1.
Malabang vs Benito
FACTS: Municipality of Balabagan was once part of the Municipality of Malabang
before it was created into a separate municipality thru an executive order.
The Municipality Malabang filed a suit against the Municipality of Balabagan for
having been created under an invalid EO 386 and to restrain the respondent
municipal officials from performing the functions of their respective offices.
Petitioner relied on the ruling of the Pelaez case that Sec. 68 of the
Administrative Code is unconstitutional (a) because it constitutes an undue
delegation of legislative power and (b) because it offends against Section 10 (1)
of Article VII of the Constitution, which limits the President's power over local
governments to mere supervision.
Section 68 of the Revised Administrative Code, approved on March 10, 1917,
must be deemed repealed by the subsequent adoption of the Constitution, in
1935, which is utterly incompatible and inconsistent with said statutory
enactment. The Respondents on the other hand argue that the Mun.
of Balabagan is at least a de facto corporation for having been organized under
color of a statute before this was declared unconstitutional, its officers having
been either elected or appointed, and the municipality itself having discharged
its corporate functions for the past five years preceding the institution of this
action. It is contended that as a de facto corporation, its existence cannot be
collaterally attacked, although it may be inquired into directly in an action for quo
warranto at the instance of the State and not of an individual like the petitioner
Balindong.
The method of challenging the existence of a municipal corporation is reserved to
the State in a proceeding for quo warranto or other direct proceeding. But the
rule disallowing collateral attacks applies only where the municipal corporation is
at least a de facto corporation. For where it is neither a corporation de jure nor de
facto, but a nullity, the rule is that its existence may be questioned collaterally or
directly in any action or proceeding by any one whose rights or interests are
affected thereby, including the citizens of the territory incorporated unless they
are estopped by their conduct from doing so.
ISSUE: W/O the municipality of Balabagan is a de facto corporation.
RULING: No, because there is no other valid statute to give color of authority to
its creation when EO 386 was subsequently declared as unconstitutional.
The color of authority requisite to the organization of a de facto municipal
corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either:
(a)been upheld for a time by the courts or
(b) not yet been declared void; provided that a warrant for its creation can be
found in some other valid law or in the recognition of its potential existence by
the general laws or constitution of the state.
In the case at bar, there is no other law that could give color of authority to the
validity of the existence of the municpality of Balabagan when EO 386 was later
on invalidated. Hence, such municipality is not a de factor corporation.
2. Bergeron v Hobbs See Campos pages 94-98
Topic and Relevant Provision: Formation and Organization of Corporations
Substantial or Colorable Compliance
FACTS
The defendants, under the name of Bayfield Agricultural Association, employed
several persons to perform labor in improving their grounds, and in erecting
fences and buildings. Time checks given by the defendants to such laborers, for
such labor, were assigned to the plaintiff, who brings this action to recover their
amount, alleging that the defendants were a partnership. Defendants alleged
that they were members of a corporation, and denied that they were co-partners,
or liable as such.
It appeared upon trial that the articles of organization of the defendants as the
Bayfield County Agricultural Association, and a certificate showing the election of
officers, had been recorded in the office of the register of deeds of Bayfield, but
were not on file there. The same had been deposited, with instruction to record
and return them, which had been complied with. Lower court held for plaintiff,
hence this appeal.
ISSUE
1. WON the mere recording of the articles of incorporation, with the certificate of
the election of officers, without the intention or fact or the papers themselves,
remaining in the office, a sufficient compliance with the statute, so that the
organization of the corporation became complete, as upon a proper filing of the
papers themselves.
2. WON if issue #1 is in the negative, the defendants can be considered as
corporation de facto, or are they acting as a partnership.
HELD
1. NO. The same is not sufficient compliance.
2. NO. They are not a corporation de facto.
Dispositive: Decision affirmed.
RATIO
1. The statute involved her provides that the filing of the proper papers in the
proper office is made a condition precedent to the vesting of corporate powers. A
literal filing of the papers is necessary, because it is so written in the law. The
term filing and the verb to file include the idea that the paper is to remain in
its proper order on file in the office. A paper is said to be filed when it is delivered
to the proper officer, and by him received, to be kept on file.
The defendants have not observed this, and as such, had not secured corporate
powers.
