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G.R. No.

L-28113 March 28, 1969

THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO


BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN
MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG
ANDOY, MACALABA INDAR LAO. respondents.

L. Amores and R. Gonzales for petitioners.


Jose W. Diokno for respondents.

CASTRO, J.:

The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors,
of the municipality of Balabagan of the same province. Balabagan was formerly a part of the
municipality of Malabang, having been created on March 15, 1960, by Executive Order 386 of
the then President Carlos P. Garcia, out of barrios and sitios 1 of the latter municipality.

The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain
the respondent municipal officials from performing the functions of their respective office
relying on the ruling of this Court in Pelaez v. Auditor General 2 and Municipality of San Joaquin
v. Siva. 3

In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section
23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power
to create barrios in the provincial board, is a "statutory denial of the presidential authority to
create a new barrio [and] implies a negation of the bigger power to create municipalities," and
(2) that section 68 of the Administrative Code, insofar as it gives the President the power to
create municipalities, is unconstitutional (a) because it constitutes an undue delegation of
legislative power and (b) because it offends against section 10 (1) of article VII of the
Constitution, which limits the President's power over local governments to mere supervision. As
this Court summed up its discussion: "In short, even if it did not entail an undue delegation of
legislative powers, as it certainly does, said section 68, as part of the Revised Administrative
Code, approved on March 10, 1917, must be deemed repealed by the subsequent adoption of the
Constitution, in 1935, which is utterly incompatible and inconsistent with said statutory
enactment."

On the other hand, the respondents, while admitting the facts alleged in the petition,
nevertheless argue that the rule announced in Pelaez can have no application in this case because
unlike the municipalities involved in Pelaez, the municipality of Balabagan is at least a de facto
corporation, having been organized under color of a statute before this was declared
unconstitutional, its officers having been either elected or appointed, and the municipality itself
having discharged its corporate functions for the past five years preceding the institution of this
action. It is contended that as a de facto corporation, its existence cannot be collaterally attacked,
although it may be inquired into directly in an action for quo warranto at the instance of the State
and not of an individual like the petitioner Balindong.

It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved
to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of government. 4 But the rule disallowing
collateral attacks applies only where the municipal corporation is at least a de facto corporations.
5
For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its
existence may be, questioned collaterally or directly in any action or proceeding by any one
whose rights or interests ate affected thereby, including the citizens of the territory incorporated
unless they are estopped by their conduct from doing so. 6

And so the threshold question is whether the municipality of Balabagan is a de facto


corporation. As earlier stated, the claim that it is rests on the fact that it was organized before the
promulgation of this Court's decision in Pelaez. 7

Accordingly, we address ourselves to the question whether a statute can lend color of validity to
an attempted organization of a municipality despite the fact that such statute is subsequently
declared unconstitutional.lawphi1.ñet

This has been a litigiously prolific question, sharply dividing courts in the United States. Thus,
some hold that a de facto corporation cannot exist where the statute or charter creating it is
unconstitutional because there can be no de facto corporation where there can be no de jure one,
8
while others hold otherwise on the theory that a statute is binding until it is condemned as
unconstitutional. 9

An early article in the Yale Law Journal offers the following analysis:

It appears that the true basis for denying to the corporation a de facto status lay in the
absence of any legislative act to give vitality to its creation. An examination of the cases
holding, some of them unreservedly, that a de facto office or municipal corporation can
exist under color of an unconstitutional statute will reveal that in no instance did the
invalid act give life to the corporation, but that either in other valid acts or in the
constitution itself the office or the corporation was potentially created....

The principle that color of title under an unconstitutional statute can exist only where
there is some other valid law under which the organization may be effected, or at least an
authority in potentia by the state constitution, has its counterpart in the negative
propositions that there can be no color of authority in an unconstitutional statute that
plainly so appears on its face or that attempts to authorize the ousting of a de jure or de
facto municipal corporation upon the same territory; in the one case the fact would imply
the imputation of bad faith, in the other the new organization must be regarded as a mere
usurper....

As a result of this analysis of the cases the following principles may be deduced which
seem to reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal
corporation may be:

1. A valid law enacted by the legislature.

2. An unconstitutional law, valid on its face, which has either (a) been
upheld for a time by the courts or (b) not yet been declared void; provided
that a warrant for its creation can be found in some other valid law or in
the recognition of its potential existence by the general laws or
constitution of the state.

II. There can be no de facto municipal corporation unless either directly or


potentially, such a de jure corporation is authorized by some legislative fiat.

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


invalidity of which is apparent on its face.

IV. There can be no de facto corporation created to take the place of an existing de jure
corporation, as such organization would clearly be a usurper.10

In the cases where a de facto municipal corporation was recognized as such despite the fact that
the statute creating it was later invalidated, the decisions could fairly be made to rest on the
consideration that there was some other valid law giving corporate vitality to the organization.
Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute
had not been invalidated cannot conceivably make it a de facto corporation, as, independently of
the Administrative Code provision in question, there is no other valid statute to give color of
authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court granted a
similar petition for prohibition and nullified an executive order creating the municipality of
Lawigan in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was
created in 1961, before section 68 of the Administrative Code, under which the President had
acted, was invalidated. 'Of course the issue of de facto municipal corporation did not arise in that
case.

In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it
confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed." Accordingly, he held that
bonds issued by a board of commissioners created under an invalid statute were unenforceable.

Executive Order 386 "created no office." This is not to say, however, that the acts done by the
municipality of Balabagan in the exercise of its corporate powers are a nullity because the
executive order "is, in legal contemplation, as inoperative as though it had never been passed."
For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored."
As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13

The courts below have proceeded on the theory that the Act of Congress, having been
found to be unconstitutional, was not a law; that it was inoperative, conferring no rights
and imposing no duties, and hence affording no basis for the challenged decree. Norton v.
Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559,
566. It is quite clear, however, that such broad statements as to the effect of a
determination of unconstitutionality must be taken with qualifications. The actual
existence of a statute, prior to such a determination, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot always be erased by a new
judicial declaration. The effect of the subsequent ruling as to invalidity may have to be
considered in various aspects — with respect to particular relations, individual and
corporate, and particular conduct, private and official. Questions of rights claimed to
have become vested, of status of prior determinations deemed to have finality and acted
upon accordingly, of public policy in the light of the nature both of the statute and of its
previous application, demand examination. These questions are among the most difficult
of those which have engaged the attention of courts, state and federal, and it is manifest
from numerous decisions that an all-inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.

