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PHILIPS EXPORT VS. COURT OF APPEALS- Corporate Trade Same; same; SEC jurisdiction.

Findings of fact of quasi-judicial


Name agencies, like the SEC, are generally accorded respect and even finality
by this Court, if supported by substantial evidence, in recognition of their
A corporations right to use its corporate and trade name is a property expertise on the specific matters under their consideration, more so if
right, a right in rem, which it may assert and protect against the whole the same has been upheld by the appellate court, as in this case.
world.
JARDELEZA, J.:
FACTS:
Philips Export B.V. (PEBV) filed with the SEC for the cancellation of the FACTS: The petitioner was first organized under the name Royal
word Philips the corporate name of Standard Philips Corporation in Savings Bank and started its operations in 1971. However, due to
view of its prior registration with the Bureau of Patents and the SEC. liquidity problems, it was placed under receivership on where GSIS
However, Standard Philips refused to amend its Articles of Incorporation acquired ownership over it. To improve its marketability, it applied to the
so PEBV filed with the SEC a petition for the issuance of a Writ of SEC an application to change its corporate name to GSIS Family Bank,
Preliminary Injunction, however this was denied ruling that it can only be a Thrift Bank. same as with BSP and DTI. The two latter entities
done when the corporate names are identical and they have at least 2 approved the application and petitioner started its operation with its new
words different. This was affirmed by the SEC en banc and the Court of name as per DTI Certificate of Registration and Monetary Board Circular
Appeals thus the case at bar. Approval. On the other hand, the respondent started using its name BPI
Family Savings Bank in the year 1985 upon merger of BPI and Family
ISSUE: Bank and Trust Company. Since its incorporation, the bank has been
Whether or not Standard Philips can be enjoined from using Philips in commonly known as Family Bank. BPI Family Savings Bank then
its corporate name registered with the Bureau of Domestic Trade the trade or business
name BPI Family Bank, and acquired a reputation and goodwill under
RULING: YES the name.
A corporations right to use its corporate and trade name is a property Upon being informed that the petitioner applied for the use of
right, a right in rem, which it may assert and protect against the whole Family Bank as its corporate name, the respondent filed a petition
world. According to Sec. 18 of the Corporation Code, no corporate name before the SEC to disallow or prevent the registration of the name GSIS
may be allowed if the proposed name is identical or deceptively Family Bank or any other corporate name with the words Family Bank
confusingly similar to that of any existing corporation or to any other in it. The respondent claimed exclusive ownership with the said name
name already protected by law or is patently deceptive, confusing or and it will create and is already creating confusion on the part of the
contrary to existing law. public between the two banking institutions.
The SEC CRMD ruled in favor of the respondent holding that it acquired
For the prohibition to apply, 2 requisites must be present: prior right over the corporate name arising from its long and nationwide
(1) the complainant corporation must have acquired a prior right over the use of the said name. Upon appeal, the CA affirmed the decision of the
use of such corporate name and SEC. It further ruled that the approvals by the BSP and by the DTI of
(2) the proposed name is either identical or deceptively or confusingly petitioners application to use the name GSIS Family Bank do not
similar to that of any existing corporation or to any other name already constitute authority for its lawful and valid use. It held that the SEC has
protected by law or patently deceptive, confusing or contrary to existing absolute jurisdiction, supervision and control over all corporations.
law. Hence, this appeal by petitioner.
ISSUE: Whether or not the petitioner is entitled to the change and use
With regard to the 1st requisite, PEBV adopted the name Philips part of its corporate name GSIS Family Bank, a Thrift Bank.
of its name 26 years before Standard Philips. As regards the 2nd, the HELD: NEGATIVE. The Corporation Code provides the rule on
test for the existence of confusing similarity is whether the similarity is corporate name and the two main requisites for the exclusive use of
such as to mislead a person using ordinary care and discrimination. corporate name are present in this case in favor of the respondent bank.
Standard Philips only contains one word, Standard, different from that The said bank has successfully established prior right over the name.
of PEBV. The 2 companies products are also the same, or cover the Family Bank. Upon its incorporation in 1969, it is already named as
same line of products. Although PEBV primarily deals with electrical Family Savings Bank and later on changed to BPI Family Savings Bank
products, it has also shipped to its subsidiaries machines and parts I 1985 whereas the petitioner was incorporated as GSIS Family Bank-
which fall under the classification of chains, rollers, belts, bearings and A Thrift Bank 17 years after, or only in 2002. The Court, applying the
cutting saw, the goods which Standard Philips also produce. Also, priority rule, ruled that respondent has the prior right over the use of the
among Standard Philips primary purposes are to buy, sell trade x x x corporate name.
electrical wiring devices, electrical component, electrical supplies. Given The second requisite likewise obtains on two points: the
these, there is nothing to prevent Standard Philips from dealing in the proposed name is (a) identical or (b) deceptive or confusingly similar to
same line of business of electrical devices. The use of Philips by that of any existing corporation or to any other name already protected
Standard Philips tends to show its intention to ride on the popularity and by law. Section 3 of the Revised Guidelines in the Approval of Corporate
established goodwill of PEBV. or Partnership Name states that if there be identical, misleading or
confusingly similar name to one already registered by another
GR No. 175278 September 23, 2015 corporation or partnership with the SEC, the proposed name must
GSIS FAMILY BANK -THRIFT BANK [Formerly Inc.], Comsavings contain at least one distinctive word different from the name of the
Bank v BPI FAMILY BANK company already registered.
In this case, the mere adding of the words GSIS and Thrift
Commercial Law; Corporation Law; Coporate Name. Section 18. does not satisfy the requirements provided. GSIS is merely an acronym
Corporate name. No corporate name may be allowed by the Securities of the proper name for which the petitioner is identified and the word
and Exchange Commission if the proposed name is identical or thrift merely indicates a classification or kind of bank the petitioner is.
deceptively or confusingly similar to that of any existing corporation or Such adding of the word would not create much distinction simply
to any other name already protected by law or is patently deceptive, because both entities are involved in the banking business. The second
confusing or contrary to existing laws. When a change in the corporate point likewise exists. In determining the existence of confusing similarity
name is approved, the Commission shall issue an amended certificate in corporate names, the test is whether the similarity is such as to
of incorporation under the amended name. mislead a person using ordinary care and discrimination. And even
without such proof of actual confusion between the two corporate
Same; same; same.To fall within the prohibition of the law on the right names, it suffices that confusion is probable or likely to occur.
to the exclusive use of a corporate name, two requisites must be proven, Respondent has proved confusion not just on their employees but even
namely:(1)that the complainant corporation acquired a prior right over on the public of the change of name of the petitioner and its connection
the use of such corporate name; and (2) the proposed name is either with the respondent bank. Furthermore, in contrast to the allegation of
(a)identical or (b) deceptive or confusingly similar to that of any existing the petitioner, Family, as used in respondent's corporate name, is not
corporation or to any other name already protected by law; or (c) patently generic. It cannot be separated from the word bank.
deceptive, confusing or contrary to existing law. SEC decisions are given much accord by this Court especially
if it is affirmed by the CA, as in this case. The SEC is the government
entity fully accorded with absolute jurisdiction as to the administration or
management of corporations in the country. It has the duty to prevent injunction against PAIC Savings and Mortgage Bank +
any confusion on the corporate name not just for the sake of this entities supplemental complaint to include defendants (sheriffs)
but more so for the protection of the public. There is a correct application - Feb 1981: PC Javier and Sons applied with First Summa Savings
of Section 18 of the Corporation Code by the SEC. the DTI AND BSP and Mortgage Bank later renamed PAIC Savings a loan
decisions granting petitioners application must bow down to SECs accommodation under Industrial Guarantee Loan Fund (P1.5M)
decision. Hence, the SC denied the petition. o March 1981: Javier was advised that loan application was
approved and same to be forwarded to Central Bank for
LYCEUM OF THE PHILS. V. CA processing and release
219 SCRA 610 o CB released loan to PAIC in two tranches of P750k each
FACTS: released to Javier Corp, but from second tranche release,
1. Petitioner had sometime commenced before in the SEC a complaint P250k was deducted and deposited in name of Javier Corp
against Lyceum of Baguio, to require it to change its corporate name under time deposit
and to adopt another name not similar or identical with that of petitioner. o Javier Corp claims loan releases were delayed, P250k was
SEC decided in favor of petitioner. Lyceum of Baguio filed petition for deducted from IGLF loan and placed under time deposit +
certiorari but was denied for they were never allowed to withdraw the proceeds of the
lack of merit. itme deposit because PAIC intended this time deposit as
2. Armed with the resolution of the Court, petitioner instituted before the automatic payments on accrued principal and interest due
SEC to compel private respondents, which are also educational on loan
institutions, to delete word Lyceum from their corporate names and o PAIC clais only final proceeds of the loan was delayed,
permanently to enjoin them from using such as part of their respective because of shortfall in collateral cover of Javier Corps loan
names. second tranche was then relased after firm commitment
3. Hearing officer sustained the claim of petitioner and held that the word by Javier Corp to cover collateral deficiency through
Lyceum was capable of appropriation and that petitioner had acquired opening time deposit using portion of loan proceeds
an enforceable right to the use of that word. (P250k) and in compliance with their commitment to submit
4. In an appeal, the decision was reversed by the SEC En Banc. They additional security and open time deposit, Javier executed
held that the word Lyceum to have become identified with petitioner as chattel mortgage over some machineries in favor of PIAC
to render use thereof of other institutions as productive of consfusion + when Javier Corp defaulted in payment of its loan, PAIC
about the identity of the schools concerned in the mind of the general sent demand letter; sent a second, informing foreclosure;
public. finally initiated extrajudicial foreclosure of real estate
5. Petitioner went to appeal with the CA but the latter just affirmed the mortgage and accordingly auction sale was executed by
decision of the SEC En Banc. sheriffs
HELD: o Instant complaint to forestall extrajudicial foreclosure of
Under the corporation code, no corporate name may be allowed by the sale of piece of land = temporarily restrained by RTC
SEC if the proposed name is identical or deceptively or confusingly o RTC: declared First Summa nd PAIC as one and the same
similar to that of any existing corporation or to any other name already + Javier Corp liable to bank for unpaid balance of loans +
protected by law or is patently deceptive, confusing or contrary to extrajudicial foreclosure justified because loans were due
existing laws. The policy behind this provision is to avoid fraud upon the and demandable when foreclosure proceedings
public, which would have the occasion to deal with the entity concerned, commenced in April 1984, hence this appeal by certiorai.