2. As a general rule, where an attempt to organize a corporation fails, by
omission of some substantial step or proceeding required by the statute, its
members or stockholders are liable as partners for its acts and contracts. The
infirmity of the defendants contention is in the assumption that they are, de
facto, a corporation. In order to secure this immunity from inquiry into its right to
be a corporation in a collateral action, its action, as a corporation, must be under
a color, at least, of right. It is immaterial that they have carried on business in
under the supposed authority to act as a body corporate in entire good faith. If
they had not the color of legal right, they have obtained no immunity from
individual liability for the debts of the supposed corporation.
Until the articles of incorporation are filed in the office of the register of deeds of
the country, there is no color of legal right to act as a corporation. So long as an
act, required as condition precedent, remains undone, no immunity from
individual liability is secured.
Marshall, J. (DISSENTING)
Agrees in so far as issue #1, but dissents on issue #2
Where the circumstances are such that a corporation might exist, and where the
party seeking to charge the members individually has dealt with them as a
corporation, he is estopped from setting up the fact that they are not a
corporation de jure, in order to charge them personally. (Corporation by estoppel)
Unless all the conditions precedent to the existence of a corporation are complied
with, personal liability of the corporation will exist, though the rule does not apply
if the organization be a corporation de facto. To hold the majoritys opinion in
issue #2 is to say in effect, that it is not sufficient to enable such members to
escape personal liability to show that the corporation is a de facto corporation;
that nothing short of corporation de jure will do to allow them to negate personal
liability.
Also, that a person who contracts with a de facto corporation, the members of
the latter and such person believing, in good faith, in its legal existence, such
members cannot be held personally liable.
As a corporation de facto, then, only the State can challenge the legality of the
exercise of the corporate powers; and that private persons who have contracted
with a de facto corporation is estopped from questioning its existence; the
sovereign power only can raise that question.
3. Harill v Davis see Campos, pages 98-103
Doctrine:
Parties who actively engage in business for profit under the name and pretense
of a corporation which they know neither exists nor has any color of existence
may not escape individual liability because strangers are led by their pretense to
contract with their pretended entity as a corporation.
Color of legal organization as a corporation, such as a charter or the filing of
articles of incorporation under some law, and user of the supposed corporate
franchise in good faith, are indispensable to the existence of a de facto
corporation which will exempt from individual liability those who actively conduct
it.
Neither the execution of articles which are not filed, nor statements nor beliefs of
the promoters that they are a corporation, nor the treatment of themselves by
themselves and by those who deal with them as a corporation, nor all these
together, will exempt those who actively conduct the business under the
assumed name of such a nonexistent corporation from individual liability for the
debts they incur.
Facts: The four defendants (Walter B. Mann, Frank Davis, Robert S. Davis, and
James G. Knight) agreed in April or June, 1902, to take specified shares in a
$10,000 enterprise for the purpose of building a cotton gin and carrying on the
business of buying, ginning, and selling cotton, and to organize a corporation for
this purpose. They transacted a business with the plaintiff consisting of the
purchase of lumber, materials, and labor for their buildings and of dealing in
cotton with it which amounted to several tens of thousands of dollars, and they
remained indebted to it over $5,000, of which $4,700.
On September 3, 1902, three of the defendants met and signed articles of
incorporation as the "Coweta Cotton & Milling Company "and a declaration of the
purpose of the incorporation, which the statutes required to be verified by the
signers and to be filed with the clerk of the Court of Appeals and with the clerk of
the judicial district in which the contemplated corporation was to do business.
This declaration was verified by Mann on November 10, 1902, and by Frank M.
Davis on December 10, 1902, and it was filed with the clerk of the Court of
Appeals on December 22, 1902, and was never filed elsewhere. Frank M. Davis,
as general manager of the investment company, treated the milling company as
a corporation all the time during which this indebtedness was contracted, and
never charged any of it to himself or his associates.
The Western Investment Company brought this action for a balance due It upon
an account for lumber and materials sold, cotton handled, and services rendered
to Walter B. Mann, Frank Davis, Robert S. Davis, and James G. Knight, as partners
doing business under the firm name the "Coweta Cotton & Milling Company. The
defendants denied the partnership and their liability, and averred that the
indebtedness in question was that of the milling company and that that company
was a corporation.
