management
committee
o
Jurisdiction of SEC requires concurrence of status or relationship of parties AND nature of
question subject of controversy (ie dispute involved is intrinsically connected with regulation of
corp, or deal with internal affairs)
o
As applied:

No intracorporate nor partnership relation between Lonzano and Anda

Controversy arose out of plan to consolidate associations into a single common

association but unified associtaiton was STILL PROPOSAL
o
Had not yet been approved by SEC
o
Officers and members had not yet submitted articles of consolidation in accordance
with Corporation Code
o
consolidation becomes effective not upon mere agreement of the
members but only upon issuance of certificate of consolidation by SEC.
When the SEC upon processing and examing the articles of consolidation,
is satisfied that the consolidation of the corporations is not inconsistent
ith the provisions of the Corporation Code and exitsting laws, it issues a
certificae of consolidation which makes the reorganization official. The
new consolidated corporation comes into existence and the constituent
corporations dissolve and cease to exist.
o
While KAMAJDA and SAMAJODA are duly registered with SEC, they are TWO
SEPARTE ENTITLES; dispute between Anda and Lozano (ie allegations of fraud re
elections) is not within KAMAJDA nor AMAJODA, but between members of separate
and distinct associations; Anda and lozana have NO INTRACORPORATE RELATION
much less an Intracorporate dispute, thus SEC has no jurisdiction
o
Doctrine of corporation by estoppel has no application and does not override
jurisdictional requierements; jurisdiction is fixed by law and not subject to the
agreement o fthe parties; it cannot be acquired/waived/diminished by any
act/omission of the parties, nor conferred by acquiescence of the court.
HELD: petition ranted, decision of RTC set aside.

Lim Tong Lim v Phil Fishing Gear Industries, Inc. (1999)

-

On behalf of Ocean Quest Fishing Corp, Antonio Chua and Peter Yao entered into a contract for the
purchase of fishing nets of various sizes from Ph Fishing Gear Industries, claiming they were engaged in a
business venture with Lim Tong Lim (who was not a signatory to the agreement) (nets totaled P53k, 400
pieces of floats worth P68k likewise sold)
o
Failed to pay
o
Ph Fishing Gear filed collection suit against Chua, Yao and Lim with prayer for prelim attachment,
in their capacity as general partners, on allegation that Ocean Quest Corp was nonexistent as
shown from SEC certification
o
Lower court issued writ sheriff attached fishing nets on board F/B Lourdes docked at Navotas,
Metro Manila
o
Chua admitted liability + requested reasonable time to pay
o
Yao filed answer + failed to appear in hearings
o
Lim filed Answer with Counter and cross claim and moved to lift writ
o
TC upheld writ, ordered sale of nets at public auction, which Ph Fishing Gears won
o
Nov 1992: TC ruled PFGI entitled to writ and Chua, Yao and Lim as general partners were jointly
liable

Partnership existed among them on basis of testimonies of witnesses + compromise

agreement executed by the three of them in a civil case chua and yao had brought
against lim for declaration of nullity of commercial documents, reformation of contracts,
declaration of ownership of fishing boats, injunction and damages while Compromise
agreement was silent as to nature of their obligations, joint liability could be presumed
from equal distribution of profit and loss
o
CA affirmed RTC:

Held Lim to be partner in fishing business, thus may be held liable

Partnership for specific undertaking = commercial fishing = ultimate undertaking was to

divide profits
o
Hence this petition; Yao disclaims existence of partnership, asserting

He had no direct participation in purchase of nets + did not even meet reps of company

He was lssor, no partner, of chua and yao merely leased to the two the main asset o
fthe partnership ie fishing boat Lourdes for 6 months

Issue: WON by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership. Yes.
o
Art 1767: By 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 amog
themselves.
o
Partnership exists because:

Lim requested Yao engaged in commercial fishing to join him while chua was already
yaos partner

Lim, chua and yao verbally agreed to acquire 2 fishing boats

They borrowed P3.25 M from jesus lim, brother of lim, to finance venture

Bought boas from CMF Fishing Corp, who executed deed of sale to Lim only to serve as
security for loan extended by Lim