the evasion of legal obligations and duties, and the reduction of - Issue: WON First Summa Savings and Mortgage Bank and PAIC
difficulties of administration and supervision over corporations. Savings are one and the same entity; whether their obligation is
The corporate names of private respondents are not identical or already due and demandable at the time commencement of
deceptively or confusingly similar to that of petitioners. Confusion and extrajudicial foreclosure took place.
deception has been precluded by the appending of geographic names o Is Javier corp legally justified in withholding amortized
to the word Lyceum. Furthermore, the word Lyceum has become payments to respondent bank until they have been properly
associated in time with schools and other institutions providing public notified of change in corporate name? (claim never having
lectures, concerts, and public discussions. Thus, it generally refers to a received formal notice of alleged change of name + first
school or an institution of learning. notice of change of name was when bank presented
Petitioner claims that the word has acquired a secondary meaning in witness Michael Caguioa on April 1990, where he
relation to petitioner with the result that the word, although originally presented SEC Certificate of Filing Amended Articles of
generic, has become appropriable by petitioner to the exclusion of other Incorporation of respondent bank)? NOPE.
institutions. There exists no requirement under law or
The doctrine of secondary meaning is a principle used in trademark law regulation ordering a bank that changes its
but has been extended to corporate names since the right to use a corporate name to formally notify all its debtors
corporate name to the exclusion of others is based upon the same Court cannot impose on bank that changes in
principle, which underlies the right to use a particular trademark or corporate name must notify debtor of such
tradename. Under this doctrine, a word or phrase originally incapable of change = tantamount to judicial legislation; such
exclusive appropriation with reference to an article in the market, notification is discretionary on bank
because geographical or otherwise descriptive might nevertheless have Although no evidence showing bank furnished
been used for so long and so exclusively by one producer with reference Javier Corp with official documents of change of
to this article that, in that trade and to that group of purchasing public, name, evidence abound that they ha dnotice
the word or phrase has come to mean that the article was his produce. Letter of accountant of Javier Corp addressed to
The doctrine cannot be made to apply where the evidence didn't prove bank: we obtained from the FORMER First
that the business has continued for so long a time that it has become of Summa
consequence and acquired good will of considerable value such that its Board of resolution of Javier Corp signed by
articles and produce have acquired a well known reputation, and Pablo Javier Sr auhorizing him to execute a
confusion will result by the use of the disputed name. chattle mortgage over certain machinery in favor
Petitioner didn't present evidence, which provided that the word of PAIC Savings and Mortgage Bank
Lyceum acquired secondary meaning. The petitioner failed to adduce Secretarys certificate signed by Fortunato
evidence that it had exclusive use of the word. Even if petitioner used Gabriel, Corp Secretary of Javier Corp, certifying
the word for a long period of time, it hadnt acquired any secondary that a board resolution was passed authorizing
meaning in its favor because the appellant failed to prove that it had Pablo Javier Sr to execute a chattel mortgage on
been using the same word all by itself to the exclusion of others. corporations equipment to serve as collateral to
cover IGLF Loan with PAIC Saivings
PC Javier & Sons v CA: (2005) Undated letter signed by Pablo Javier Sr and
addressed to PAIC Savings authorzing Mr Victor
- May 1984: PC Javier and Sons and Spouses Javier filed a Javier, Gen Manager, to secure from PAIC
complaint for annulment of mortgage and foreclosure with prelim Savings certain documents for his signature
DOCTRINE: a change in the corporate name On June 1, 1953, plaintiff was originally named as 'The Yek Tong Lin
does not make a new corporation, whether Fire and Marine Insurance Co., Ltd an insurance corp. duly presented
effected by a special act or under a general with the Security and Exchange Commissioner and before a Notary
law. It has no effect on the identity of the Public as provided in their articles of incorporation. Later amended its
corporation, or on its property, rights, or articles of incorporation and changed its name on May 26, 1961 as
liabilities. The corporation, upon such Philippine First Insurance Co., Inc. pursuant to a certificate of the Board
change in its name, is in no sense a new of Directors. The complaint alleges that: Philippine First Insurance Co.,
corporation nor the successor of the original Inc., doing business under the name of 'The Yek Tong Lin Fire and
corporation. It is the same corporation with a Marine Insurance Co., Lt.' signed as comaker together with defendant
diff name, and its character is in no respect Maria Carmen Hartigan, CGH, to which a promissory note was made in
changed. favour of China Banking. Said defendant failed to pay in full despite
- Issue: WON CA correctly sustained collection of entire proceeds renewal of such note. The complaint ends with a prayer for judgment
of IGLF loans amounting to 1.5M despite withholding of P250k. against the defendants, jointly and severally, for the sum of P4,559.50
YES. with interest at the rate of 12% per annum from November 23, 1961 plus
o Javier Corp was required to place P250k loan in time P911.90 by way of attorney's fees and costs. Defendants admitted the
deposit with respondet bank for simple reason that execution of the indemnity agreement but they claim that they signed
collateral it put up was insufficient ot cover IGLF loans it said agreement in favor of the Yek Tong Lin Fire and Marine Insurance
received; even admitted shortfall of its collateral when it Co., Ltd.' and not in favor of the plaintiff Philippine Insurance. They
authorized PabloJavier via board resolution to execute likewise admit that they failed to pay the promissory note when it fell due
chattel mortgage over certain machinery in favor of PAIC but they allege that since their obligation with the China Banking
Savings. Corporation based on the promissory note still subsists, the surety who
Hon Mendoza found in his order tha lonable co-signed the promissory note is not entitled to collect the value thereof
value of lands, buildings, machinery and from the defendants otherwise they will be liable for double amount of
equipment amounted only to P934k final their obligation, there being no allegation that the surety has paid the
proceeds were released in November because obligation to the creditor. In their special defense, defendants claim that
the collateral covered by lands and buildings there is no privity of contract between the plaintiff and the defendants
then subject of existing mortgages had loanable and consequently, the plaintiff has no cause of action against them,
value of P934k and only after commitment by considering that the complaint does not allege that the plaintiff and the
Javier Corp to correct collateral deficiency thru 'Yek Tong Lin Fire and Marine Insurance Co., Ltd.' are one and the same
execution of chattel mortgage on additional or that the plaintiff has acquired the rights of the latter.
machineries id PACI use protion of loan proeeds
to open time deposit to answer for obligaton to ISSUE:
defenant bank May a Philippine corporation change its name and still retain its original
Mere allegation of overcollateralization by personality and individuality?
JavierCorp does not invalidate the above
Collection of P250k is not a case of unjust RULING:
enrichment. Elements of unjust enrichment The court ruled in the affirmative.
(enrichment on part of defendant, As can be gleaned under Sections 6 and 18 of the Corporation Law, the
impoverishment of plaintiff, lack of cause, name of a corporation is peculiarly important as necessary to the very
prevent enrichment of one at expense of existence of a corporation. The general rule as to corporations is that
another/profit inequitably at the anothers each corporation shall have a name by which it is to sue and be sued
expense) does not apply and do all legal acts. The name of a corporation in this respect
Questioning of propriety of placing of P250k in designates the corporation in the same manner as the name of an
time deposits with respondent bank as additional individual designates the person." Since an individual has the right to
collateral was belatedly made; requirement to change his name under certain conditions, there is no compelling reason
give additional collateral was warranted because why a corporation may not enjoy the same right. There is nothing
of deficiency in collateral by Javier Corp if latter sacrosanct in a name when it comes to artificial beings. The sentimental
really meant to question the same, should have considerations which individuals attach to their names are not present
done so immediately after making time deposits in corporations and partnerships. Of course, as in the case of an
in Nov 1981; too late for Javier Corp to question individual, such change may not be made exclusively by the
placing of P250k in time deposits after it failed to corporation's own act. It has to follow the procedure prescribed by law
pay its loan obligations for the purpose. Strict adherence to such procedure is important and
From amortization schedule attached to indispensably prescribed.
promissory ynotes, Javier orp clearly defaulted A general power to alter or amend the charter of a corporation
on loan obligations when Bank gave notice of necessarily includes the power to alter the name of the corporation.
foreclosure proceedings + terms in promissory Hence, a mere change in the name of a corporation, either by the
note: failure to pay an installment when due shal legislature or by the corporators or stockholders under legislative
entitle the bank or its assign to declare all the authority, does not, generally speaking, affect the identity of the
obligations as immediately due and payable corporation, nor in any way affect the rights, privileges, or obligations
- Issue: WON damages should be awarded, even if Javier Corp previously acquired or incurred by it. Indeed, it has been said that a
claims there was no malice or bad faith on their part. YES. Malice change of name by a corporation has no more effect upon the identity
and bad faith is evident in the case before the Corut. of the corporation than a change of name by a natural person has upon
o Javier Corp was well aware that First Summa had changed the identity of such person. The corporation, upon such change in its
its name, yet pretended otherwise purported ignorance name, is in no sense a new corporation, nor the successor of the original
as excuse to renege on obligations = bad faith one, but remains and continues to be the original corporation. It is the
o Good faith, Javier Corp should have made valid same corporation with a different name, and its character is in no respect
consignation in court + if dobuted as to whom payment changed.