Issue/s: Was there colorable compliance enough to give the supposed
corporation at least the status of a de facto corporation?
Held: There was none. The defendants cannot escape individual liability on the
ground that the Coweta Cotton & Milling Company was a corporation de facto
when that portion of the plaintiff's claim was incurred, because it then had no
color of incorporation, and they knew it and yet, actively used its name to incur
the obligation.
The general rule is that parties who associate themselves together and actively
engage in business for profit under any name are liable as partners for the debts
they incur under that name. It is an exception to this rule that such associates
may escape individual liability for such debts by a compliance with incorporation
laws or by areal attempt to comply with them which gives the color of a legal
corporation, and by the user of the franchise of such a corporation in the honest
belief that it is duly incorporated. When the fact appears, as it does in the case at
bar, by indisputable evidence that parties associated and knowingly incurred
liabilities under a given name, the legal presumption is that they are governed by
the general rule, and the burden is upon them to prove that they fall under some
exception to it.
For the exception to apply, under the general law of Arkansas in force in the
Indian Territory, the filing of articles of incorporation with the clerk of the Court of
Appeals was a sine qua non of any color of a legal corporation. Without that there
was not, and there could not be, an apparent corporation or the color of a
corporation, Agreements to form one, statements that there was one, signed
articles of association to make one, acts as one, created no color of incorporation,
because there could be no incorporation or color of it under the law until the
articles were filed. The defendants never became a corporation de facto prior to
December 22, 1902, that they never became a corporation de jure, that the
indebtedness here in question was not incurred under any promise or assurance
of the defendants as promoters that it should become the obligation of a
corporation to be formed, that a large part of it was incurred in the conduct of a
general commercial business, and not to prepare for the commencement of such
a business or for the organization of a corporation.
4. Hall v Piccio
Post under case digests, Commercial Law at Tuesday, February 07, 2012 Posted
by Schizophrenic Mind
Facts: Petitioners Arnold Hall, Bradley Hall and Private Respondents Fred Brown,
Emma Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged
the articles of incorporation of the Far Eastern Lumber and Commercial Co., Inc.
organized to engage in a general lumber business to carry on as general
contractors, operators and managers. Attached to the articles was an affidavit of
the treasurer stating that 23, 428 shares of stock had been subscribed and fully
paid with certain properties transferred to the corporation.
Immediately after the execution of the articles of incorporation, the corporation
proceeded to do business with the adoption of by-laws and the election of its
officers.
Then, the articles of incorporation were filed in SEC for the issuance of the
corresponding certificate of incorporation.
Pending action on the articles of incorporation, Fred Brown, Emma Brown, Hipolita
Chapman and Ceferino Abella filed a civil case against the Halls alleging among
other things that Far Eastern Lumber and Commercial Co, was an unregistered
partnership and that they wished to have it dissolved because of bitter dissension
among the members, mismanagement and fraud by the managers and heavy
financial losses.
The Halls filed a Motion to Dismiss contesting the courts jurisdiction and the
sufficiency of the cause of action but Judge Piccio ordered the dissolution of the
company and appointed a receiver.
Issues:
(1) Whether or not the court had jurisdiction to decree the dissolution of the
company because it being a de facto corporation, dissolution may only be
ordered in a quo warranto proceeding in accordance with Section 19.
(2) Inasmuch as the Browns had signed the articles of incorporation, whether or
not they are estopped from claiming that it is not a corporation but only a
partnership.
Held:
(1) YES. The court had jurisdiction but Section 19 does not apply.
First, not having obtained the certificate of incorporation, the Far Eastern Lumber
and Commercial Co. even its stockholders may not probably claim in good
faith to be a corporation.
The immunity of collateral attack is granted to corporations claiming in good
faith to be corporation under this act. Such a claim is compatible with the
existence of errors and irregularities but not with a total or substantial disregard
of the law. Unless there has been an evident attempt to comply with the law, the
claim to be a corporation under this act could not be made in good faith.
Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a
private suit for its dissolution between stockholders, without the intervention of
the state.