Lim chua and yao agreed that refurshibbing would be shouldered by C and Y

Because of unavailability of funds jesus lim agains extended loan to partnership (P1M)
secured by check, because of which Y and C entrusted ownership papers of 2 other
boats to Lim

Pursuant to this business, they bought nets from respondent PFGI

Subsequently C and Y brought action against Lim

Case was amicabl settled through compromise agreement

Fishing nets and floats = essential to fishing = in furtherance eof their business

Since petitions for review involve only questions of law, factual findings of RTC and CA
are binding on this Court
o
Lim was a PARTNER, not a Lessor

No lessor would agree to the sale of his own boats to pay for debt of lessees with excess
proceeds to be divided among the three of them

Sale of boats + division aong the three of balance reminaing proves that FB Lourdes
though registered in his name was not his own property but an asset of the partnership

Not uncommon to register properties acquired from a loan in the name of the person the
lender trusts, in this case Lim himself, as brother of creditor
o
Corporation by estoppel

Sec 21: 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 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.

May also be applied when an unincorporated association which represented itself to be a

corporation will be estopped from denying its corporate capacity in a suti against it by a
third person who relied in good faith on such representation

Conversely, a third party who, knowing an association to be unincorporated, nonethesls

treated it as a corporation and received benefits from it, ma be barred from denying its
corporate existence
PFGI = entitled to be paid for nets sold
Lim benefited from use of nets he questioned the attachment of the nets because the writ
effectively stopped his use of the fishing vessel
While Lim did not directly act on behalf of the corporation, he reaped the benefits of the
contract entered into by persons with whom he previously had existing relationship =
deemed to be part of said association and is covered by the scope of doctrine of
corporation by estoppel
o
On the validity of attachment

Issue of whether or not it was improperly issued is moot and acadmemic

FB Lourdes = asset of prartnership placed in name of Lim only to assure payment of

debt

Nets and floats were made to their specifications

Issuacen of writ to assure payment of price stipulated is proper

By specific agreement, ownership had remained with PFGI until payment in full
o
Doctrine: 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 credi or industry, not necessarily cash or fixed assets. Being partners, they
are all liable for debts incurred by or on behalf of the patnership. 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.
Held: petition denied. Decision appealed from affirmd.

Loyola Grand Villas Homeowners v CA: (1997)

Fleischer v Botica Nolasco:

Govt of the Ph v El Hogar:

-

Marc 1906: Ph Commission enacted Corporation Law effective April 1 1906

o
Sec 171 190: relted to building and loan associations + adopted from American statutes =
reflect such ideals
o
El HOgar Filipino = first corporation organized in Ph islands under provisions cited
o
Articles of incorporation details:

Dec 28 1910

P150k capital stock subscribed, P10620 paid

Capital stock not permitted to exceed P3k but by Act 2092, statute was amended to
permit capitalization of bulding and loan associations to ten millions

Shareholders increased to 5, 26 shareholders in Dec 31 1925 holding 125, 750 shares,

with total paid-up value of P8M703,602
Issue: re: alleged illegal holding by hogar of title to real property in excess of 5 years after property had
been bought by Hogar at one of its own foreclosure sales; does it work as forfeiture of its franchise so as
to require judgment for its dissolution? NO.
o
Sec 75 repeated in Corporation Law: 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
o
El Hogar obtained land from mortgage in Dec 1920, asked for registration of TCT and got it in
May 1921 from register of deeds
o
March 1921: board of directors of Hogar adopted resolution authorizing Vicente Bengzon, agent
of corp, to endeavor to find a buyer for the San Clemente land

July 1921: Hogar authorized Jose Laguardia to endeavor to find a prchaser for the land
for P23k, undertaking to pay Laguardia commission of 5% for services, but no one
bought

July 1923: plans of San Clemente were sent to Mr Gomez, Mr Gonzalez and Mr Castelvi,
but no offers were received from them

