3) GR NO.
26649, July 13, 1927 counting the period as it was supposed to be sold already but was
PETITIONER: The Govt of the Philippine Islands
RESPONDENT: El Hogar Filipino
FACTS:
El Hogar was the first corporation organized in the Philippine
Islands under the Corporation Law (Act No. 1459, effective on April
1, 1906). El Hogar was organized as a building and loan association.
This case has seventeen causes of action, eleven of which will be
discussed here.
FIRST CAUSE OF ACTION:
LAW (AN 1459, Sec13, Subsec5): Corporations are prohibited
from holding title to real property for a period in excess of five
years.
WHAT HAPPENED: Borrowers of El Hogar funds were not able
to pay El Hogar. The security was a tract of land in San Clemente,
Tarlac. El Hogar foreclosed such property.
Nov 18, 1920 The auction sale took place and El Hogar
was the highest bidder.
Dec 27, 1920 The deed conveying the property to El Hogar
was sent to the register of deeds with the request that the
certificate of title then standing in the name of former owners be
cancelled and that a new certificate be issued in the name of El
Hogar Filipino.
May 7, 1921 It was only then that the certificate of title to
the property was received by El Hogar from the register of deeds of
Tarlac.
May 10, 1921 The board of directors adopted a resolution
authorizing agents to find a buyer for the San Clemente land, but
no offers to purchase were obtained until Jan 1926.
Jan 1926 The property was advertised for sale in El
Debate, La Vanguardia and Taliba
Mar 16, 1926 the first offer for purchase by one Alcantara
was made for P4000. Until Apr 30, 1926, Alcantara was not able to
pay thus El Hogar treated the contract with him as rescinded.
July 30, 1926 The property was finally purchased by Doa
Felipa Alberto for P6000.
GOVT OF THE PH: El Hogar violated the law for being in
possession of the property from Nov 1920 to July 1926; exceeded
the 5-year limitation. Thus quo warranto was filed (an association
which acts as a corporation).
EL HOGAR: 5-year period did not begin to run until May 7,
1921 when the register of deeds of Tarlac delivered the new
certificate of title to El Hogar pursuant to the deed by which the
property was acquired. March Apr 1926 must not be included in
rescinded through the acts of the buyer, independent of El Hogar.
SUPREME COURT: The corporation has not been shown to
have offended against the law in a manner that should entail a
forfeiture of its charter. El Hogar cannot sell the property if it has
not yet received the title. Dissolution would not be an appropriate
remedy as El Hogar appears to have rid itself of the San Clemente
property many months prior to the institution of this action.
(Discussion of Courts discretion on dissolution of the
corporation not relevant)
SECOND CAUSE OF ACTION:
LAW (AN 1459, Sec 13, Subsec 5): Every corporation has the
power to acquire real property to enable them to carryout purposes
for which the corporation was created.
WHAT HAPPENED: El Hogar owns and holds a business lot
with the structure thereon, in the financial district of the City of
Manila. At the time El Hogar acquired this 1,413 lot there stood
upon it a building, then nearly 50 years old, which was occupied in
part by the offices of an importing firm and in part by warehouse of
the same firm. El Hogar caused it to be demolished and a new 5-
floor building was completed. Only 324 sqm of the office space was
used for El Hogars own business and the remaining 3,175sqm was
rented out to other persons and entities.
GOVT: The acquisition, construction and subsequent renting
of the building in great part to third persons, are ultra vires acts on
the part of the corporation, and the proper penalty to be imposed is
that of dissolution.
SUPREME COURT: No legitimate principle can be 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. A
corporation 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.
THIRD CAUSE OF ACTION:
LAW: Corporations must not engage in activities foreign to
the purpose for which the corporation was created and not
reasonably necessary to its legitimate ends.
WHAT HAPPENED:
(a) El Hogar administers the renting out of offices to the public.
(b) Administration and management of properties belonging to
delinquent shareholders of the association. The association has
accustomed to take over and manage the mortgaged property for
the purpose of applying the income to the obligations of the debtor
party.
(c) El Hogar has undertaken the management of some parcels of
improved real estate situated in Manila not under mortgaged to it,
but owned by shareholders and has held itself out by
advertisement as prepared to do so. The management of the real
estates by nonborrowing shareholders administered by El Hogar
consist in renting out of the same, the payment of real estate taxes
and insurance for the repairs for upkeep to be made, and collecting
rents due from tenants.
SUPREME COURT:
(a) If El Hogar had the power to acquire the lot, construct the
edifice and hold it beneficially, the beneficial administration by it of
such parts of the buildings as are let to others must necessarily be
lawful.
(b) 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 association.
(c) The practice described is in our opinion unauthorized by law.