There is then no basis for the respondents' apprehension that the invalidation of the executive
order creating Balabagan would have the effect of unsettling many an act done in reliance upon
the validity of the creation of that municipality. 14

ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the
respondents are hereby permanently restrained from performing the duties and functions of their
respective offices. No pronouncement as to costs.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano, JJ., concur.
Teehankee and Barredo, JJ., took no part.

Separate Opinions

FERNANDO, J., concurring:

I concur fully with the well-written opinion of Justice Castro. It breaks new ground; it strikes
out new paths. It is precisely because of its impact on the power of judicial review of executive
acts that I deem a few additional words would not be amiss.

1. Insofar as the effect of a declaration of unconstitionality is concerned, the latter and


more realistic trend reflected in Chicot County Drainage District v. Baxter State Bank 1
had previously elicited our approval. Thus: "'Rutter vs. Esteban (93 Phil. 68) may be
construed to mean that at the time of the decision the Moratorium law could no longer be
validly applied because of the prevailing circumstances. At any rate, although the general
rule is that an unconstitutional statute — 'confers no right, creates no office, affords no
protection and justifies no acts performed under it.' ... there are several instances wherein
courts, out of equity, have relaxed its operation ... or qualified its effects 'since the actual
existence of a statute prior to such declaration is an operative fact, and may have
consequences which cannot justly be ignored' ... and a realistic approach is eroding the
general doctrine ....'" 2 Also: "We have taken note, of the fact that, on June 30, 1961,
Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional by this
Court in the case of Corominas, et al. v. The Labor Standards Commission, et al., .... It
appears, however, that the Plaintiff had filed his claim before Regional Office No. 4 of
the Department of Labor on July 26, 1960, or about one year before said Section 25 had
been declared unconstitutional. The circumstance that Section 25 of Reorganization Plan
No. 20-A had been declared unconstitutional should not be counted against the defendant
in the present case. In the case of Manila Motor Co., Inc. v. Flores, ..., this Court upheld
the right of a party under the Moratorium Law which had accrued in his favor before said
law was declared unconstitutional by this Court in the case of Rutter v. Esteban, 93 Phil.
68." 3

2. Nothing can be clearer therefore in the light of the two above cases than that a previous
declaration of invalidity of legislative acts would not be bereft of legal results. Would
that view hold true of nullification of executive acts? There might have been doubts as to
the correct answer before. There is none now.

A judicial decision annulling a presidential exercise of authority 4 is not without its


effect either. That much is evident from the holding now reached. The act stricken down,
whether proceeding from the legislature or the Executive, could in the language of the
Chicot County case, be considered, prior to the declaration of invalidity, as "an operative
fact and may have consequences which cannot justly be ignored."

Thus the frontiers of the law have been extended, a doctrine which to some may come
into play when a statute is voided is now considered equally applicable to a Presidential
act that has met a similar fate. Such a result should not occasion surprise. That is to be
expected.

There would be an unjustified deviation from the doctrine of separation of powers if a


consequence attached to the annulment of a statue is considered as not operative where an
executive order is involved. The doctrine of co-equal or coordinate departments would be
meaningless if a discrimination of the above sort were considered permissible. The
cognizance taken of the prior existence of an enactment subsequently declared
unconstitutional applies as well as to a Presidential act thereafter successfully assailed.
There was a time when it too did exist and, as such, a fact to be reckoned with, though an
infirm source of a legal right, if, as subsequently held, considered violative of a
constitutional command.

3. Precisionists may cavil at the above view; they may assert, and with some degree of
plausibility, that the holding in the Pelaez case goes no further than to locate a statutory
infirmity in the Presidential act there challenged, creating municipal corporations under
what the then Executive considered a grant of authority found in the Revised
Administrative Code. 5 Such a power having been found not to exist, the decision, so it
may be asserted, did not reach the constitutional issue of non-delegation of legislative
power. Tersely put, there was no finding of nullity based on a violation of the
Constitution.

To such a claim, it suffices to answer that while the challenged Administrative Code provision
was in fact held as not containing within itself the authority conferred on the President to create
municipal corporations, the opinion by the then Justice, now Chief Justice, Concepcion went
further. As was pointed out by him: "Although Congress may delegate to another branch of the
Government the power to fill in the details in the execution, enforcement or administration of a
law, it is essential, to forestall a violation of the principle of separation of powers, that said law:
(a) be complete in itself — it must set forth therein the policy to be executed, carried out or
implemented by the delegate — and (b) fix a standard — the limits of which are sufficiently
determinate or determinable — to which the delegate must conform in the performance of his
functions. Indeed, without a statutory declaration of policy, the delegate would, in effect, make
or formulate such policy, which is the essence of every law; and without the aforementioned
standard, there would be no means to determine, with reasonable certainty, whether the delegate
has acted within or beyond the scope of his authority. Hence, he could thereby arrogate upon
himself the power, not only to make the law, but also — and this is worse — to unmake it, by
adopting measures inconsistent with the end sought to be attained by the Act of Congress, thus
nullifying the principle of separation of powers and the system of checks and balances, and,
consequently, undermining the very foundation of our Republican system." 6

From which, it would follow, in the language of the opinion: "Section 68 of the Revised
Administrative Code does not meet these well-settled requirements for a valid delegation of the
power to fix the details in the enforcement of a law. It does not enunciate any policy to be carried
out or implemented by the President. Neither does it give a standard sufficiently precise to avoid
the evil effects above referred to." 7

It is thus clear that while it might not be strictly accurate to advance the view that there was a
finding of unconstitutionality of a challenged statutory norm, there could be no objection to the
view that the holding was one of unconstitutional application.