should be made, could have inquired from SEC + As correctly pointed out by appellant, the approval by the stockholders
resondent Bank demanded paymentfor loans already due of the amendment of its articles of incorporation changing the name "The
and demandable is sufficient to make Jaiier Corp wonder Yek Tong Lin Fire & Marine Insurance Co., Ltd." to "Philippine First
why this is so, but latter never took intiative + actual Insurance Co., Inc." on March 8, 1961, did not automatically change the
damages for Defendant Bank for having been prevented name of said corporation on that date. To be effective, Section 18 of the
from foreclosing on mortgages at least 4 times Corporation Law, earlier quoted, requires that "a copy of the articles of
- Held: CA decision affirmed. incorporation as amended, duly certified to be correct by the president
and the secretary of the corporation and a majority of the board of
PHILIPPINE FIRST INSURANCE vs. HARTIGAN G.R. No. directors or trustees, shall be filed with the Securities & Exchange
L-26370 July 31, 1970 Commissioner", and it is only from the time of such filing, that "the
FACTS: corporation shall have the same powers and it and the members and
stockholders thereof shall thereafter be subject to the same liabilities as The Respondents on the other hand argue that the Mun. of Balabagan
if such amendment had been embraced in the original articles of is at least a de facto corporation for having been organized under color
incorporation." It goes without saying then that appellant rightly acted in of a statute before this was declared unconstitutional, its officers having
its old name when on May 15, 1961, it entered into the indemnity been either elected or appointed, and the municipality itself having
agreement, Annex A, with the defendant-appellees; for only after the discharged its corporate functions for the past five years preceding the
filing of the amended articles of incorporation with the Securities & institution of this action. It is contended that as a de facto corporation,
Exchange Commission on May 26, 1961, did appellant legally acquire its existence cannot be collaterally attacked, although it may be inquired
its new name; and it was perfectly right for it to file the present case In into directly in an action for quo warranto at the instance of the State and
that new name on December 6, 1961. Such is, but the logical effect of not of an individual like the petitioner Balindong.
the change of name of the corporation upon its actions. The method of challenging the existence of a municipal corporation is
Therefore, actions brought by a corporation after it has changed its reserved to the State in a proceeding for quo warranto or other direct
name should be brought under the new name although for the proceeding. But the rule disallowing collateral attacks applies only where
enforcement of rights existing at the time the change was made. The the municipal corporation is at least a de facto corporation. For where it
change in the name of the corporation does not affect its right to bring is neither a corporation de jure nor de facto, but a nullity, the rule is that
an action on a note given to the corporation under its former name. its existence may be questioned collaterally or directly in any action or
proceeding by any one whose rights or interests are affected thereby,
Zuellig Freight and Cargo Systems, including the citizens of the territory incorporated unless they are
vs. estopped by their conduct from doing so.
National Labor Relations Commission and Ronaldo V. San Miguel
ISSUE:
G.R. No. 157900; July 22, 2013 W/O the municipality of Balabagan is a de facto corporation.

Facts: This is a petition appealing the decision of CA, whereby it RULING:


dismissed its petition for certiorari and upheld the adverse decision of No, because there is no other valid statute to give color of authority to
the NLRC finding San Miguel to have been illegally dismissed. San its creation when EO 386 was subsequently declared as
Miguel, employed as checker/custom representative, brought a unconstitutional.
complaint for unfair labor practice, illegal dismissal, non-payment of The color of authority requisite to the organization of a de facto municipal
salaries and moral damages against petitioner, formerly known as Zeta corporation may be:
Brokerage Corporation (Zeta). He contended that amendments of the 1. A valid law enacted by the legislature.
articles of incorporation of Zeta were for the purpose of changing the 2. An unconstitutional law, valid on its face, which has either (a) been
corporate name, broadening the primary functions, and increasing the upheld for a time by the courts or (b) not yet been declared void;
capital stock; and that such amendments could not mean that Zeta had provided that a warrant for its creation can be found in some other valid
been thereby dissolved. Petitioner countered that San Miguels law or in the recognition of its potential existence by the general laws or
termination from Zeta had been for a cause authorized by the Labor constitution of the state.
Code; that its non-acceptance of him had not been by any means In the case at bar, there is no other law that could give color of authority
irregular or discriminatory; that its predecessor-in-interest had complied to the validity of the existence of the municpality of Balabagan when EO
with the requirements for termination due to the cessation of business 386 was later on invalidated. Hence, such municipality is not a de factor
operations and that it had no obligation to employ San Miguel in the corporation.
exercise of its valid management prerogative.
NLRC and CA rendered its decision holding San Miguel to have been MALABANG V BENITO: (1969)
illegally dismissed ordering Zuellig to pay San Miguel his back wages
and Attorneys fees equivalent to ten percent (10%) of the total award. - Amer balindong is mayor of Malabang, Lanao del Sur, while
Pangandupan Bonito is mayor of Balabagan, Lanao del sur, which
Issue: Whether or not the awarding of attorneys fees had basis in fact was formerly part of of Malabang, having been created by EO 386 of
and in law. Pres Garcia
o Balindong brought action for prohibition to nullify EO 386
Ruling: Yes, the court upheld the CA, NLRC and Labor Arbiter and restrain Bonito and Co from performing the functions
unanimous decision, where the amendments of the articles of of their respective office, relying on Pelaez v Auditor
incorporation of Zeta to change the corporate name to Zuellig Freight General and Municipality of San Joaquin v Siva
and Cargo Systems, Inc. did not produce the dissolution of the former Pelaez: RA 2370 vesting power to create barrios
as a corporation, therefore not giving them the license to terminate in Provincial Board is statutory denial of
employees without just or authorized cause and considering that that presidential autohority to create new barrio +
San Miguel had been compelled to litigate and to incur expenses to Administrative Codes Sec 68 is unconstitutional
protect his rights and interest entitles him to recover attorneys fees. for giving President power to create
municipalities, as undue delegation of legislative
In Producers Bank of the Philippines v. Court of Appeals, the Court ruled power and against Art VII limiting Presidents
that attorneys fees could be awarded to a party whom an unjustified act power to mere supervision
of the other party compelled to litigate or to incur expenses to protect his o Bonito and Co on the other hand argue that Pelaez has no
interest. application because unlike the municipalities in Pelaez,
Balabagan is at least a DE FACTO Corporation, having
MALABANG VS BENITO been organized under color of statute before this was
FACTS: declared unconstitutional, its officers having been
Municipality of Balabagan was once part of the Municipality of Malabang elected/appointed and municipality itself having discharged
before it was created into a separate municipality thru an executive corporate functions for the past 5 years preceding the
order. isntituion of this action
The Municipality Malabang filed a suit against the Municipality of Thus as de facto corporation, existence cannot
Balabagan for having been created under an invalid EO 386 and to be collaterally attacked, athough it may be
restrain the respondent municipal officials from performing the functions inquired into directly OR in an anction quo
of their respective offices. warranto at the instance of the State
Petitioner relied on the ruling of the Pelaez case that Sec. 68 of the - Court concedes that inquiry into legal existence of a municipality is
Administrative Code is unconstitutional (a) because it constitutes an reserved to the State in a proceeding quo warranto or other direct
undue delegation of legislative power and (b) because it offends against proceeding + only in a few exceptions may a private person exercise
Section 10 (1) of Article VII of the Constitution, which limits the this function of voernment, BUT the rule disallowing collateral attacks
President's power over local governments to mere supervision. applies ONLY where municipal corporation is at least de facto
Section 68 of the Revised Administrative Code, approved on March 10, corporation if corporation isa NULLITY, its existence may be
1917, must be deemed repealed by the subsequent adoption of the questioned in any manner
Constitution, in 1935, which is utterly incompatible and inconsistent with
said statutory enactment.
- ISSUE: Whether the municipality of Balabagan is a de facto On May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and
corporation (considering it was organized before the promulgation of the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
the decision Pelaez) Ceferino S. Abella, signed and acknowledged in Leyte, the articles of
o Can a statute lend the color of validity to an attempted incorporation of the Far Eastern Lumber and Commercial Co., Inc.,
organization despite the fact that such statute is organized to engage in a general lumber business to carry on as general
subsequently declared unconstitutional? contractors, operators and managers, etc. Attached to the articles was
Two positions: de facto corp cannot exist where an affidavit of the treasurer stating that 23,428 shares of stock had been
the statute or charter creating it is subscribed and fully paid with certain properties transferred to the
unconstitutional (there can be no de facto corporation described in a list appended thereto.
corporation where there can be no de jure one) Immediately after the execution of said articles of incorporation, the
while statute is binding until condemned as corporation proceeded to do business with the adoption of by-laws and
unconstitutional) the election of its officers. On December 2, 1947, the said articles of
Yale Law Journal: true basis for denying a incorporation were filed in the office of the Securities and Exchange
corporation de facto status lies in absence of any Commission for the issuance of the corresponding certificate of
legislative act to give vitality to its creation in incorporation.
cases where a de facto office can exist under On March 22, 1948, pending action on the articles of incorporation by
color of an unconstitutional statute is simply the SEC, respondents Fred Brown, Emma Brown, Hipolita D. Chapman
because other valid acts or the ocnsittution itself and Ceferino S. Abella filed a suit against petitioners before the Court of
gave life to said corporation First Instance of Leyte alleging among other things that the Far Eastern
Principles: Lumber and Commercial Co. was an unregistered partnership; that they
o Color of authority requisite to organization wished to have it dissolved because of bitter dissension among the
of de facto municipal corporation may be members, mismanagement and fraud by the managers and heavy
valid law enacted by legislature OR an financial losses.
unconstitutional law, valid on its face, which The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall,
has either been upheld for a time or not yet filed a motion to dismiss, contesting the courts jurisdiction and the
been delared void PROVIDED warrant for sufficiency of the cause of action.
its creation can be found in some other valid After hearing the parties, the Hon. Edmundo S. Piccio ordered the
law or in the recognition of its potential dissolution of the company; and at the request of plaintiffs, appointed
existence by the general laws or the respondent Pedro A. Capuciong as receiver of the properties
constitution of the state thereof, upon the filing of a P20,000 bond.
o There can be no de facto municipal corp The defendants therein (petitioners herein) offered to file a counter-bond
unless either directly or potentially, such a for the discharge of the receiver, but the respondent judge refused to
de jure corp is authorized by some accept the offer and to discharge the receiver.