Jan 1926: agent not having succeeded in finding buyer, San Clemente was advertised
for sale by Hogar in three newspapers of gen circulation

March 1926: offier was made by Alcantara for P4k payable P500 in cash, and the
remainder within 30 days

March 1926: Board by resolution decided to accept offer + communicated to buyer;

Alcantara given extensions of time, expiring April 1926, to make payment failed to
pay, Hogar treated ocntract as rescinded

July 1926: land sold to Dona Alberto for P6k

o
While hogar violated strict letter of law, did not do so intentionally + mitigating circumstances

While hogar obtained title in 1920 and title remained with it until 1926, contended that
five year period di not begin to run until May 1921 when TCT was delivered

Purchaser of land registered under Torrens system cannot acquire status of innocent
purchaser for value unless his vendor is able to place in his hands an owners duplicate
showing title of such land to be in vendor

Period during which Alcantara failed to make payment likewise not counted because
hogar not chargeable for lapse ofnegotiations

Hogar bought for P24k, sold for P6k

o
SEC 212 of Code of Civil Proceudre: 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 of forfeiture, or has
misused a franhise or exercised a power not conferred by law, ut not of such a character as to
work a surrender or forfeiture of its franchise, judgment shall be rendered that it be ousted from
the continuance of such offense or the exercise of such power.

Court has discretion w/ respect to infliction of capital punishment upon corporation +

there are misdemeanors and misuses of frnachises which should not be recognized as
requiring dissolution

(e.g. hodling real property for speculative purposes in contravention of its charter
court made ousting conditional upon failure of corp to discontinue unlawful conduct w/in
6 months)
o
Poliy against tenure of land was to prevent revival of the ENTAIL/MAYORAZGO by which land could
be fettered and its alienation hampered over long periods of time.

Hogar in this case was in good faith attempting to dispose of the property

But I it discretionary or mandatory upon court to dissolve corp under Corporation law for
violation of later?
o
Sec. 190: iolation of any provisions of this Act and its amendments shall be
punished by a fine ofnot more than P1k, r imprisonment of not more than 5 years
or both at discretion of court, if violation being prved, be dissolved by quo warranto
proceedings by att-general or provincial fiscal, provided nothing in this section shall
be construed to repeal the other causes for dissolution of corporation prescribed by

existing law + remedy in this section considered as additional to remedies already

existing

Section simply means action shall be taken against corporation via quo
warrantio

No corporate enterprise can be conducted perpetually w/o trivial

misdemeanor against corporate law being committed cannot penalize all
violations automatically; must be via discretion of courtthru quo warranto

Furthermore subject matter of the section is not expressed in the title

Issue: WON Hogar, owning and holding a business lot with structure thereon in Manila in excess o fits
reasonable requirements and in contravention of subsection 5 of sec 13 of corporation law, should be
dissolved. NO.
o
Aug 1913: bought land with structure on it adjacent to HSBC demolished building (Guadalupe
stone and hewn timber, 50 years old) and built a new one 3 stories in main, made 4 stories, then
in one corner, 5 stories) reasonably proportionate in value and revenue producing capacity to
value of land upon which it stands
o
Argued that acquisition of lot, construction of enw building, and renting of the same to 3 rd
persons, are ultra vires acts of corp, and proper penalty is dissolution
o
Sec 13: every corporation has power to purchase, hold, lease such real property as the
transaction of the lawful business of the corporation may reasonably and necessarily require.

Owning building to construct and matinain offices is necessary to a building and loan
association (otherwise theyd have to coduct businsess exclusively in leased offices)

Hogar lawfully acquired the lot

Issue: WON Hogar, charged with engaging in activities foreign to the purposes for which the corporation
was created and not reasonable necessary to its legitimate ends, should be dissolved. Nope, merely
enjoined.
o
Administration of offices in Hogar building not used by Hogar itself and renting of such offices to
public

Hogar uses about 10% of office space and leases the rest to strangers

Clearly within legitimate powers of Hogar

o
Re: administration and management of properties belonging to delinquent shareholders of the
association