(2) NO. The Browns are not estopped. Because the SEC has not yet issued the
corresponding certificate of incorporation, all of them know or ought to know that
the personality of a corporation begins to exist only from the moment such
certificate is issued and not before.
The complaining associates have not represented to the others that they were
incorporated any more than the latter had made similar representations to them.
And as nobody was led to believe anything to his prejudice and damage, the
principle of estoppel does not apply. This is not an instance requiring the
enforcement of contracts with the corporation through the rule of estoppel.
5. Empire Manufacturing Company v Stuart see Campos, pages 108-
109
EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527; 1881)
Company was sued on a promissory note. Its defense was that at the
time of its issuance, it was defectively organized and therefore could not be sued
as such.
The Corporation cannot repudiate the transaction or evade responsibility
when sued thereon by setting up its own mistake affecting the original
organization.
6. Lowell-Woodward Hardware Company v Woods, et al Campos, pp
109-112
LOWELL-WOODWARD vs. WOODS (104 Kan. 729; 1919)
Corporation sued a partnership on a promissory note. The latter as
defense alleged that the plaintiff was not a corporation.
One who enters into a contract with a party described therein as a
corporation is precluded, in an action brought thereon by such party under the
same designation, from denying its corporate existence.
7. Asia Banking v Standard Products, GR 22106, 11 Sept 1924, 46 Phil
145 FULL TEXT
OSTRAND, J.:
This action is brought to recover the sum of P24,736.47, the balance due on the
following promissory note:
P37,757.22
MANILA, P. I., Nov. 28, 1921.
MANILA, P. I., Nov. 28, 1921.
On demand, after date we promise to pay to the Asia Banking
Corporation, or order, the sum of thirty-seven thousand seven hundred
fifty-seven and 22/100 pesos at their office in Manila, for value received,
together with interest at the rate of ten per cent per annum.
No. ________ Due __________
THE STANDARD PRODUCTS CO., INC.
By (Sgd.) GEORGE H. SEAVER
By President
The court below rendered judgment in favor of the plaintiff for the sum
demanded in the complaint, with interest on the sum of P24,147.34 from
November 1, 1923, at the rate of 10 per cent per annum, and the costs. From this
judgment the defendant appeals to this court.
At the trial of the case the plaintiff failed to prove affirmatively the corporate
existence of the parties and the appellant insists that under these circumstances
the court erred in finding that the parties were corporations with juridical
personality and assigns same as reversible error.
There is no merit whatever in the appellant's contention. The general rule is that
in the absence of fraud a person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit its legal existence
as a corporate body is thereby estopped to deny its corporate existence in any
action leading out of or involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the contract or other dealing
relied on as an estoppel and this applies to foreign as well as to domestic
corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14
Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by
making a promissory note in its favor and making partial payments on the same
is therefore estopped to deny said plaintiff's corporate existence. It is, of course,
also estopped from denying its own corporate existence. Under these
circumstances it was unnecessary for the plaintiff to present other evidence of
the corporate existence of either of the parties. It may be noted that there is no
evidence showing circumstances taking the case out of the rules stated.
The judgment appealed from is affirmed, with the costs against the appellant. So
ordered.
8. Salvatierra v Garlitos, et al, GR L-11442, 23 May 1958, 103 Phil 757
103 Phil 757 Business Organization Corporation Law Separate and Distinct
Personality When Not Applicable
In 1954, Manuela Vda. De Salvatierra entered into a lease contract with Philippine
Fibers Producers Co., Inc. (PFPC). PFPC was represented by its president
Segundino Refuerzo. It was agreed that Manuela shall lease her land to PFPC in
exchange of rental payments plus shares from the sales of crops. However, PFPC
failed to comply with its obligations and so in 1955, Manuela sued PFPC and she
won. An order was issued by Judge Lorenzo Garlitos of CFI Leyte ordering the
execution of the judgment against Refuerzos property (there being no property
under PFPC). Refuerzo moved for reconsideration on the ground that he should
not be held personally liable because he merely signed the lease contract in his
official capacity as president of PFPC. Garlitos granted Refuerzos motion.

Manuela assailed the decision of the judge on the ground that she sued PFPC
without impleading Refuerzo because she initially believed that PFPC was a
legitimate corporation. However, during trial, she found out that PFPC was not
actually registered with the Securities and Exchange Commission (SEC) hence
Refuerzo should be personally liable.