legislative fiat Hence, this petition.
o There can be no color of authority in an
unconstitutional statute alone, the invalidity ISSUE:
of which is apparent on its face Whether or not the trial court has jurisdiction over the case?
o There can be no de facto corp created to
take place of existing de jure corp, as such HELD:
org would clearly be a usurper No. The court had no jurisdiction in civil case No. 381 to decree the
As applied: dissolution of the company, because it being a de facto corporation,
o mere fact that Balabagan was organized at dissolution thereof may only be ordered in a quo warranto proceeding
time when the statue had not been instituted in accordance with section 19 of the Corporation Law.
invalidated cannot conveivably make it a de Under our statute it is to be noted that it is the issuance of a certificate
facto corporation, as independently of the of incorporation by the Director of the Bureau of Commerce and Industry
administrative code, there is no other valid which calls a corporation into being. The immunity of collateral attack is
statute to give color of authority to its granted to corporations claiming in good faith to be a corporation under
creation this act.
o Norton v Sheby Count: an unconstitutional Further, this is not a suit in which the corporation is a party. This is a
act is not a law; it confers no rights, litigation between stockholders of the alleged corporation, for the
imposes no duties, affords no protection, purpose of obtaining its dissolution. Even the existence of a de jure
creates no office; in legal contemplation, is corporation may be terminated in a private suit for its dissolution
as inoperative as though it had never been between stockholders, without the intervention of the state.
passed WHEREFORE, the petition is dismissed.
- HELD: Petition granted, EO 386 declared void, respondents
permanently restrained from performing duties and functions of ASIA BANKING CORPORATION vs. STANDARD PRODUCTS, CO.,
respective offices. INC
G.R. No. 22106 September 11, 1924
Harril v Davis: (168 F. 187; 1909)
FACTS: Standard Products, Co., Inc., was indebted to Asia Banking
The constitutive documents were filed with the clerk of the Court of Corporation for the amount of P37,757.22. To secure its indebtedness,
ppeals !ut not withthe clerk of court in the judicial district where the it executed a promissory note in favor of plaintiff-appellee. Upon demand
!usiness was located. rkansas law re"uiresfiling in !oth offices. #as for the balance due, the respondent-appellant failed to pay. Hence an
there $colora!le compliance enough to give the supposed corporation action was brought by plaintiff-appellee to recover the sum of
at least thestatus of a $de facto corporation% &o. &either the hope' P24,736.47. The court rendered judgment in favor of the plaintiff-
the !elief' nor the statement !y parties that they are incorporated'nor appellee for the sum demanded in the complaint, with interest on the
the signing of the articles of incorporation which are not filed' where sum of P24,147.34 from November 1, 1923, at the rate of 10 per cent
filing is re"uisite tocreate the corporation' nor the use of the pretended per annum, and the costs. Hence this appeal by the respondent-
franchise of the nonexistent corporation' willconstitute such a appellant. At the trial of the case the plaintiff failed to prove affirmatively
corporation de facto as will exempt those who actively and knowingly the corporate existence of the parties and the appellant insists that under
use sname to incur legal o!ligations from their individual lia!ility to pay these circumstances the court erred in finding that the parties were
them. There could !e noincorporation or color of it under the law until corporations with juridical personality and assigns same as reversible
the articles were filed (re"uisites for validincorporation . error.

ARNOLD HALL vs. EDMUNDO PICCIO ISSUE: Whether or not respondent is estopped from denying the
G.R. No. L-2598 / June 29, 1950 corporate existence of the plaintiff.
FACTS:
RULING: The general rule is that in the absence of fraud a person who commencement of action already harvested,
has contracted or otherwise dealt with an association in such a way as processed and sold b Ph Fibers
to recognize and in effect admit its legal existence as a corporate body Ph Fibers refused to render accounting of
is thereby estopped to deny its corporate existence in any action leading income derived therefrom
out of or involving such contract or dealing, unless its existence is Stimated gross income = P4,500 and
attacked for cause which have arisen since making the contract or other deductible expenses amount to P1k
dealing relied on as an estoppel and this applies to foreign as well as to H Fibers refusal to undertake accounting was
domestic corporations. The defendant having recognized the corporate in violation of terms of covenant
existence of the plaintiff by making a promissory note in its favor and o Ph Fibers failed to file answer; Court declared them in
making partial payments on the same is therefore estopped to deny said default; rendered judgment granting Manuelas prayer,
plaintiff's corporate existence. It is, of course, also estopped from requiring Ph Fibers to render complete accounting of
denying its own corporate existence. Under these circumstances it was harvest of land within 15 days from receipt of decision +
unnecessary for the plaintiff to present other evidence of the corporate deliver 30% of net income realized from last harvest with
existence of either of the parties. It may be noted that there is no legal interest + upon Ph Fibers failure to abide by
evidence showing circumstances taking the case out of the rules stated. 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
NOTE: The name of parties as plaintiff/respondent in this case was not due to contract of lease which was declared rescinded
changed. They remained as such even on appeal. o No appeal taken, so Court on Manuelas motion issued
writ of execution, cuains gprovincial sheriff to attach 3
Cranson v. International Business Machines Corp., (1964) parcels of land registered under Segundino Refuerzo
No property found available for attachment
1. Cranson v. International Business Machines Corp., (1964); pg. o Jan 1956: Segundino Refuerzo filed motion claiming that
197, briefed 2/19/97 decision rendered in Civil Case was null and void with
respect ot him, there being no allegation in the complaint
Facts: Cranson hired an attorney to incorporate a business. Cranson pointing to his personal laibiltiy + pryed that order be
acted as president of the corporation, and exercised corporate business issued limiting liability to defendant Corp
observing all formalities. Cranson contracted with IBM, on behalf of the o Corp granted the same ordered provincial sheriff to
corporation, to purchase 8 typewriters. It was later discovered that the release all properties that might have already been
corporation was not formally incorporated at the time of the making of attached after finding that evidence on record made no
the typewriter purchase contracts due to an oversight on the part of the mention to any fact which might hold movant personally
incorporating attorney. liable
- Manueal institued instant action asserting trial judge acted in grave
Procedural Posture: IBM sued Cranson personally for the balance due abuse of discretion in granting Segurindos motion
on the typewriters. The lower court granted summary judgment against - Issue: WON Refuerzo is personally liable. Yes.
Cranson holding that the constituents of a business that fails to file o Refuerzos motion was pursuant to Rule 38:
articles of incorporation are personally liable, as a matter of law, for the Petition provided for in either of the preceding
debts of the business. sections of this rule must be verified, filed
within sixty days after petitioner learns of
Issue: Whether an officer of a defectively incorporated association may judgment, order or other proceeding to be set
be subjected to personal liability for the debts of the association under aside, and not more than 6 months after such
these facts. judgment or order was entered, or such
proeeding was taken, and must be
Holding: No. accompanied with affidavit showing fraud,
accident, mistake or excusable negligence
Reasoning: A de-facto corporation may be formed if there is a good relied upon, and facts constituting the
faith effort to incorporate, and actual exercise of corporate petitioner is good and substantial cause ofa
powers. Furthermore, under the doctrine of estoppel, a person seeking tion or defense, as the case may be which he
to hold a corporate officer personally liable may not do so if he has dealt may prove if his petition be granted
with the association as if it were a legally-existing corporation. IBM dealt 2 periods: 60 days after petitioner learns of
with the business as if it were a legitimate corporation, and relied on its judgment, and not more than 6 months after
credit rather than that of Cranson. Thus, it is estopped to assert that the judgment or order was rendered
business was not incorporated decision in case at bar was under June 8 1955
, whereas Refuerzos motion was dated Jan 31
SALVATIERRA VS GARLITOS 1956 or after lapse of 7 months and 23 days
clearly beoyn dprescriptive period
- Manuela Vda de Salvatierra appeared to be owner of a parcel of o policy of remedy: allow party adversely
land in Maghobas Poblacion, Leyte. affected by decision to protect his
o March 1954: entered into contract of lease w/ Ph Fibers interest
Producers Co Inc, allegedly, a corporation duly o periods fixed by said rule are non-
organized and existing uner the laws of the Ph, domiciled extendible and never interrupted nor
at Barauen Leyte, represented by Mr Refuerzo, Pres; subject to any contingency
terms: o Court nevertheless deemd it wise to
Lifetime of lease = 10 years pass upon the merits of the case
Land would be planted to kenaf, ramie or other o Rs defense: complaint filed with lower court contained
crops suitable to the soil no allegation which would hold him liable personally
Lessor entitled to 30% of net income accruing while it stated he was signatory to the lease contract, he
from harvest of any crop w/o being responsible did so in capacity s president of the corporation found
for cost of production thereof to be supported by records, as found by lower court;
After every harvest, lessee bound to declare Manuela argues that failure to specify Refuerzos
at earliest possible time the income derived personal liability was due to fact that all the time she was
therefrom and to deliver corresponding share under the impression that Ph fibrs represented by
due the lesor Refuerzo was a duly registered corporation as apearin
o April 1955: Manuela filed with CFI Leyte complaint gin the contract, but a subsequent inquiry into SEC
against Ph Fibers for accounting, rescission and yielded otherwise
damages, verring that: While as a general rule a person who has
Ph Fiers had planted kenaf on 3 ha of leased contracted or dealt with an association in such
property which crop was at time of a way as to recognize its existence as a
corporate body is estopped from denyin gth unless exempted for special reasons by the Sec of
esame in an action arising out of such Public Instruction, any private schoolor collece
transaction or dealing, this doctrine may not be recognized by the govt shall be incorporated under the
held to be applicable where fraud takes a part provisions of Act 1459 known as the Corporation Law,
in said transaction within 90 days after the date of recognition, and shall file
As applied: manuea was made to believe that with the Sec of Public instruction a copy of its
corp was organized in accordance with law ie incorporation papers and by-laws.
she was unawre that Ph Fibers had no juridical o Having been recognized by the govt, CSK had obligation
personality to incorporation under the Corporation law, within 90
o A registered corporation has a juridical personality days from such recognition having not done so at the
separate and distinct from its component members time the complaint was filed notwithstanding its
or stockholders and officers, such that a corporation existence even earlier than 1932, CSK cannot now
cannot be held liable for the personal indebtedness invoke its own non-compliance with law as immunity
of a stockholder even if he should be its president, from suit
and conversely, a stockholder or member cannot be o Having contracted with Oh for 32 years and representing
held personally laible for any financial obligation of itself as possessed of juridical personality, CSK is
the corporation in excess of his unpaid subcription estopped from denying such personality to defeat Ohs
This rule refers only to REGISTERED claim against it (Art 1431: through estoppel an admssion
corporations and NOT APPLICABLE to or representation is rendered conclusive upon the
LIABILITY OF MEMBERS of person making it and cannot be denied or disproved as
UNINCORPORATED ASSOCIATION against th person relying on it.)