Nor is this all. If there be admission of the force of the assertion that the Pelaez opinion went no
further than to locate in the challenged Executive orders creating municipal corporations an act
in excess of statutory authority, then our decision in this case is all the more noteworthy for the
more hospitable scope accorded the Chicot doctrine. For as originally formulated, it would
merely recognize that during its existence, prior to its being declared violative of the constitute,
the statute must be deemed an operative fact. Today we decide that such a doctrine extends to a
Presidential act held void not only on the ground of unconstitutional infirmity but also because in
excess of the statutory power conferred. That to me is the more significant aspect of this
decision. To repeat, to that point of view I yield full concurrence.

I do so because it appears to me a logical corollary to the principle of separation of powers.


Once we accept the basic doctrine that each department as a coordinate agency of government is
entitled to the respect of the other two, it would seem to follow that at the very least, there is a
presumption of the validity of the act performed by it, unless subsequently declared void in
accordance with legally accepted principles. The rule of law cannot be satisfied with anything
less.

Since under our Constitution, judicial review exists precisely to test the validity of executive or
legislative acts in an appropriate legal proceeding, there is always the possibility of their being
declared inoperative and void. Realism compels the acceptance of the thought that there could be
a time-lag between the initiation of such Presidential or congressional exercise of power and the
final declaration of nullity. In the meanwhile, it would be productive of confusion, perhaps at
times even of chaos, if the parties affected were left free to speculate as to its fate being one of
doom, thus leaving them free to disobey it in the meanwhile. Since, however, the orderly
processes of government not to mention common sense, requires that the presumption of validity
be accorded an act of Congress or an order of the President, it would be less than fair, and it may
be productive of injustice, if no notice of its existence as a fact be paid to it, even if thereafter, it
is stricken down as contrary, in the case of Presidential act, either to the Constitution or a
controlling statute.

The far-reaching import in the above sense of the decision we now render calls, to my mind, for
an articulation of further reflection on its varied implications. We have here an illustration to
paraphrase Dean Pound, of the law being stable and yet far from standing still. That is as it ought
to be; that is how law grows. It is in that sense that the judicial process is impressed with
creativity, admittedly within limits rather narrowly confined. That in itself is to hold fast to the
appropriate role of the judiciary, far from insignificant as our decision discloses. Hence, this
separate concurring opinion, which, I trust, will make manifest why my agreement with what
Justice Castro had so ably expressed in the opinion of the Court is wholehearted and entire.

Concepcion, C.J., concurs.

CRANSON v. I.B.M. CORP.


HORNEY, J., delivered the opinion of the Court.

On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation
and that Albion C. Cranson, Jr., was a partner in the business conducted by the Bureau and as such
was personally liable for its debts, the International Business Machines Corporation brought this
action against Cranson for the balance due on electric typewriters purchased by the Bureau. At the
same time it moved for summary judgment and supported the motion by affidavit. In due course,
Cranson filed a general issue plea and an affidavit in opposition to summary judgment in which
he asserted in effect that the Bureau was a de factocorporation and that he was not personally liable
for its debts.

The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new
business corporation which was about to be created. Towards this purpose he met with other
interested individuals and an attorney and agreed to purchase stock and become an officer and
director. Thereafter, upon being advised by the attorney that the corporation had been formed under
the laws of Maryland, he paid for and received a stock certificate evidencing ownership of shares
in the corporation, and was shown the corporate seal and minute book. The business of the new
venture was conducted as if it were a corporation, through corporate bank accounts, with auditors
maintaining corporate books and records, and under a lease

[234 Md. 480]


entered into by the corporation for the office from which it operated its business. Cranson was
elected president and all transactions conducted by him for the corporation, including the
dealings with I.B.M., were made as an officer of the corporation. At no time did he assume any
personal obligation or pledge his individual credit to I.B.M. Due to an oversight on the part of
the attorney, of which Cranson was not aware, the certificate of incorporation, which had been
signed and acknowledged prior to May 1, 1961, was not filed until November 24, 1961.
Between May 17 and November 8, the Bureau purchased eight typewriters from I.B.M., on
account of which partial payments were made, leaving a balance due of $4,333.40, for which
this suit was brought.

Although a question is raised as to the propriety of making use of a motion for summary judgment
as the means of determining the issues presented by the pleadings, we think the motion was
appropriate. Since there was no genuine dispute as to the material facts, the only question was
whether I.B.M. was entitled to judgment as a matter of law. The trial court found that it was, but
we disagree.

The fundamental question presented by the appeal is whether an officer1of a defectively


incorporated association may be subjected to personal liability under the circumstances of this
case. We think not.

Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively
incorporated association with the corporate attribute of limited liability. The first, often referred to
as the doctrine of de facto corporations, has been applied in those cases where there are elements
showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to
incorporate under the existing law; and (3) actual user or exercise of corporate powers.
Ballantine, Private Corporations, § 23; 8 Fletcher, Cyclopedia of the Law of Private

[234 Md. 481]


Corporations, § 3777; 13 Am. Jur., Corporations, §§ 49-56; 18 C.J.S., Corporations, § 99. The
second, the doctrine of estoppel to deny the corporate existence, is generally employed where
the person seeking to hold the officer personally liable has contracted or otherwise dealt with
the association in such a manner as to recognize and in effect admit its existence as a corporate
body. Ballantine, op.cit., § 29; Machen, Modern Law of Corporations, §§ 278-282; 18
C.J.S., op.cit., § 109.