In case of delinquency of shareholders in payment of interest, premium and dues, Hogar

takes over and manages mortgaged property to apply income to obligations of debtor
party

Also charges a c omission at rate of 2 on sums collected

Govt argues that only remedy for default by shareholders is to enforce collection of
whole loan in manner contemplated in Sec 85 of Corp Law but said section tates that
the association may treat the whole indetedness as due at the option of the board of
diretors

NO REASON FOR INVALIDATION of management by corp of property constituting security

of delinquent debt
o
Re: activities described as management of parcels of improved real estate in Manila not under
mortgage to it, but owned by shareholders, and Hogar holding itself out by advertisement as
prepared to do so service elimited to shareholders, but some persons whose propertieses are
managed for them became shareholders only tot ake advantage of this service

Services: renting, payment of taxes and insurance, necessary repairs, collection of rent
from tennats

Hogar receives compensation for such management at varying rates

Carried out by same staff who attend to mangement details of Hogar for mortgage
properties

SUCH PRACTICE IS UNAUTHORIZED BY LAW

o
view of Treasury Bureau in report to Insular Treasurer on Dec 1925
o
administration of property = more fitting to real estate agent ot trust company than
building and loan associaton
o
DOCTRINE: corporations possess only such express powers; the
management an dadministration of the property of the shareholders of
the corporation is not expressly authorized by law.
o
But not enough to dissolve merely to be enjoined.
Issue: WON Art. 10 (board of directors, by vote of absolute majority, is empowered to cancel shares and
to retrun to the owner the balance resulting from liquidation thereof, whenever, by reason of their
ocnduct, or for any other motive, the continuation as members of the owners of such shares is not
desirable): yes, misdemeanor, but NOT enough to dissolve.
o
By-law = patent nullity
o
Direct conflict with Sec 187 which expressly declares that board of directors DONT have the
power to force the surrender and withdrawal of unmatured stock except in case of liquidation of
the corporation or forfeiture of stock for delinquency
o
It has been called to Hogars attention by Acting insular Treasurer, but no annual meeting of
shareholders has been attene by a sufficient number to constitute a quorum, resulting tha
tproviison has not been eliminated

Existence fo this by-law is a misdeamonur, but not for dissolution mere nullity that board of
directors cannot enforce.
Issue: WON Art 61 of by-laws of Hogar that the attendance in person/proxy of shareholders owning onehalf plus one of shareholdersshall be necessary to constitute quorum for election of directors but failure
to make quorum for election of directors (directors limited to wealthy men) justifies dissolution. No.
o
Corp aw: at all elections of directors, there must be present in person or y proxy by written
authorization, owners of majority of subscribed capital stock entitled ot vote
o
1911 and 1912 = abided by rule
o
but corporation has grow since;
o
with exception of 1917 meeting, meetings have failed for lack of quorum
o
special efforts: publication of notices by letter of notification sent to every shareholder + blank
form of proxy, still no quorum
o
alternative of directors: choose to fill vacanacies in directorate by choosing suitable persons as
per Art 71 of by-laws directors shall elect from among the shareholders members to fill the
vacancies that may occur in the board of directors until the election at the general meeting.
o
Not Hogars falt shareholders fail to attend annual meetings
o
Upon failure of quorum, directorate naturally holds and continues to function until
another directorate is chosen and qualified; unless the law or the charter of a
corporation expressly provides than 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 dul qualified. Mere failure of a corporation to
elect officers does not terminate the terms of existing officers nor dissolve the
corporation.
o
Practice is valid
Issue: alleged that directors of Hogar, instead of serving w/o pay or for a nominal salary, have been
receiving large compensation from Hogar. Valid.
o
Sec 92: 5% of net profit of Hogar is distributed to directors in proportion to their attendance at
meetings of the board
o
Because of this practice, attendance at board meetings has been extraordinarily god
o
Hogar argues that such a liberal policy has had highly beneficial reulsts in obtaining intelligent
attention to affairs of corp
o
Courts can oly look into validity of measure, and nothing in Corp Law prescribes the rate of
compensation for directors of corporations. Power to fix compensation to be receied, if any, is left
to corporation, to be determined by its by-laws.
o
Such is fixed in Sec 92 of Hogars by-laws.
o
Cannot be a basis of depriving Hogar of its franchise.
Issue: in conformit with a written agreement between Mr Melian and pres of Hogar in Sec 92 of by laws
recognizing Melians rights as founder to 5% ofnet profits for pament to himself and heirs during life of
association as compensation for contributions in organization of Hogar, WON such compensation is
uncscionable. No.
o
Contract is NOT a capital offense of the corporation
o
Mere fact that compensation paid under the contract is in excessof what might be appropriate
court cannot interfere
o
Contract by Hogar with Melian does not affect Hogars legal caracter
Issue: are Art 70 ( requiring persons elected to board of directors must beholders of shares of paid up
value of P5k which shall be held as securiy may be put up in the behalf of any director by some other
holder of shares) and Art 76 (declaring directors waive their rights as shareholders to receive loans from
the association) are invalid. No.
o
Art. 70 assailed because poor shareholders daw cannot sit on board
o
Art. 76 assailed because it requires directors to renounce their right to loans and unreasonably
limits their rights as members
o
Sec 21 of Corp law expressly gives corp power to provide in its by-laws the
qualifications of directors; requirement of security from them for discharge of duties;
Art. 70 is highly prudent; Art. 76 is designed to prevent possibility of looting from
corp
Issue: WON the franchise has abused its franchise in issuing special shares No.
o
special shares as described in articles of incropration:

issued upon payment of 8% of par value in cash, or monthly dues of P10 + 20%
remaining par value to be completed by accumulation of proportionate part of profits of
corporation + at end of each quarter, holders of special shares entitled to receive in
cahs such part of net profits of corporation corresponding to amount on such date paid
to be dteremind by directors, and at end of each year, fulla mount of net profits
available for distribution corresponding to special shares + directors shall aply such part
as they deem advisable to the amortization of the subscription to capital with respect to
share snot fully paid up, and the remainder of the profits, if any, acorresponding to such
shares, shall be delivered to the holders thereof in accordance with the provision of the
by-laws
o
govt argues that special shares are not mentione in the Corp law as one of the forms of
security which may be issued by the association;
o

when special shares are outsanding, hogar accumulates to each special share, at the
end of the year, 1/10 of dividend declared and to pay the remainder of the dividend in
cash to the holders of shares

when amount paid upon any special share plus accumulated dividends amounts to par
value of share, share matures and ceases to participate in earning amount then
returned to shreholder and share cancelled

nature o special shares: advance payment shares

Sec 178 of Corp Law: payment of dues or interest may be made in advance, but the
corporation sall not allow interest on such advance payment at a greater rate than 6%
per annum nor for a longer period than one year

No interest is ever paid by Hogar in any amount for the advance payments made on
these shares BECAUSE pariticpation of special shares in the earning of Hogar sufficiently
compensates the shareholder for advance payments made b him

Final 20% of par value of ach share is not paid by shareholder out of pocket but satisfied
by applying a portion of the shareholders pariticipation in the annual earnings