Ratio: an organization which before the law - Issue: WON a complaint filed against persons associated under a
is non-existent has no personality + would common name will justify a judgment against the association itself
be incompetent to act and appropriate for and not its individual members. YES.
itself the powers and attributes of a o since the school may be sued in its own name, no need
corporation as provide by law + cannot ot apply Rule 3 Sec 15 under which persons joined in an
create agents or confer authority on association w/o any juridical personality may be sued
another to act in its behalf + those who act with such association it has been shown that individual
or purport to act as its representatives or members of board of trustees are not laible, having been
agents do so without authority and at their appointed only after Ohs dismissal
own risk - Issue: WON the collection of tuition fees and book rentals will
A person who acts as an agent w/o make a school profit-making and not charitable. NO.
authority or w/o a principal is himself o But even assuming CSK is charitable, Oh was
regarded as the principal, possessed of all nonetheless entitled ot protection of Termination Pay
the rights and subject to all the liabilities of Law chartiable institusions are covered by labor laws
a principal, a person acting or purporting o It has not ben established that CSK is a charitable
to act on behalf of a corporaton whch has isntution, considering it charges tuition fees an collects
no valid existence assumes such book rentals from its students while this alone does not
privileges and obligations and comes indicate that it is profit-makign, it does weakn its claim
personally liable for contracts entered into that it is a non-profit entity
or for other performed acts as agent - Issue: WON Termination Pay Law then in force was available to
o AS APPLIED: the private respondent who was employed on a year-to-year basis.
Rfuerzo, as pres of unregistered Ph Fibers, o even if CSK argues that ohs services were terminable at
was the moving spirit behind the the end of each year at the discretion of the school, after
consummation of the lease agreement by 32 years of services, Court held Oh to have become a
acting as its representative; his liability cannot permanent EE of the school and entitled to security of
be limited or restricted tenure at the time of her dismissal; since no cause was
In acting on behalf of a corporation he knew to shown and established at an appropriate hearing, and
be unregistred, he assumed the risk of reaping the notice then required by law had not been given, such
the consequential damages or resulting rights, dismissal was invalid.
if any, arising out of such transaction o Applicable law is Termination Pay Law:
- HELD: order amending previous decision and ordering provincial In cases of employment w/o definite period
sheriff to release properties of refuerzo is SET ASIDE; Refuerzo is ER or EE may terminate at any time the
liable. employment with just cause; or without just
cause in the case of an EE by serving written
CHIANG KAI SHECK V CA: (1989) notice on ER at least one month in advance,
or in case of Er by serving such notice to EE
- when Fausta Oh reported for work at Chiang Kai Shek in Sorsogon at least 1 month in advance or 12 month for
on the first week of July 1968, she was shocked to be told she had every year of service, whichever is onger, a
no assignment for next semester, having taught since 1932 for a fraction of at least six months being
continuous period of almost 33 years considered as one whole year
o Oh sued for separation pay, social security benefits, ER upon whom no notice as served in case of
salary differentials, maternity benefits and moral and termination of employement may hold EE
exemplary damages: liable for damages
Original defendant: Chiang Kai Shek; EE upon whom no notice was served in case
complaint amended to implead officers ot of termination w/o just cause shall be entitled
make them solidarily liable to backwages in amount equivalent to salaries
o CFI Sorsogon dismissed the complaint; CA reversed and corresponding to required period of notice
held school suable and liable while absolving other Magna Carta for public Teachers further
defendants; CKSs MR reversed, hence this petition. confer security of tenure on teachers upon
- Issue: WON a school that has not been incorporated may be sued appointment as long as he psosess the
by reason alone of its long continued existence and recognition by required qualification and under policy of
the govt. YES. DepEd, a teacher becomes permanent and
o While Rule 3, Sec 1 of Rules of Court do provide that automatically acquires security of tenure upon
only natura or judicial persons may be parties in a civil completion of 3 years in the service
action it is not denied and that the school has not been - Issue: WON awards made by respondent court were warranted.
incorporated, as a school, CKS was nevertheless - Held: appealed decision AFFIRMED except for award of separation
governed by Act 2706 amended by CA 180, providing: ay reduced to P2880 (P90 x 32 months).
Code and exitsting laws, it issues a
LOZANO V DELOS SANTOS: (19967) certificae of consolidation which
makes the reorganization official. The
- Dec 1995: Reynaldo Lozano filed case for damages against new consolidated corporation comes
Antonio Anda before MTC, Pampanga, alleging that as president into existence and the constituent
of Kapatiran Malbalacat-Angeles Jeepney Drivers Assosciaton In corporations dissolve and cease to
c9KAMAJDA) while Anda was pres of Samahang Angeles- exist.
Mabalacat Jeepney Operators and Drivers Associaton o While KAMAJDA and SAMAJODA are
(SAMAJODA) duly registered with SEC, they are TWO
o That in Aug 1995, upon request of Sanggniang Bayan of SEPARTE ENTITLES; dispute between
Mabalacat, Lozano and Anda agreed to consolidate Anda and Lozano (ie allegations of fraud
associations and form Uniified Mabalacat-Angeles re elections) is not within KAMAJDA nor
Jeepney Operators and Drivers Association AMAJODA, but between members of
(UMAJODA) separate and distinct associations; Anda
o Agreed to elect one set of officers who shall be given and lozana have NO
sole authority to collect daily dues from members of INTRACORPORATE RELATION much
consolidated association less an Intracorporate dispute, thus SEC
o Oct 1995: both Lozano and Anda ran for pres; Loano has no jurisdiction
won; Anda protested and alleged fraud, refusing to o Doctrine of corporation by estoppel has
recognize election and abide by agreement, continued no application and does not override
collecting dues from his association jurisdictional requierements; jurisdiction
o Hence Lozanos complaint is fixed by law and not subject to the
- Anda moved to dismss for lack of jurisdciton, claiming jurisdiction agreement o fthe parties; it cannot be
was lodged with SEC; MCTC denied motion and MR acquired/waived/diminished by any
- Anda filed petition for certiorari before RTC; RTC found dispute to act/omission of the parties, nor conferred
be intracorporate, hence subject to jurisdiction of SEC, ordering by acquiescence of the court.
MCTC to dismiss Civil Case accordingly; denied MR, hence - HELD: petition ranted, decision of RTC set aside.
lonzanos petition.
- Issue: WON RTC acted with GAD in concluding that SEC has LIM TONG LIM V PHIL FISHING GEAR INDUSTRIES, INC. (1999)
jurisdiction over case of damages between heads of 2 associations
who intended to consolidate their associations but had not yet been - On behalf of Ocean Quest Fishing Corp, Antonio Chua and Peter
approved and registered with SEC. Yes. SEC has no jurisdiction, Yao entered into a contract for the purchase of fishing nets of
there being no intracorporate relation nor dispute between various sizes from Ph Fishing Gear Industries, claiming they were
Anda and Lozano. engaged in a business venture with Lim Tong Lim (who was not a
o SECs jurisdiction: Sec. 5, PD 902-A: signatory to the agreement) (nets totaled P53k, 400 pieces of floats
Schemes of board, amounting to fraud, worth P68k likewise sold)
detrimental to o Failed to pay
public/stockholder/members/orgs registered o Ph Fishing Gear filed collection suit against Chua, Yao
with SEC and Lim with prayer for prelim attachment, in their
Controversies arising out of capacity as general partners, on allegation that Ocean
intracorproate/partnership relations Quest Corp was nonexistent as shown from SEC
Controversies in election/appointment of certification
directors, trustees, officers or managers of o Lower court issued writ sheriff attached fishing nets on
such corps board F/B Lourdes docked at Navotas, Metro Manila
Petitions of corporations, partnerships or o Chua admitted liability + requested reasonable time to
associatons to be declared in the state of pay
suspension of payments in cases where o Yao filed answer + failed to appear in hearings
corporation, partnership or association o Lim filed Answer with Counter and cross claim and
possesses sufficient property to cover all its moved to lift writ
debts but forsees impossibility of meeting o TC upheld writ, ordered sale of nets at public auction,
them when they fall due o rin cases where they which Ph Fishing Gears won
have no sufficient assets to cover liaibilities but o Nov 1992: TC ruled PFGI entitled to writ and Chua, Yao
are under management of rehabilitation and Lim as general partners were jointly liable
receiver or management committee Partnership existed among them on basis of
o Jurisdiction of SEC requires concurrence of status or testimonies of witnesses + compromise
relationship of parties AND nature of question subject of agreement executed by the three of them in a
controversy (ie dispute involved is intrinsically connected civil case chua and yao had brought against
with regulation of corp, or deal with internal affairs) lim for declaration of nullity of commercial
o As applied: documents, reformation of contracts,
No intracorporate nor partnership relation declaration of ownership of fishing boats,
between Lonzano and Anda injunction and damages while Compromise
Controversy arose out of plan to consolidate agreement was silent as to nature of their
associations into a single common association obligations, joint liability could be presumed
but unified associtaiton was STILL from equal distribution of profit and loss
PROPOSAL o CA affirmed RTC:
o Had not yet been approved by SEC Held Lim to be partner in fishing business, thus
o Officers and members had not yet may be held liable
submitted articles of consolidation in Partnership for specific undertaking =
accordance with Corporation Code commercial fishing = ultimate undertaking was
o consolidation becomes effective not to divide profits
upon mere agreement of the o Hence this petition; Yao disclaims existence of
members but only upon issuance of partnership, asserting
certificate of consolidation by SEC. He had no direct participation in purchase of
When the SEC upon processing and nets + did not even meet reps of company
examing the articles of consolidation, He was lssor, no partner, of chua and yao
is satisfied that the consolidation of merely leased to the two the main asset o fthe
the corporations is not inconsistent partnership ie fishing boat Lourdes for 6
ith the provisions of the Corporation months
- Issue: WON by their acts, Lim, Chua and Yao could be deemed to While Lim did not directly act on behalf of the
have entered into a partnership. Yes. corporation, he reaped the benefits of the
o Art 1767: By contract of partnership, two or more contract entered into by persons with whom he
persons bind themselves to contribute money, property, previously had existing relationship = deemed
or industry to a common fund, with the intention of to be part of said association and is covered by
dividing the profits amog themselves. the scope of doctrine of corporation by
o Partnership exists because: estoppel
Lim requested Yao engaged in commercial o On the validity of attachment
fishing to join him while chua was already Issue of whether or not it was improperly
yaos partner issued is moot and acadmemic
Lim, chua and yao verbally agreed to acquire FB Lourdes = asset of prartnership placed in
2 fishing boats name of Lim only to assure payment of debt
They borrowed P3.25 M from jesus lim, Nets and floats were made to their
brother of lim, to finance venture specifications
Bought boas from CMF Fishing Corp, who Issuacen of writ to assure payment of price
executed deed of sale to Lim only to serve as stipulated is proper
security for loan extended by Lim By specific agreement, ownership had
Lim chua and yao agreed that refurshibbing remained with PFGI until payment in full
would be shouldered by C and Y o Doctrine: A partnership may be deemed to exist among
Because of unavailability of funds jesus lim parties who agree to borrow money to pursue a business
agains extended loan to partnership (P1M) and to divide the profits or losses that may arise
secured by check, because of which Y and C therefrom, even if it is shown that they have not
entrusted ownership papers of 2 other boats contributed any capital of their own to a common fund.