It is not at all clear what Maryland has done with respect to the two doctrines. There have been no
recent cases in this State on the subject and some of the seemingly irreconcilable earlier cases offer
little to clarify the problem.2

In one line of cases, the Court, in determining the rights and liabilities of a defectively organized
corporation, or a member or stockholder thereof, seems to have drawn a distinction between those
acts or requirements which are a condition precedent to corporate existence and those acts
prescribed by law to be done after incorporation. In so doing, it has been generally held that where
there had been a failure to comply with a requirement which the law declared to be a condition
precedent to the existence of the corporation, the corporation was not a legal entity and was
therefore precluded from suing or being sued as such. Boyce v. M.E. Church, 46 Md. 359
(1877); Regester v. Medcalf, 71 Md. 528, 18 Atl. 966 (1889); Bonaparte v. Lake Roland R.R.
Co., 75 Md. 340, 23 Atl. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 Atl. 76
(1894); Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 Atl. 620 (1898); Cleaveland
v. Mullin, 96 Md. 598,

[234 Md. 482]


54 Atl. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 Atl. 19 (1909).
These cases appear to stand for the proposition that substantial compliance with those
formalities of the corporation law, which are made a condition precedent to corporate
existence, was not only necessary for the creation of a corporation de jure, but was also a
prerequisite to the existence of a de facto corporation or a corporation by estoppel.

In the Boyce case, an action in assumpsit against a defectively incorporated religious society, the
Court (at p. 373 and p. 374), in holding that the society was not estopped to deny its corporate
existence, said:

We think it would be extending the doctrine of estoppel to an extent, not justified by the
principles of public policy, to allow it to operate through the conduct of the parties concerned,
to create substantially a de facto corporation, with just such powers as the parties may by their
acts give to it.* * *The statute law of the State, expressly requiring certain prescribed acts to be
done to constitute a corporation, to permit parties indirectly, or upon the principle of estoppel,
virtually to create a corporation for any purpose, or to have acts so construed, would be in
manifest opposition to the statute law, and clearly against its policy, and justified upon no
sound principle in the administration of justice.

In the Maryland Tube case, an action by a corporation for specific performance of a contract to
convey land which it had entered into prior to its becoming a legal entity, the Court, having cited
(at p. 217) the statements in Jones v. Aspen Hardware Co., 40 Pac. 457 (Colo. 1895),3 with
approval for the

[234 Md. 483]


proposition that "`the doctrine of estoppel cannot be successfully invoked, unless the
corporation has at least a de facto existence,'" that "`a de factocorporation can never be
recognized in violation of a positive law'" and that "`there is a broad distinction between those
acts made necessary by the statute as a prerequisite to the exercise of corporate powers, and
those acts required of individuals seeking incorporation but not made prerequisite to the
exercise of such powers,'" went on to say (at p. 218) that "these principles were clearly
recognized and applied" in the Boycecase.

In the National Shutter Bar case, an action by a corporation for an alleged libel which had occurred
before the performance of a condition precedent necessary for legal incorporation, it was held —
citing the Maryland Tubecase for the proposition that statutory conditions precedent must have
been complied with to give existence to corporations formed under general laws — that the
corporation had no legal existence at the time of the alleged libel. In referring to the Boyce case, it
was said (at p. 320) that "it has been held by our predecessors that a corporation cannot be actually
or virtually created by estoppel in Maryland." And, on the basis of the statements in Jones v. Aspen
Hardware Co., supra (also relied on in the Maryland Tube case), it was concluded that the
corporation could not maintain the action.

On the other hand, where the corporation has obtained legal existence but has failed to comply
with a condition subsequent to corporate existence, this Court has held that such nonperformance
afforded the State the right to institute proceedings for the forfeiture of the charter, but that such
neglect or omission could never be set up by the corporation itself, or by its members and
stockholders, as a defense to an action to enforce their liabilities. C. & O. Canal Co. v. B. & O.
Railroad Co., 4 G. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102
Md. 501, 63 Atl. 62 (1906).

[234 Md. 484]


In the Hammond case, an action by a creditor against a stockholder of a state bank on his
statutory liability, the Court, after stating that a corporation or a stockholder could not defeat
an action by showing noncompliance with the requirements of the corporation law unless the
acts required are conditions precedent to corporate existence, said (at p. 15):
By holding otherwise, parties might avail themselves of the powers and privileges of a
corporation, without in any manner subjecting themselves to its duties and obligations, and
might set up their own neglect of duty, of wilful omission to comply with the requirements of
the statute, as means of discharge from all their just obligations under the law. This is forbidden
by every principle of law and justice, and hence such a defense could never be tolerated.

It seems clear therefore that when a defect in the incorporation process resulted from a failure to
comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit of a
creditor to estop the corporation, or the members or stockholders thereof, from denying its
corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and Practice (rev.
ed.), § 339.

In another line of Maryland cases which determined the rights and liabilities of a defectively
organized corporation, or a member or stockholder thereof, the Court, apparently disregarding the
distinction made between those requirements which are conditions precedent and those which are
conditions subsequent to corporate existence, has generally precluded, on the grounds of estoppel
or collateral attack, inquiry into the question of corporate existence. Maltby v. Northwestern Va.
R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building Asso., 24 Md. 259 (1866); Grape Sugar
& Vinegar Mfg. Co. v. Small, 40 Md. 395 (1874); Laflin & Rand Powder Co. v. Sinsheimer, 46
Md. 315 (1877); Keene v. Van Reuth, 48 Md. 184 (1878); Bartlett v. Wilbur, 53 Md. 485
(1880); Pott & Co. v. Schmucker, 84 Md. 535, 36 Atl. 592 (1897). In the Grape Sugar case, an
action against a defectively organized corporation to

[234 Md. 485]


recover the balance due for work done and materials furnished, the Court said (at p. 400):
The second prayer proceeds upon the assumption that the [corporation] is not liable, provided
the work was done prior to the recording of the certificate of incorporation. It is true, that
under the general incorporation law of this State, the recording of the certificate was necessary
to constitute the [corporation] a body politic. If, however, the contract was made with the
[creditor] through * * * [the] President of the [corporation], after the certificate had been
signed by the members of the proposed corporation, but before it was recorded, and the
company, after its incorporation was complete, accepted the work done under the contract, it
will be estopped, both in law and equity, from denying its liability, on account of the same.

Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which might
be distinguishable in that it involved an effort to impose liability on a religious society and not a
business corporation.

In the Laflin & Rand case, decided in the same year (1877) as the Boycecase, the Court, in an
action against certain members of a corporation to make them individually liable for goods sold
and delivered to the corporation, said (at p. 321):

[The company] has been clothed with all the forms of a corporation by the laws of a
neighboring State, and was in the exercise and use of the franchises conferred upon it. It was a
corporation de facto at the time the goods were sold and delivered to it * * * and its existence
as a corporation cannot be collaterally drawn into question.To permit a recovery against the
defendants, and thereby to say that they are to be regarded in law as a voluntary
unincorporated association, would be a departure from all the cases. The debt was not created
with them individually, but with a company acting under a formal incorporation, and in the
exercise of its corporate powers. This [creditor] dealt with it and gave it credit as a corporation.
If its assets are not ample to pay, it is the misfortune of the creditor.4

See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for similar
statements of the law. From these cases it appears that where the parties have assumed corporate
existence and dealt with each other on that basis, the Court will apply the estoppel doctrine on the
theory that the parties by recognizing the organization as a corporation were thereafter prevented
from raising a question as to its corporate existence.

When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals
that the cases seem to fall into one or the other of two categories. In one line of cases, the Court,
choosing to disregard the nature of the dealings between the parties, refused to recognize both
doctrines where there had been a failure to comply with a condition precedent to corporate
existence, but, whenever such noncompliance concerned a condition subsequent to incorporation,
the Court often applied the estoppel doctrine. In the other line of cases, the Court, choosing to
make no distinction between defects which

[234 Md. 487]


were conditions precedent and those which were conditions subsequent, emphasized the
course of conduct between the parties and applied the estoppel doctrine when there had been
substantial dealings between them on a corporate basis.

Whether or not the decisions in the Boyce and Maryland Tube cases had the effect of repudiating
the de facto doctrine in this state, as some of the text writers seem to think, is a question we do not
reach in this case and therefore need not consider at this time. On the other hand, since it is clear
that the Maryland Tube and National Shutter Bar cases are inconsistent with other Maryland cases
insofar as they held (in relying on the statements in Jones v. Aspen Hardware Co., supra) that the
doctrine of estoppel cannot be invoked unless a corporation has at least a de factoexistence, both
cases — Maryland Tube and National Shutter Bar — should be, and are hereby, overruled to the
extent of the inconsistency. There is, as we see it, a wide difference between creating a corporation
by means of the de facto doctrine and estopping a party, due to his conduct in a particular case,
from setting up the claim of no incorporation. Although some cases tend to assimilate the doctrines
of incorporation de facto and by estoppel, each is a distinct theory and they are not dependent on
one another in their application. See 8 Fletcher, op.cit., § 3763; France on Corporations (2nd ed.),
§ 29; 18 C.J.S., op.cit., § 111h. Where there is a concurrence of the three elements necessary for
the application of the de facto corporation doctrine, there exists an entity which is a corporation de
jure against all persons but the state. On the other hand, the estoppel theory is applied only to the
facts of each particular case and may be invoked even where there is no corporation de
facto. Accordingly, even though one or more of the requisites of a de facto corporation are absent,
we think that this factor does not preclude the application of the estoppel doctrine5 in a proper case,
such as the one at bar.

[234 Md. 488]


I.B.M. contends that the failure of the Bureau to file its certificate of incorporation
debarred all corporate existence. But, in spite of the fact that the omission might have
prevented the Bureau from being either a corporation de jure or de facto,6 Jones v. Linden
Building Asso., supra, we think that I.B.M. having dealt with the Bureau as if it were a
corporation and relied on its credit rather than that of Cranson, is estopped to assert that the
Bureau was not incorporated at the time the typewriters were purchased. Laflin & Rand
Powder Co. v. Sinsheimer, supra. See also Tulane Improvement Co. v. S.A. Chapman & Co., 56
So. 509 (La. 1911). In 1 Clark and Marshall, Private Corporations, § 89, it is stated:
The doctrine in relation to estoppel is based upon the ground that it would generally be
inequitable to permit the corporate existence of an association to be denied by persons who
have represented it to be a corporation, or held it out as a corporation, or by any persons who
have recognized it as a corporation by dealing with it as such; and by the overwhelming weight
of authority, therefore, a person may be estopped to deny the legal incorporation of an
association which is not even a corporation de facto.
In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts of
other jurisdictions have held that where one has recognized the corporate existence of an
association, he is estopped to assert the contrary with respect to a claim arising out of such dealings.
See, for example, Tarbell v. Page, 24 Ill. 46 (1860); Magnolia Shingle Co. v. J. Zimmern's Co., 58
So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John Lucas Co. v.
Bernhardt's Estate, 100 So. 399 (La. 1924).

Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson was
not liable for the balance due on account of the typewriters.

Judgment reversed; the appellee to pay the costs.