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. It is of
general rule that corporations possess only such express powers as
are actually conferred and such implied powers as are reasonably
necessary to the exercise of the 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. But it
does not result that the dissolution of the corporation is in order, it
will merely be enjoined from further activities of this sort.
SEVENTH CAUSE OF ACTION
WHAT HAPPENED: Mr. Antonio Melian, organizer of El Hogar
Filipino, authorized the association to make a contract with him
with regard to the services to be rendered by him. He is to lend to
the corporation, without interest P6000 for the purpose of meeting
the expense of rent, office supplies, etcetera until such times as the
association has sufficient funds of its own with which to return this
loan. A provision recognizing the rights of Mr. Melian, as founder to
5% 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.
GOVT: 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 the contract was beyond the powers of the association;
nor is it alleged that it is vitiated by fraud of any kind in its
procurement.
SUPREME COURT: The contention is without merit. 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
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.
NINTH CAUSE OF ACTION:
LAW:
WHAT HAPPENED: El Hogar has issued special shares. In
the Art. of Inc., Special shares shall be issued upon the payment of
80% of their par value in cash, or in monthly dues of P10. Xxx
GOVT: special shares is unlawful for it was never
mentioned in the Corporation Law as one of the forms of security
which may be issued by an association. The issuances of these
shares is alleged to be illegal and inconsistent with the plan and
purpose of building and loan associations; and in particular, it is
that they are, in the main, held by well-todo people purely for
purposes of investment and not by wage earners for accumulating
their modest savings for the building of homes. By issuing this, the
CIR should make them liable for income tax.
SUPREME COURT: 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 as what is generally known
in American jurisdictions as advance payment shares. If close
attention be paid to the language used in the last sentence of sec
178 of the Corporation Law, it will be found that special shares were
evidently created for the purpose of meeting the conditions caused
by the prepayment of dues that is there permitted. Even assuming
that the statute has not expressly authorized such shares, the
association has implied authority to issue them.
TENTH CAUSE OF ACTION:
WHAT HAPPENED: El Hogar places real estates purchased in
its inventory at actual costs and until it is sold, its book value is
depreciated at the rate fixed by the directors. The book value is not
followed in making sales but sales are made for the best prices
obtainable, whether greater or lesser than the book value.
 GOVT: El Hogar is depreciating its real properties acquired
at its sales at the excessive rate of 10% per annum.
SUPREME COURT: No law prohibiting the association from
writing off a reasonable amount for depreciation on its assets for
the purpose of determining its real profits. The Legislature must be
the one defining the extent to which depreciation may be allowed
by building and loans association. Absent such law, the Court
cannot undertake to control the discretion of the association. Thus,
the cause of action is not well founded.
ELEVENTH/TWELFTH CAUSE OF ACTION:
GOVT: El Hogar maintains excessive reserve funds and the
board of directors has settled upon the unlawful policy of paying a
straight annual dividend of 10%, regardless of losses suffered and
profits made, in contravention of Sec 188 of the Corporation Law
SUPREME COURT: It is true that the Corp Code deos not
provide the power to declare regular dividends of 10%, but the
Court thinks that it is 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.
El Hogar also has power to maintain the
reserves criticized and if it be supposed that the reserves have
become excessive, the remedy is in the hands of the Legislature.
THIRTEENTH CAUSE OF ACTION:
WHAT HAPPENED: El Hogar has made loans which, to the
knowledge of El Hogars officers, were intended to be used by the
borrowers for purposes other than building of houses.
GOVT: In making loans for other purposes than the building
of residential houses, El Hogar has illegally departed from its
charter and made itself amenable to the penalty of dissolution
SUPREME COURT: No substantial support of Governments
contention from the Philippine Courts nor from the American
Courts. There is no statute expressly declaring that loans may be
made by El Hogar solely for the purposes of building homes.
SIXTEENTH CAUSE OF ACTION:
LAW: Sec 173 (Corporation Law): Any person may become a
stock holder in building and loan associations
WHAT HAPPENED: Various loans have been made by El
Hogar to corporations and partnerships, and that these entities
have in some instances subscribed to shares in El Hogar for the
sole purpose of obtaining such loans.
SUPREME COURT: The word person appears to be used in
its general sense, and there is nothing in the context to indicate
that the expression is used in the restricted sense of natural
persons. Nothing in the allegation would justify the Court in
granting the dissolution based on this cause of action.
SEVENTEENTH CAUSE OF ACTION:
GOVT: Properties are mortgaged to El Hogar for the security
of loans. El Hogar, on some occasion, sold the properties even if the
loans are still outstanding. The buyers of the said properties are not
shareholders nor members of El Hogar. The prices of the properties
are carried in the books still as loans. Corporation Law requires that
loans are to be made to stockholders only.
SUPREME COURT: The contention of the government is
untenable. The complaint is based upon a mere technicality of
bookkeeping. 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.
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 cost.