to Lim Their contribution may be in the form of credi or industry,
Pursuant to this business, they bought nets not necessarily cash or fixed assets. Being partners, they
from respondent PFGI are all liable for debts incurred by or on behalf of the
Subsequently C and Y brought action against patnership. The liability for a contract entered into on
Lim behalf of an unincorporated association or ostensible
Case was amicabl settled through corporation may lie in a person who may not have
compromise agreement directly transacted on its behalf, but reaped benefits from
Fishing nets and floats = essential to fishing = that contract.
in furtherance eof their business - Held: petition denied. Decision appealed from affirmd.
Since petitions for review involve only
questions of law, factual findings of RTC and LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
CA are binding on this Court INC., petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE
o Lim was a PARTNER, not a Lessor AND GUARANTY CORPORATION, EMDEN ENCARNACION and
No lessor would agree to the sale of his own HORATIO AYCARDO, respondents.
boats to pay for debt of lessees with excess
proceeds to be divided among the three of G.R. No. 117188 August 7, 1997
them
Sale of boats + division aong the three of ROMERO, J.:
balance reminaing proves that FB Lourdes
though registered in his name was not his own Loyola Grand Villas Homeowners Association, Inc. (LGVHAI) was
property but an asset of the partnership organized on 8 February 1983 as the homeoenwers' association for
Not uncommon to register properties acquired Loyola Grand Villas. It was also registered as the sole homeowners'
from a loan in the name of the person the association in the said village with the Home Financing Corporation
lender trusts, in this case Lim himself, as (which eventually became Home Insurance Guarantee Corporation
brother of creditor ["HIGC"]). However, the association was not able file its corporate by-
o Corporation by estoppel laws.
Sec 21: all persons who assume to act as a
corporation knowing it to be without authority The LGVHAI officers then tried to registered its By-Laws in 1988, but
to do so shall be liable as general partners for they failed to do so. They then discovered that there were two other
all debts, liabilities and damages incurred or homeowners' organizations within the subdivision - the Loyola Grand
arising as a result thereof: provided that when Villas Homeowners (North) Association, Inc. [North Association] and
any such ostensible corporation is sued on herein Petitioner Loyola Grand Villas Homeowners (South) Association,
any transaction entered by it as a corporation Inc.["South Association].
or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of Upon inquiry by the LGVHAI to HIGC, it was discovered that LGVHAI
corporate personality. One who assumes an was dissolved for its failure to submit its by-laws within the period
obligation to an ostensible corporation as such required by the Corporation Code and for its non-user of corporate
cannot resist performance thereof on the charter because HIGC had not received any report on the association's
ground that there was in fact no corporation. activities. These paved the way for the formation of the North and South
May also be applied when an unincorporated Associations.
association which represented itself to be a
corporation will be estopped from denying its LGVHAI then lodged a complaint with HIGC Hearing Officer Danilo
corporate capacity in a suti against it by a third Javier, and questioned the revocation of its registration. Hearing Officer
person who relied in good faith on such Javier ruled in favor of LGVHAI, revoking the registration of the North
representation and South Associations.
Conversely, a third party who, knowing an
association to be unincorporated, nonethesls Petitioner South Association appealed the ruling, contending that
treated it as a corporation and received LGVHAI's failure to file its by-laws within the period prescribed by
benefits from it, ma be barred from denying its Section 46 of the Corporation Code effectively automatically dissolved
corporate existence the corporation. The Appeals Board of the HIGC and the Court of
PFGI = entitled to be paid for nets sold Appeals both rejected the contention of the Petitioner affirmed the
Lim benefited from use of nets he decision of Hearing Officer Javier.
questioned the attachment of the nets because
the writ effectively stopped his use of the Issue: W/N LGVHAI's failure to file its by-laws within the period
fishing vessel prescribed by Section 46 of the Corporation Code had the effect of
automatically dissolving the said corporation. The particular provisions of the Corporation Law referring to transfer of
shares of stock are as follows:
Ruling: No. SEC. 13. Every corporation has the power:
xxx xxx xxx
The pertinent provision of the Corporation Code that is the focal point of (7) To make by-laws, not inconsistent with any existing law, for the fixing
controversy in this case states: or changing of the number of its officers and directors within the limits
Sec. 46. Adoption of by-laws. - Every corporation formed under this prescribed by law, and for the transferring of its stock, the administration
Code, must within one (1) month after receipt of official notice of the of its corporate affairs, etc.
issuance of its certificate of incorporation by the Securities and xxx xxx xxx
Exchange Commission, adopt a code of by-laws for its government not SEC. 35. The capital stock of stock corporations shall de divided into
inconsistent with this Code. shares for which certificates signed by the president or the vice-
Ordinarily, the word "must" connotes an imposition of duty which must president, countersigned by the secretary or clerk and sealed with the
be enforced. However, the word "must" in a statute, like "shall," is not seal of the corporation, shall be issued in accordance with the by-
always imperative. It may be consistent with an ecercise of discretion. If laws. Shares of stock so issued are personal property and may be
the language of a statute, considered as a whole with due regard to its transferred by delivery of the certificate indorsed by the owner or his
nature and object, reveals that the legislature intended to use the words attorney in fact or other person legally authorized to make the
"shall" and "must" to be directory, they should be given that meaning. transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the
The legislative deliberations of the Corporation Code reveals that it was corporation so as to show the names of the parties to the transaction,
not the intention of Congress to automatically dissolve a corporation for that date of the transfer, the number of the certificate, and the number
failure to file the By-Laws on time. of shares transferred.
No share of stock against which the corporation holds any unpaid claim
Moreover, By-Laws may be necessary to govern the corporation, but By- shall be transferable on the books of the corporation.
Laws are still subordinate to the Articles of Incorporation and the The holder of shares, as owner of personal property, is at liberty, under
Corporation Code. In fact, there are cases where By-Laws are said section (Sec. 35), to dispose of them in favor of whomsoever he
unnecessary to the corporate existence and to the valid exercise of pleases, without any other limitation in this respect, than the general
corporate powers. provisions of law. Therefore, a stock corporation in adopting a by-law
governing transfer of shares of stock should take into consideration the
The Corporation Code does not expressly provide for the effects of non- specific provisions of section 35 of Act No. 1459, and said by-law should
filing of By-Laws. However, these have been rectified by Section 6 of PD be made to harmonize with said provisions. It should not be inconsistent
902-A which provides that SEC shall possess the power to suspend or therewith.
revoke, after proper notice and hearing, the franchise or certificate of The by-law now in question was adopted under the power
registration of corporations upon failure to file By-Laws within the conferred upon the corporation by section 13, paragraph 7, above
required period. quoted; but in adopting said by-law the corporation has
transcended the limits fixed by law in the same section, and has
This shows that there must be notice and hearing before a corporation not taken into consideration the provisions of section 35 of Act No.
is dissolved for failure to file its By-Laws. Even assuming that the 1459.
existence of a ground, the penalty is not necessarily revocation, but may As a general rule, the by-laws of a corporation are valid if they are
only be suspension. reasonable and calculated to carry into effect the objects of the
corporation, and are not contradictory to the general policy of the laws
By-Laws are indispensable to corporations, since they are required by of the land.
law for an orderly management of corporations. However, failure to file On the other hand, it is equally well settled that by-laws of a
them within the period prescribed does not equate to the automatic corporation must be reasonable and for a corporate purpose, and
dissolution of a corporation. always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land. They
G.R. No. L-23241 March 14, 1925 must not infringe the policy of the state, nor be hostile to public welfare.
HENRY FLEISCHER, plaintiff-appellee, They must not disturb vested rights or impair the obligation of a contract,
vs. take away or abridge the substantial rights of stockholder or member,
BOTICA NOLASCO CO., INC., defendant-appellant. affect rights of property or create obligations unknown to the law.