FootNotes
1. Although we are concerned with the liability of an "officer" in this case, the principles of law stated
herein might under other circumstances be applicable to a determination of the liability of a member or
shareholder of a defectively organized corporation.
2. Apparently because it was not requested to do so, the lower court did not undertake to prepare and file
a memorandum of its reasons for deciding the problem as it did. But, inexcusably, the briefs were for the
most part of no practical use to this Court in arriving at a decision of the intricate question of law
presented by the appeal. While the appellant cited three Maryland cases for the proposition that a de
facto corporation was created and the appellee cited one Maryland case for the proposition that a
corporation cannot be created by estoppel, neither made an attempt to analogize or distinguish the
numerous other Maryland cases touching the problem.
3. This case involved an action of replevin brought by a corporation for goods seized under a writ of
attachment. The Colorado statute required the payment of a fee by persons forming a corporation to the
Secretary of State "for incorporation and certain other privileges" and further provided that no such
corporation "shall have or exercise any corporate powers or be permitted to do any business in this State
until the said fee shall have been paid." It was held that the corporation did not have title to the property it
sought to replevy since the goods had been transferred to it before the payment of the fee which was made
a condition precedent to corporate existence by the statute.
4. In this case, the first point the Court considered was whether the validity of the incorporation could be
attacked by proving, aliunde the certificate of its incorporation, that certain prerequisites of the law had
not been complied with in good faith. Then, after stating the established rule that a company incorporated
according to all the required forms of law must be regarded by third persons as a corporation until it is
dissolved by a judicial proceeding on behalf of the government that created it, the Court apparently
assumed that as the company was in fact dealing with the third person on a corporate basis, it was to him
a corporation de facto. Although this assumption seems (1) to have confused the de facto doctrine with
the estoppel theory and (2) was unnecessary in view of the fact that the company might have been a
corporation de jure, we believe that it did not affect the force of the holding with respect to the
proposition that third persons who have dealt with a company on a corporate basis are precluded from
impeaching its corporate existence.
5. A third doctrine, called the modern "enterprise-entity theory," which in many respects is not unlike the
estoppel theory applied in Maryland, is described in 1 Oleck, Modern Corporation Law, § 592. For an
excellent analysis of the law concerning defective incorporation in general, see Chapter 25 of Vol. 1, §§
584-595. See also the last sentence in § 591 (p. 839) where the author says that "in time the doctrine of
`de facto' corporation may become merely an historic example of legal conceptualism at its worst."
6. Those states which recognize the de facto doctrine are not in accord as to whether a corporation de
facto may be created in spite of the failure to file the necessary papers. Some courts, without making clear
in every instance whether a de facto corporation was meant or not, have stated that failure to file the
required papers prevented the organizations from becoming a corporation and have held in effect that the
persons acting as a corporation are a mere association or partnership. See, among others, Slocum v.
Head, 81 N.W. 673 (Wis.); Perrine v. Levin, 123 N.Y. Supp. 1007; H.J. Hughes Co. v. Farmers' Union
Produce Co., 194 N.W. 872 (Neb.); Elrod Slug Casting Mach. Co. v. O'Malley, 57 F.Supp. 915 (D. Neb.).
Other courts, without expressly deciding whether a de facto corporation was created, hold that the statutes
of the state imply corporate existence prior to the filing of articles of incorporation. See, for
example, Merrick v. Reynolds Eng. & Gov. Co., 101 Mass. 381; Granby Min. & Smelt. Co. v. Richards, 8
S.W. 246 (Mo.). Still other courts hold that a de facto existence is not precluded by failure to file the
articles of incorporation. See Mason v. Stevens, 92 N.W. 424 (S.D.); Frawley v. Tenafly Transportation
Co., 113 Atl. 242 (N.J.L.); Tisch Auto Supply Co. v. Nelson, 192 N.W. 600 (Mich.); Berlin Bank v.
Nelson, 204 N.W. 92 (Mich.); A.W. Mendenhall Co. v. Booher, 48 S.W.2d 120 (Mo. App.); Culkin v.
Hillside Restaurant, 8 A.2d 173 (N.J. Eq.). Numerous other cases on the problem are collected in 22
A.L.R. 376, 37 A.L.R. 1319. See also 1 Oleck, Modern Corporation Law, § 585, and the cases cited in
the footnotes.

G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,


vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.

Jimenez, Tantuico, Jr. and Tolete for petitioner.


Francisco Astilla for respondent Segundino Refuerzo.

FELIX, J.:

This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of
the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between the former and the Philippine
Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas,
Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease with
the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing under
the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business address
therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was provided
in said contract, among other things, that the lifetime of the lease would be for a period of 10 years;
that the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor
would be entitled to 30 per cent of the net income accruing from the harvest of any, crop without
being responsible for the cost of production thereof; and that after every harvest, the lessee was
bound to declare at the earliest possible time the income derived therefrom and to deliver the
corresponding share due the lessor.

Apparently, the aforementioned obligations imposed on the alleged corporation were not complied
with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance
of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo,
for accounting, rescission and damages (Civil Case No. 1912). She averred that sometime in April,
1954, defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of
the commencement of the action, already harvested, processed and sold by defendants; that
notwithstanding that fact, defendants refused to render an accounting of the income derived
therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the
deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was in
violation of the terms of the covenant entered into between the plaintiff and defendant corporation, a
rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were allegedly
notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June 8,
1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to
render a complete accounting of the harvest of the land subject of the proceeding within 15 days
from receipt of the decision and to deliver 30 per cent of the net income realized from the last
harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It
was further provide that upon defendants' failure to abide by the said requirement, the gross income
would be fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30
per cent of which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of
lease, which was declared rescinded.

No appeal therefrom having been perfected within the reglementary period, the Court, upon motion
of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the
attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the
Philippine Fibers Producers Co., Inc., was found available for attachment. On January 31, 1956,
defendant Segundino Refuerzo filed a motion claiming that the decision rendered in said Civil Case
No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to
his personal liability and thus prayed that an order be issued limiting such liability to defendant
corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered the Provincial
Sheriff of Leyte to release all properties belonging to the movant that might have already been
attached, after finding that the evidence on record made no mention or referred to any fact which
might hold movant personally liable therein. As plaintiff's petition for relief from said order was
denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in
issuing the order complained of, acted with grave abuse of discretion and prayed that same be
declared a nullity.