ISSUE: Whether or not Manuela is correct.
HELD: Yes. It is true that as a general rule, the corporation has a personality
separate and distinct from its incorporators and as such the incorporators cannot
be held personally liable for the obligations of the corporation. However, this
doctrine is not applicable to unincorporated associations. The reason behind this
doctrine is obvious-since an organization which before the law is non-existent has
no personality and would be incompetent to act and appropriate for itself the
powers and attribute of a corporation as provided by law; it cannot create agents
or confer authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at their own
risk. In this case, Refuerzo was the moving spirit behind PFPC. As such, his
liability cannot be limited or restricted that imposed upon [would-be] corporate
shareholders. In acting on behalf of a corporation which he knew to be
unregistered, he assumed the risk of reaping the consequential damages or
resultant rights, if any, arising out of such transaction.
MANUELA T. VDA. DE SALVATIERRA vs. GARLITOS
FACTS: Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of
land located at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said
landholder entered into a contract of lease with the Philippine Fibers Producers
Co., Inc., allegedly a corporation "duly organized and existing under the laws of
the Philippines, domiciled at Burauen, Leyte, Philippines, and with business
address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the
President". For failure of the corporation to comply with the terms and conditions
agreed upon with Manuela, plaintiff Alanuela T. Vda, de Salvatierra filed with the
CFI of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and
Segundino Q. Refuerzo, for accounting, rescission and damages. The lower Court
rendered judgment in favor of plaintiff. No appeal therefrom having been
perfected within the reglementary period, the Court, upon motion of plaintiff,
issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused
the attachment of 3 parcels of land registered in the name of Segundino
Refuerzo. Defendant filed a motion claiming that the decision rendered in said
Civil Case was null and void with respect to him, there being no allegation in the
complaint pointing to his personal liability for while it was stated therein that he
was a signatory to the lease contract, he did so in his capacity as president of the
corporation and thus prayed that an order be issued limiting such liability to
defendant Corporation. The Court a quo then granted the same and ordered the
Provincial Sheriff of Leyte to release all properties belonging to the movant that
might have already been attached. As plaintiff's petition for relief from said order
was denied, hence this instant action of Manuela asserting that the trial Judge in
issuing the order complained of acted with grave abuse of discretion and prayed
that same be declared a nullity. She contended that her failure to specify
defendant's personal liability was due to the fact that all the time she was under
the impression that the Philippine Fibers Producers Co., Inc., represented by
Refuerzo was a duly registered corporation as appearing in the contract, but a
subsequent inquiry from the SEC yielded otherwise.
ISSUE: Whether or not Segundino Q. Refuerzo in his capacity as president of the
corporation shall be personally liable for the contract of lease entered into.
RULING: While as a general rule a person who has contracted or dealt with an
association in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such transaction or
dealing, yet this doctrine may not be held to be applicable where fraud takes a
part in the said transaction. In the instant case, on plaintiff's charge that she was
unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical
personality, defendant Refuerzo gave no confirmation or denial and the
circumstances surrounding the execution of the contract lead to the inescapable
conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe
that such corporation was duly organized in accordance with law.
There can be no question that a corporation with registered has a juridical
personality separate and distinct from its component members or stockholders
and officers such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president and conversely,
a stockholder or member cannot be held personally liable for any financial
obligation be, the corporation in excess of his unpaid subscription. But this rule is
understood to refer merely to registered corporations and cannot be made
applicable to the liability of members of an unincorporated association. The
reason behind this doctrine is obvious-since an organization which before the law
is non-existent has no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a corporation as provided by
law; it cannot create agents or confer authority on another to act in its behalf;
thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations unregistered, he assumed the risk of reaping the consequential damages or
and comes personally liable for contracts entered into or for other acts performed resultant rights, if any, arising out of such transaction.
as such, agent. Considering that defendant Refuerzo, as president of the
unregistered corporation Philippine Fibers Producers Co., Inc., was the moving
spirit behind the consummation of the lease agreement by acting as its
representative, his liability cannot be limited or restricted that imposed upon
corporate shareholders. In acting on behalf of a corporation which he knew to be