Even if the Corp Law does not expressly authorize such shares, corp has implied
authority to issue them
Issue: alleged that depreciation is charged by association at 10% epr annum.
o
Hogar purchases from foreclosures of mortgages and places in its book the value of such real
estate at a fixed rate, resulting in depreciation
o
But board has power to allow some depreciation + no positive provision of law prohibits
association from writing off a reasonable amount for depreciation on its assets for purpose of
determining its real profits + art 74 of by-laws expressly authorize board of directors to
determine each year the amount to be written down upon expenses of installation and property
of corp
o
Question to adopt such by-law is embraced within power to make by-laws for
administration of corporate affairs as well as control and disposition of property
o
Legislature should provide the remedy by defining th extent to which depreciation may be
allowed by building and loan associations
Issue: WON Hogar maintains excessive reserve funds and WON the board has settled upon unlawful
policy of paying a straight annual dividend o 10% regardless of losses suffered and profits made by the
corporation and in contravention of the requirements of Sec 188 of the Corp law
o
Art 92 of by-laws: 5% per centum of net profits earned each year shall be carried over to General
Rsserve
o
Art 93: authorizes directors to carry funds to special reserve, provided annual dividedn in year in
which funds are carried to special reserve exceeds 8%
o
Policy of board to place in special reserve any balance in profit and loss account after satisfaction
of preferential charges and payment of dividend of 10% to all special and ordinary shares
o
General reserve never drawn upon for maintaining regular annual dividend, but recourse to
special reserve on 3 diff ocasionshave been made to make good amount necessary to pay
dividends
o
Corp law impliedly grants power to maintina reserves all commercial enterprises
encounter periods when earings fall below the average, and prudent manager makes
provision for such contingencies; to regard all surplus as profit is to neglect on eof the
primary canons of good business practice
o
contingent fund is merely insurance against possible loss.
o
Sec 188 of Corp Law providng thatprofits and lowsses shall be annually apportioned among the
shareholders does not mean potion cannot be carried over to reserve; profits and lossess shall be
determined by board exercise discretion of good businessman
Issue: that Hogar 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
o
ie that no attempt has been made by Hogar with respect to the use made of borrowed funds,
Hogar being cntent that security be given for each loan
o
govt alleges that in making laons for other purposes than building of residential houses, Hogar
has illegally departed from its charcter and made itself amendble to dissolution
o
no statute in this jurisdiction expressly declares that loans made by these corps be solely for
purpose of building homes; building of homes is mentioned in Sec 171 as only among several
ends which building and loan associations are designed to promote
Issue: loans made by Hogar for purposes other than building or acquiring homes have been extended in
extremely large amounts to wealthy persons and large companies.
o
in connecion with the larger of the two, available funds of Hogar were reduced to the point that
the associatin was compelled to take avantage of certain provisions of its by-laws authorizing the
postponement of payment of claims resulting from withdrawals, whereas previously the
association had alwys settled thes claims promptly from current funds delay in payment of
matured shares, but there was delay in payment of withdrawal applications
o
is it suicidal on the part of the corp to make large oans? But no fact was alleged re inadequacy of
security
o
but these large loans are only 10 out of 540 outsanding, and average of the rest are modest
enough
o
the law states no limit with respect to size of loans to be made b the association confided to
discretion of the board of directors

Issue: if corp expires or liquiates early, accumulated reserves wil go to founder and heirs and directors,
and not to ordinary holders.
o
Art 95 of by laws: funds obtained by liquidation of association shall be applied in the first place
to repayment of shares and the balance, if any, shall be distributedin accordance with the system
established for distribution of annual profits
o
Reserve fund = not a matter of judicial interference
Issue: re entities subscribing shares to Hogar for sole purpose of obtaining loans
o
Sec 173: Any person may become a stockholder in a building and loan association person =
general sense,
o
Whether or not these loans and subscriptions were properly made involves consideration of the
power of the subscribing corporations and partnerships to own stock and take loans
o
Mere motive for subscriptions is of no moment in deterining whether subscribes were competent
to make contracts
Issue: charged that in disposing of real estate, Hogar has sold some real estate on credit, transferring
title but properties are mortgaged to Hogar to secure payment of purchase price thus considered a loan
and carried as such in books of Hogar
o
Matter of bookkeeping
o
Proviisno of law involved: requiring loans to be to stockholders only
o
But in requiring that Hogar sell real estate which it acquires in connection with collection of loans
within 5 years after receiving title ot the same, the law does not prescribe hat property must be
sold ofr cash or that purchaser be a shareholder in the corporation, then such sales can be made
upon terms and conditions approved by the parties

And when Hoger takes a mortgage to secure the deferred payments, such obligation of
purchaser is not a LOAN

Or does the fact that it is carried as a loan on the books of the Corp cannot make it a
loan in law
HELD: Hogar is enjoined from administering real property not owne by it, except as may be permitted to it
by conract when a borrowing shareholder defaults in his obligation.