From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile
respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of
Court. Section 3 of said Rule, however, in providing for the period within which such a motion may
be filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided


for in either of the preceding sections of this rule must be verified, filed within sixty days after
the petitioner learns of the judgment, order, or other proceeding to be set aside, and not
more than six months after such judgment or order was entered, or such proceeding was
taken; and must be must be accompanied with affidavit showing the fraud, accident, mistake,
or excusable negligence relied upon, and the facts constituting the petitioner is good and
substantial cause of action or defense, as the case may be, which he may prove if his
petition be granted". (Rule 38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment,
and not more than 6 months after the judgment or order was rendered, both of which must be
satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas the motion
filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23
days, the filing of the aforementioned motion was clearly made beyond the prescriptive period
provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision
or order is certainly an alert of grace or benevolence intended to afford said litigant a penultimate
opportunity to protect his interest. Considering the nature of such relief and the purpose behind it,
the periods fixed by said rule are non-extendible and never interrupted; nor could it be subjected to
any condition or contingency because it is of itself devised to meet a condition or contingency
(Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the
petition for a writ of certiorari filed herein may be granted. However, taking note of the question
presented by the motion for relief involved herein, We deem it wise to delve in and pass upon the
merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that
the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so in
his capacity as president of the corporation. And this allegation was found by the Court a quo to be
supported by the records. Plaintiff on the other hand tried to refute this averment by contending that
her failure to specify defendant's personal liability was due to the fact that all the time she was under
the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly
registered corporation as appearing in the contract, but a subsequent inquiry from the Securities and
Exchange Commission yielded otherwise. While as a general rule a person who has contracted or
dealt with an association in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such transaction or dealing, (Asia
Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs.
Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine
may not be held to be applicable where fraud takes a part in the said transaction. In the instant case,
on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc.,
had no juridical personality, defendant Refuerzo gave no confirmation or denial and the
circumstances surrounding the execution of the contract lead to the inescapable conclusion that
plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly
organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separate and
distinct from its component members or stockholders and officers such that a corporation cannot be
held liable for the personal indebtedness of a stockholder even if he should be its president (Walter
A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or member cannot be held
personally liable for any financial obligation be, the corporation in excess of his unpaid subscription.
But this rule is understood to refer merely to registered corporations and cannot be made applicable
to the liability of members of an unincorporated association. The reason behind this doctrine is
obvious-since an organization which before the law is non-existent has no personality and would be
incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by
law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at their own risk. And as it
is an elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and comes personally liable for contracts
entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited
in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that
defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co.,
Inc., was the moving spirit behind the consummation of the lease agreement by acting as its
representative, his liability cannot be limited or restricted that imposed upon corporate shareholders.
In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of
reaping the consequential damages or resultant rights, if any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this
matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein
which might have been attached in the execution of such judgment, is hereby set aside and nullified
as if it had never been issued. With costs against respondent Segundino Refuerzo. It is so ordered.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.

G.R. No. L-23241 March 14, 1925

HENRY FLEISCHER, plaintiff-appellee,


vs.
BOTICA NOLASCO CO., INC., defendant-appellant.

Antonio Gonzalez for appellant.


Emilio M. Javier for appellee.

JOHNSON, J.:

This action was commenced in the Court of First Instance of the Province of Oriental Negros on the
14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a corporation
duly organized and existing under the laws of the Philippine Islands. The plaintiff prayed that said
board of directors be ordered to register in the books of the corporation five shares of its stock in the
name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages sustained by
him resulting from the refusal of said body to register the shares of stock in question. The defendant
filed a demurrer on the ground that the facts alleged in the complaint did not constitute sufficient
cause of action, and that the action was not brought against the proper party, which was the Botica
Nolasco, Inc. The demurrer was sustained, and the plaintiff was granted five days to amend his
complaint.

On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc.,
alleging that he became the owner of five shares of stock of said corporation, by purchase from their
original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the defendant
refused to register said shares in his name in the books of the corporation in spite of repeated
demands to that effect made by him upon said corporation, which refusal caused him damages
amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to register in his
name in the books of the corporation the five shares of stock recorded in said books in the name of
Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to pay the costs. The
defendant again filed a demurrer on the ground that the amended complaint did not state facts
sufficient to constitute a cause of action, and that said amended complaint was ambiguous,
unintelligible, uncertain, which demurrer was overruled by the court.

The defendant answered the amended complaint denying generally and specifically each and every
one of the material allegations thereof, and, as a special defense, alleged that the defendant,
pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at the
par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer
was refused by the plaintiff. The defendant prayed for a judgment absolving it from all liability under
the complaint and directing the plaintiff to deliver to the defendant the five shares of stock in
question, and to pay damages in the sum of P500, and the costs.

Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at the
conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, in his
opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its shares
from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with section
35 thereof; and rendered a judgment ordering the defendant corporation, through its board of
directors, to register in the books of said corporation the said five shares of stock in the name of the
plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the original owner, Manuel
Gonzalez, with costs against the defendant.

The defendant appealed from said judgment, and now makes several assignment of error, all of
which, in substance, raise the question whether or not article 12 of the by-laws of the corporation is
in conflict with the provisions of the Corporation Law (Act No. 1459).

There is no controversy as to the facts of the present case. They are simple and may be stated as
follows:

That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, 17,
18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said
five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided on
the back thereof, together with other credits, in consideration of a large sum of money owed by
Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo
Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer,
on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500; that
by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential
right to buy from Manuel Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to
the defendant; that the plaintiff requested Doctor Miciano to register said shares in his name; that
Doctor Miciano refused to do so, saying that it would be in contravention of the by-laws of the
corporation.

It also appears from the record that on the 13th day of March, 1923, two days after the assignment
of the shares to the plaintiff, Manuel Gonzales made a written statement to the Botica Nolasco, Inc.,
requesting that the five shares of stock sold by him to Henry Fleischer be noted transferred to
Fleischer's name. He also acknowledged in said written statement the preferential right of the
corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to the
Botica Nolasco, withdrawing and cancelling his written statement of March 13, 1923 (Exhibit C), to
which letter the Botica Nolasco on June 15, 1923, replied, declaring that his written statement was in
conformity with the by-laws of the corporation; that his letter of June 14th was of no effect, and that
the shares in question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is whether or not article 12 of the by-
laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act No.
1459). Appellant invoked said article as its ground for denying the request of the plaintiff that the
shares in question be registered in his (plaintiff's) name, and for claiming that it (Botica Nolasco, Inc.)
had the preferential right to buy said shares from Gonzalez. Appellant now contends that article 12
of the said by-laws is in conformity with the provisions of Act No. 1459. Said article is as follows:

ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero para
que estas transferencias tengan validez legal, deben constar en los registros de la
Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion o
acciones que se transfieran, o un documento de transferencia. Entendiendose que, ningun
accionista transferira accion alguna a otra persona sin participar antes por escrito al
Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de adquirir
para si la accion o acciones que se traten de transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc.,
governing the transfer of shares of stock of said corporation. The latter part of said article creates in
favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the share or
shares of stock of a retiring shareholder. Has said corporation any power, under the Corporation
Law (Act. No. 1459), to adopt such by-law?