FACTS: This action was commenced in the CFI against the board of The validity of the by-law of a corporation is purely a question of law.
directors of the Botica Nolasco, Inc., a corporation duly organized and (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
existing under the laws of the Philippine Islands. The plaintiff prayed that The power to enact by-laws restraining the sale and transfer of stock
said board of directors be ordered to register in the books of the must be found in the governing statute or the charter. Restrictions upon
corporation five shares of its stock in the name of Henry Fleischer, the the traffic in stock must have their source in legislative enactment, as
plaintiff, and to pay him the sum of P500 for damages sustained by him the corporation itself cannot create such impediments. By-law are
resulting from the refusal of said body to register the shares of stock in intended merely for the protection of the corporation, and prescribe
question. (Basta na amend ung complaint) regulation and not restriction; they are always subject to the charter of
defendant answered the amended complaint denying generally and the corporation. The corporation, in the absence of such a power, cannot
specifically each and every one of the material allegations thereof, and, ordinarily inquire into or pass upon the legality of the transaction by
as a special defense, alleged that the defendant, pursuant to article which its stock passes from one person to another, nor can it question
12 of its by-laws, had preferential right to buy from the plaintiff said the consideration upon which a sale is based. A by-law cannot take
shares at the par value of P100 a share, plus P90 as dividends away or abridge the substantial rights of stockholder. Under a statute
corresponding to the year 1922, and that said offer was refused by the authorizing by- laws for the transfer of stock, a corporation can do no
plaintiff. more than prescribe a general mode of transfer on the corporate books
Trial Court held that, in his opinion, article 12 of the by-laws of the and cannot justify an unreasonable restriction upon the right of sale.
corporation which gives it preferential right to buy its shares from retiring xxx
stockholders, is in conflict with Act No. 1459 (Corporation Law), that a corporation has no power to prevent or to restrain transfers of its
especially with section 35 thereof; and rendered a judgment in favor of shares, unless such power is expressly conferred in its charter or
plaintiff. governing statute. This conclusion follows from the further consideration
Hence, this appeal. that by-laws or other regulations restraining such transfers, unless
ISSUE: whether or not article 12 of the by-laws of the corporation is in derived from authority expressly granted by the legislature, would be
conflict with the provisions of the Corporation Law (Act No. 1459). regarded as impositions in restraint of trade.
Questioned article 12 creates in favor of the Botica Nolasco, Inc., a The only restraint imposed by the Corporation Law upon transfer of
preferential right to buy, under the same conditions, the share or shares shares is found in section 35 of Act No. 1459, quoted above, as follows:
of stock of a retiring shareholder. Has said corporation any power, under No transfer, however, shall be valid, except as between the parties, until
the Corporation Law (Act. No. 1459), to adopt such by-law? the transfer is entered and noted upon the books of the corporation xxx
HELD: This restriction is necessary in order that the officers of the corporation
may know who are the stockholders, which is essential in conducting
elections of officers, in calling meeting of stockholders, and for other While hogar obtained title in 1920 and title
purposes. But any restriction of the nature of that imposed in the remained with it until 1926, contended that five
by-law now in question, is ultra vires, violative of the property year period di not begin to run until May 1921
rights of shareholders, and in restraint of trade. when TCT was delivered
And moreover, the by-laws now in question cannot have any effect Purchaser of land registered under Torrens
on the appellee. He had no knowledge of such by-law when the system cannot acquire status of innocent
shares were assigned to him. He obtained them in good faith and purchaser for value unless his vendor is able
for a valuable consideration. He was not a privy to the contract created to place in his hands an owners duplicate
by said by-law between the shareholder Manuel Gonzalez and the showing title of such land to be in vendor
Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as Period during which Alcantara failed to make
a purchaser. payment likewise not counted because hogar
A by-law of a corporation which provides that transfers of stock shall not not chargeable for lapse ofnegotiations
be valid unless approved by the board of directors, while it may be Hogar bought for P24k, sold for P6k
enforced as a reasonable regulation for the protection of the corporation o SEC 212 of Code of Civil Proceudre: when it Is found
against worthless stockholders, cannot be made available to defeat the and adjudged that a corporation has offended in any
rights of third persons. (Farmers and Merchants Bank of Lineville vs. matter or manner which does not by law work as a
Wasson, 48 Iowa, 336.) surrender of forfeiture, or has misused a franhise or
Whenever a corporation refuses to transfer and register stock in cases exercised a power not conferred by law, ut not of such a
like the present, mandamus will lie to compel the officers of the character as to work a surrender or forfeiture of its
corporation to transfer said stock upon the books of the corporation. franchise, judgment shall be rendered that it be ousted
Petition denied. Decision of trial court affirmed. from the continuance of such offense or the exercise of
such power.
GOVT OF THE PH V EL HOGAR: Court has discretion w/ respect to infliction of
capital punishment upon corporation + there
- Marc 1906: Ph Commission enacted Corporation Law effective are misdemeanors and misuses of frnachises
April 1 1906 which should not be recognized as requiring
o Sec 171 190: relted to building and loan associations dissolution
+ adopted from American statutes = reflect such ideals (e.g. hodling real property for speculative
o El HOgar Filipino = first corporation organized in Ph purposes in contravention of its charter court
islands under provisions cited made ousting conditional upon failure of corp
o Articles of incorporation details: to discontinue unlawful conduct w/in 6
Dec 28 1910 months)
P150k capital stock subscribed, P10620 paid o Poliy against tenure of land was to prevent revival of the
Capital stock not permitted to exceed P3k but ENTAIL/MAYORAZGO by which land could be fettered
by Act 2092, statute was amended to permit and its alienation hampered over long periods of time.
capitalization of bulding and loan associations Hogar in this case was in good faith attempting
to ten millions to dispose of the property
Shareholders increased to 5, 26 shareholders But I it discretionary or mandatory upon court
in Dec 31 1925 holding 125, 750 shares, with to dissolve corp under Corporation law for
total paid-up value of P8M703,602 violation of later?
- Issue: re: alleged illegal holding by hogar of title to real property in o Sec. 190: iolation of any provisions of
excess of 5 years after property had been bought by Hogar at one this Act and its amendments shall be
of its own foreclosure sales; does it work as forfeiture of its punished by a fine ofnot more than P1k,
franchise so as to require judgment for its dissolution? NO. r imprisonment of not more than 5 years
o Sec 75 repeated in Corporation Law: while corporations or both at discretion of court, if violation
may loan funds upon real estate security and purchase being prved, be dissolved by quo
real estate when necessary for the collection of loans, warranto proceedings by att-general or
they shall dispose of real estate so obtained within five provincial fiscal, provided nothing in this
years after receiving the title section shall be construed to repeal the
o El Hogar obtained land from mortgage in Dec 1920, other causes for dissolution of
asked for registration of TCT and got it in May 1921 from corporation prescribed by existing law +
register of deeds remedy in this section considered as
o March 1921: board of directors of Hogar adopted additional to remedies already existing
resolution authorizing Vicente Bengzon, agent of corp, to Section simply means action shall
endeavor to find a buyer for the San Clemente land be taken against corporation via
July 1921: Hogar authorized Jose Laguardia quo warrantio
to endeavor to find a prchaser for the land for No corporate enterprise can be
P23k, undertaking to pay Laguardia conducted perpetually w/o trivial
commission of 5% for services, but no one misdemeanor against corporate
bought law being committed cannot
July 1923: plans of San Clemente were sent penalize all violations
to Mr Gomez, Mr Gonzalez and Mr Castelvi, automatically; must be via
but no offers were received from them discretion of courtthru quo
Jan 1926: agent not having succeeded in warranto
finding buyer, San Clemente was advertised Furthermore subject matter of the
for sale by Hogar in three newspapers of gen section is not expressed in the title
circulation - Issue: WON Hogar, owning and holding a business lot with
March 1926: offier was made by Alcantara for structure thereon in Manila in excess o fits reasonable
P4k payable P500 in cash, and the remainder requirements and in contravention of subsection 5 of sec 13 of
within 30 days corporation law, should be dissolved. NO.
March 1926: Board by resolution decided to o Aug 1913: bought land with structure on it adjacent to
accept offer + communicated to buyer; HSBC demolished building (Guadalupe stone and
Alcantara given extensions of time, expiring hewn timber, 50 years old) and built a new one 3 stories
April 1926, to make payment failed to pay, in main, made 4 stories, then in one corner, 5 stories)
Hogar treated ocntract as rescinded reasonably proportionate in value and revenue
July 1926: land sold to Dona Alberto for P6k producing capacity to value of land upon which it stands
o While hogar violated strict letter of law, did not do so
intentionally + mitigating circumstances
o Argued that acquisition of lot, construction of enw in case of liquidation of the corporation or forfeiture of
building, and renting of the same to 3rd persons, are ultra stock for delinquency
vires acts of corp, and proper penalty is dissolution o It has been called to Hogars attention by Acting insular
o Sec 13: every corporation has power to purchase, hold, Treasurer, but no annual meeting of shareholders has
lease such real property as the transaction of the lawful been attene by a sufficient number to constitute a
business of the corporation may reasonably and quorum, resulting tha tproviison has not been eliminated
necessarily require. o Existence fo this by-law is a misdeamonur, but not for
Owning building to construct and matinain dissolution mere nullity that board of directors cannot
offices is necessary to a building and loan enforce.
association (otherwise theyd have to coduct - Issue: WON Art 61 of by-laws of Hogar that the attendance in
businsess exclusively in leased offices) person/proxy of shareholders owning one-half plus one of
Hogar lawfully acquired the lot shareholdersshall be necessary to constitute quorum for election
- Issue: WON Hogar, charged with engaging in activities foreign to of directors but failure to make quorum for election of directors
the purposes for which the corporation was created and not (directors limited to wealthy men) justifies dissolution. No.