The particular provisions of the Corporation Law referring to transfer of shares of stock are as
follows:

SEC. 13. Every corporation has the power:

xxx xxx xxx

(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the
number of its officers and directors within the limits prescribed by law, and for the transferring
of its stock, the administration of its corporate affairs, etc.

xxx xxx xxx

SEC. 35. The capital stock of stock corporations shall de divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary or
clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by delivery of
the certificate indorsed by the owner or his attorney in fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, that date of the transfer, the number of the certificate,
and the number of shares transferred.

No share of stock against which the corporation holds any unpaid claim shall be transferable
on the books of the corporation.

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent
with any existing law, for the transferring of its stock. It follows from said provision, that a by-law
adopted by a corporation relating to transfer of stock should be in harmony with the law on the
subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459 above
quoted. Said section specifically provides that the shares of stock "are personal property and may be
transferred by delivery of the certificate indorsed by the owner, etc." Said section 35 defines the
nature, character and transferability of shares of stock. Under said section they are personal
property and may be transferred as therein provided. Said section contemplates no restriction as to
whom they may be transferred or sold. It does not suggest that any discrimination may be created by
the corporation in favor or against a certain purchaser. The holder of shares, as owner of personal
property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer of shares of stock should take into consideration
the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize
with said provisions. It should not be inconsistent therewith.

The by-law now in question was adopted under the power conferred upon the corporation by section
13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the
limits fixed by law in the same section, and has not taken into consideration the provisions of section
35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to
carry into effect the objects of the corporation, and are not contradictory to the general policy of the
laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala.,
436; 46 Am. Rep., 332.)

On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for
a corporate purpose, and always within the charter limits. They must always be strictly subordinate
to the constitution and the general laws of the land. They must not infringe the policy of the state, nor
be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair the
obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect
rights of property or create obligations unknown to the law. (People's Home Savings Bank vs.
Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep.,
769.)

The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs.
Rhodes, 25 Fla., 40.)

The power to enact by-laws restraining the sale and transfer of stock must be found in the
governing statute or the charter. Restrictions upon the traffic in stock must have their source
in legislative enactment, as the corporation itself cannot create such impediments. By-law
are intended merely for the protection of the corporation, and prescribe regulation and not
restriction; they are always subject to the charter of the corporation. The corporation, in the
absence of such a power, cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to another, nor can it question the
consideration upon which a sale is based. A by-law cannot take away or abridge the
substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of
stock, a corporation can do no more than prescribe a general mode of transfer on the
corporate books and cannot justify an unreasonable restriction upon the right of sale. (4
Thompson on Corporations, sec. 4137, p. 674.

The right of unrestrained transfer of shares inheres in the very nature of a corporation, and
courts will carefully scrutinize any attempt to impose restrictions or limitations upon the right
of stockholders to sell and assign their stock. The right to impose any restraint in this respect
must be conferred upon the corporation either by the governing statute or by the articles of
the corporation. It cannot be done by a by-law without statutory or charter authority. (4
Thompson on Corporations, sec. 4334, pp. 818, 819.)

The jus disponendi, being an incident of the ownership of property, the general rule (subject
to exceptions hereafter pointed out and discussed) is that every owner of corporate shares
has the same uncontrollable right to alien them which attaches to the ownership of any other
species of property. A shareholder is under no obligation to refrain from selling his shares at
the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to
enable another shareholder to make gains and profits. (10 Cyc., p. 577.)

It follows from the foregoing that a corporation has no power to prevent or to restrain
transfers of its shares, unless such power is expressly conferred in its charter or governing
statute. This conclusion follows from the further consideration that by-laws or other
regulations restraining such transfers, unless derived from authority expressly granted by the
legislature, would be regarded as impositions in restraint of trade. (10 Cyc., p. 578.)

The foregoing authorities go farther than the stand we are taking on this question. They hold that the
power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only
be in harmony with the law or charter of the corporation, but such power should be expressly
granted in said law or charter.

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of
Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the certificate, and the
number of shares transferred." 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 purposes. but any restriction of the nature
of that imposed in the by-law now in question, is ultra vires, violative of the property rights of
shareholders, and in restraint of trade.

And moreover, the by-laws now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good faith
and for a valuable consideration. He was not a privy to the contract created by said by-law between
the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering them
to the corporation for a period of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law and took part in its adoption. (10
Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a purchaser is
not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust
and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to an


unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation for
the protection of the corporation against worthless stockholders, cannot be made available to
defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48
Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of
action against the defendant corporation, but against the president and secretary thereof, inasmuch
as the signing and registration of shares is incumbent upon said officers pursuant to section 35 of
the Corporation Law. This contention cannot be sustained now. The question should have been
raised in the lower court. It is too late to raise it now in this appeal. Besides, as stated above, the
corporation was made defendant in this action upon the demurrer of the attorney of the original
defendant in the lower court, who contended that the Botica Nolasco, Inc., should be made the party
defendant in this action. Accordingly, upon order of the court, the complaint was amended and the
said corporation was made the party defendant.

Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus
will lie to compel the officers of the corporation to transfer said stock upon the books of the
corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower court is
in accordance with law and should be and is hereby affirmed, with costs. So ordered.

Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.