reasonable necessary to its legitimate ends, should be dissolved. o Corp aw: at all elections of directors, there must be
Nope, merely enjoined. present in person or y proxy by written authorization,
o Administration of offices in Hogar building not used by owners of majority of subscribed capital stock entitled ot
Hogar itself and renting of such offices to public vote
Hogar uses about 10% of office space and o 1911 and 1912 = abided by rule
leases the rest to strangers o but corporation has grow since;
Clearly within legitimate powers of Hogar o with exception of 1917 meeting, meetings have failed for
o Re: administration and management of properties lack of quorum
belonging to delinquent shareholders of the association o special efforts: publication of notices by letter of
In case of delinquency of shareholders in notification sent to every shareholder + blank form of
payment of interest, premium and dues, Hogar proxy, still no quorum
takes over and manages mortgaged property o alternative of directors: choose to fill vacanacies in
to apply income to obligations of debtor party directorate by choosing suitable persons as per Art 71 of
Also charges a c omission at rate of 2 on by-laws directors shall elect from among the
sums collected shareholders members to fill the vacancies that may
Govt argues that only remedy for default by occur in the board of directors until the election at the
shareholders is to enforce collection of whole general meeting.
loan in manner contemplated in Sec 85 of o Not Hogars falt shareholders fail to attend annual
Corp Law but said section tates that the meetings
association may treat the whole indetedness o Upon failure of quorum, directorate naturally holds
as due at the option of the board of diretors and continues to function until another directorate is
NO REASON FOR INVALIDATION of chosen and qualified; unless the law or the charter
management by corp of property constituting of a corporation expressly provides than an office
security of delinquent debt shall become vacant at the expiration of the term of
o Re: activities described as management of parcels of office for which the officer was elected, the general
improved real estate in Manila not under mortgage to it, rule is to allow the officer to holdover until his
but owned by shareholders, and Hogar holding itself out successor is dul qualified. Mere failure of a
by advertisement as prepared to do so service elimited corporation to elect officers does not terminate the
to shareholders, but some persons whose propertieses terms of existing officers nor dissolve the
are managed for them became shareholders only tot ake corporation.
advantage of this service o Practice is valid
Services: renting, payment of taxes and - Issue: alleged that directors of Hogar, instead of serving w/o pay
insurance, necessary repairs, collection of or for a nominal salary, have been receiving large compensation
rent from tennats from Hogar. Valid.
Hogar receives compensation for such o Sec 92: 5% of net profit of Hogar is distributed to
management at varying rates directors in proportion to their attendance at meetings of
Carried out by same staff who attend to the board
mangement details of Hogar for mortgage o Because of this practice, attendance at board meetings
properties has been extraordinarily god
SUCH PRACTICE IS UNAUTHORIZED BY o Hogar argues that such a liberal policy has had highly
LAW beneficial reulsts in obtaining intelligent attention to
o view of Treasury Bureau in report to affairs of corp
Insular Treasurer on Dec 1925 o Courts can oly look into validity of measure, and nothing
o administration of property = more fitting in Corp Law prescribes the rate of compensation for
to real estate agent ot trust company directors of corporations. Power to fix compensation to
than building and loan associaton be receied, if any, is left to corporation, to be determined
o DOCTRINE: corporations possess by its by-laws.
only such express powers; the o Such is fixed in Sec 92 of Hogars by-laws.
management an dadministration of o Cannot be a basis of depriving Hogar of its franchise.
the property of the shareholders of - Issue: in conformit with a written agreement between Mr Melian
the corporation is not expressly and pres of Hogar in Sec 92 of by laws recognizing Melians rights
authorized by law. as founder to 5% ofnet profits for pament to himself and heirs
o But not enough to dissolve merely to during life of association as compensation for contributions in
be enjoined. organization of Hogar, WON such compensation is uncscionable.
- Issue: WON Art. 10 (board of directors, by vote of absolute No.
majority, is empowered to cancel shares and to retrun to the owner o Contract is NOT a capital offense of the corporation
the balance resulting from liquidation thereof, whenever, by reason o Mere fact that compensation paid under the contract is
of their ocnduct, or for any other motive, the continuation as in excessof what might be appropriate court cannot
members of the owners of such shares is not desirable): yes, interfere
misdemeanor, but NOT enough to dissolve. o Contract by Hogar with Melian does not affect Hogars
o By-law = patent nullity legal caracter
o Direct conflict with Sec 187 which expressly declares - Issue: are Art 70 ( requiring persons elected to board of directors
that board of directors DONT have the power to force must beholders of shares of paid up value of P5k which shall be
the surrender and withdrawal of unmatured stock except 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 determine each year the amount to be written down upon
rights as shareholders to receive loans from the association) are expenses of installation and property of corp
invalid. No. o Question to adopt such by-law is embraced within
o Art. 70 assailed because poor shareholders daw power to make by-laws for administration of
cannot sit on board corporate affairs as well as control and disposition
o Art. 76 assailed because it requires directors to of property
renounce their right to loans and unreasonably limits o Legislature should provide the remedy by defining th
their rights as members extent to which depreciation may be allowed by building
o Sec 21 of Corp law expressly gives corp power to and loan associations
provide in its by-laws the qualifications of directors; - Issue: WON Hogar maintains excessive reserve funds and WON
requirement of security from them for discharge of the board has settled upon unlawful policy of paying a straight
duties; Art. 70 is highly prudent; Art. 76 is designed annual dividend o 10% regardless of losses suffered and profits
to prevent possibility of looting from corp made by the corporation and in contravention of the requirements
- Issue: WON the franchise has abused its franchise in issuing of Sec 188 of the Corp law
special shares No. o Art 92 of by-laws: 5% per centum of net profits earned
o special shares as described in articles of incropration: each year shall be carried over to General Rsserve
issued upon payment of 8% of par value in o Art 93: authorizes directors to carry funds to special
cash, or monthly dues of P10 + 20% remaining reserve, provided annual dividedn in year in which funds
par value to be completed by accumulation of are carried to special reserve exceeds 8%
proportionate part of profits of corporation + at o Policy of board to place in special reserve any balance
end of each quarter, holders of special shares in profit and loss account after satisfaction of preferential
entitled to receive in cahs such part of net charges and payment of dividend of 10% to all special
profits of corporation corresponding to amount and ordinary shares
on such date paid to be dteremind by o General reserve never drawn upon for maintaining
directors, and at end of each year, fulla mount regular annual dividend, but recourse to special reserve
of net profits available for distribution on 3 diff ocasionshave been made to make good amount
corresponding to special shares + directors necessary to pay dividends
shall aply such part as they deem advisable to o Corp law impliedly grants power to maintina
the amortization of the subscription to capital reserves all commercial enterprises encounter
with respect to share snot fully paid up, and periods when earings fall below the average, and
the remainder of the profits, if any, prudent manager makes provision for such
acorresponding to such shares, shall be contingencies; to regard all surplus as profit is to
delivered to the holders thereof in accordance neglect on eof the primary canons of good business
with the provision of the by-laws practice
o govt argues that special shares are not mentione in the o contingent fund is merely insurance against possible
Corp law as one of the forms of security which may be loss.
issued by the association; o Sec 188 of Corp Law providng thatprofits and lowsses
when special shares are outsanding, hogar shall be annually apportioned among the shareholders
accumulates to each special share, at the end does not mean potion cannot be carried over to reserve;
of the year, 1/10 of dividend declared and to profits and lossess shall be determined by board
pay the remainder of the dividend in cash to exercise discretion of good businessman
the holders of shares - Issue: that Hogar has made loans which to the knowledge of the
when amount paid upon any special share associations officers were intended to be used by the borrowers
plus accumulated dividends amounts to par for other purposes than the building of homes
value of share, share matures and ceases to o ie that no attempt has been made by Hogar with respect
participate in earning amount then returned to the use made of borrowed funds, Hogar being cntent
to shreholder and share cancelled that security be given for each loan
nature o special shares: advance payment o govt alleges that in making laons for other purposes than
shares building of residential houses, Hogar has illegally
Sec 178 of Corp Law: payment of dues or departed from its charcter and made itself amendble to
interest may be made in advance, but the dissolution
corporation sall not allow interest on such o no statute in this jurisdiction expressly declares that
advance payment at a greater rate than 6% loans made by these corps be solely for purpose of
per annum nor for a longer period than one building homes; building of homes is mentioned in Sec
year 171 as only among several ends which building and loan
No interest is ever paid by Hogar in any associations are designed to promote
amount for the advance payments made on - Issue: loans made by Hogar for purposes other than building or
these shares BECAUSE pariticpation of acquiring homes have been extended in extremely large amounts
special shares in the earning of Hogar to wealthy persons and large companies.
sufficiently compensates the shareholder for o in connecion with the larger of the two, available funds of
advance payments made b him Hogar were reduced to the point that the associatin was
Final 20% of par value of ach share is not paid compelled to take avantage of certain provisions of its
by shareholder out of pocket but satisfied by by-laws authorizing the postponement of payment of
applying a portion of the shareholders claims resulting from withdrawals, whereas previously
pariticipation in the annual earnings the association had alwys settled thes claims promptly
Even if the Corp Law does not expressly from current funds delay in payment of matured
authorize such shares, corp has implied shares, but there was delay in payment of withdrawal
authority to issue them applications
- Issue: alleged that depreciation is charged by association at 10% o is it suicidal on the part of the corp to make large oans?
epr annum. But no fact was alleged re inadequacy of security
o Hogar purchases from foreclosures of mortgages and o but these large loans are only 10 out of 540 outsanding,
places in its book the value of such real estate at a fixed and average of the rest are modest enough
rate, resulting in depreciation o the law states no limit with respect to size of loans to be
o But board has power to allow some depreciation + no made b the association confided to discretion of the
positive provision of law prohibits association from board of directors
writing off a reasonable amount for depreciation on its - Issue: if corp expires or liquiates early, accumulated reserves wil
assets for purpose of determining its real profits + art 74 go to founder and heirs and directors, and not to ordinary holders.
of by-laws expressly authorize board of directors to
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.

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