FACTS:

The Philippine Commission enacted Act No. 1459, also known as the Corporation Law, on March 1, 1906.
El Hogar Filipino, organized in 1911under the laws of the Philippine Islands, was the first corporation
organized under Sec. 171-190 Act No. 1459, devoted to the subject of building and loan associations,
their organization and administration. In the said law, the capital of the corporation was not permitted
to exceed P3M, but Act No. 2092amended the statute, permitting capitalization to the amount of ten
millions .El Hogar took advantage of the amendment of Act No. 1459 and amended its AOI as a result
thereof, stating that the amount of capital must not exceed what has been stated in Act No. 2092. This
resulted to El Hogar having 5,826 shareholders, 125,750 shares with paid-up value of P8.7M. The
corporation paid P7.16M to its withdrawing stockholders .The Government of the Philippine Islands filed
an action against ElHogar due to the alleged illegal holding title to real property for a period exceeding
five (5) years after the same was bought in a foreclosure sale. Sec.13(5) of the Corporation Law states
that corporations must dispose of real estate obtained within
5 years from receiving the title. The Philippine Government also prays that El Hogar be excluded from all
corporate rights and privileges and affecting a final dissolution of said corporation .It appears from the
records that El Hogar was the holder of a recorded mortgage on the San Clemente land as security for
a P24K loan to El Hogar. However, shareholders and borrowers defaulted in payment so El
Hogar foreclosed the mortgage and purchased the land during the auction sale. A deed of conveyance in
favor of El Hogar was executed and sent to the Register of Deeds of Tralac with a request that the
certificate of title be cancelled and a new one be issued in favor of El Hogar from the Register of Deeds
of Tarlac. However, no reply was received. El Hogar filed a complaint with the Chief of the General Land
Registration Office. The certificate of title to the San Clemente land was received by El Hogar and a
board resolution authorizing Benzon to find a buyer was issued. Alcantara, the buyer of the land, was
given extension of time to make payment but defaulted
so thecontract treated rescinded. Efforts were made to find another buyer.Respondent acquired title in
December 1920 until the property was finally sold to Felipa Alberto in July 1926. The interval exceeded 5
years but the period did not commence to run until May 7, 1921 when the register of deeds delivered
the new certificate of title. It has been held that a purchaser of land registered under the Torrens system
cannot acquire the status of an innocent purchaser for value unless the vendor is able to place the
owner’s duplicate in his hands showing the title to be in the vendor. During the period before May 1921,
El Hogar was not in a position to pass an indefeasible title to any purchaser. Therefore, El Hogar cannot
be held accountable for this delay which was notdue to its fault. Likewise, the period from March 25,
1926 to April 20, 1926must not be part of the five-year period because this was the period where
respondent was under the obligation to sell the property to Alcantara prior to the contract’s rescission
due to Alcantara’s non-payment.
Another circumstance causing the delay is the fact that El Hogar purchased the property in the full
amount of the loan made by the former owner which is nearly P24K when it was subsequently found
that the property was not salable and later sold for P6K notwithstanding El Hogar’s efforts to find a
purchaser upon better terms.

ISSUE: Whether the acts of respondent corporation merit its dissolution or deprivation of its corporate
franchise and to exclude it from all corporate rights and privileges
HELD: SUSTAINED only as to administering of real property not owned by it and when permitted by
contract. Causes of action:
1) Alleged illegal holding of real property for a period exceeding fiveyears from receipt of title-Cause of
delay is not respondent’s fault
2) That respondent is owning and holding a business lot with the structure thereon in excess of
its reasonable requirements and incontravention of Sec. 13(5) of Corpo. Law- WITHOUT MERIT
Every corporation has the power to purchase, hold and lease such real property as the transaction
of the lawful business may reasonably and necessarily require.
3) That respondent is engaged in activities foreign to the purposes for which the corporation was
created and not reasonably necessary to its legitimate ends-VALID
The administration of property, payment of real estate taxes, causing necessary repairs, managing real
properties of non-borrowing shareholders is more befitting to the business of a real estate agent or a
trust company than a building and loan association.
4) That the by-laws of the association stating that, “the board of directors by the vote of an absolute
majority of its members is empowered to cancel shares and to return the balance to the owner by
reason of their conduct or any other motive or liquidation” is in direct conflict with Sec. 187 of the
Corporation Law which provides that the board
of directors shall not have the power to force the surrender andwithdrawal of unmatured stock except i
n case of liquidation or forfeiture of stock for delinquency-WITHOUT MERIT There is no provision of law
making it a misdemeanor toincorporate an invalid provision in the by-laws of a corporation; and if there
were such, the hazards incident tocorporate effort would be largely increased.
5) Art. 61 of El Hogar’s by-laws which states that “ attendance in
personor by proxy by shareholders owning one-
half plus one of theshareholders shall be necessary to constitute a quorum for theelection of directors”
is contrary to Sec. 31 of the Corpo Law whichprovides that owners of the majority of the subscribed
capital stockentitled to vote must be present either in person or by proxy at allelections of directors-
WITHOUT MERITNo fault can be imputed to the corporation on account of thefailure of
the shareholders to attend the annual meetings andtheir non-
attendance in meetings is doubtless to beinterpreted in part as expressing their satisfaction of the
wayin which things have been conducted. Mere failure of acorporation to elect officers does not
terminate the terms of existing officers nor dissolve the corporation. The general ruleis to allow the
officer to holdover until his successor is dulyqualified.
6)
That the directors of El Hogar, instead of receiving nominal pay or serving without pay, have been
receiving large compensation, varyingin amount from time to time, out of respondents’ profits-
WITHOUTMERITWith the growth of the corporation, the amount paid ascompensation to the directors
has increased beyond whatwould probably be necessary is a matter that cannot becorrected in this
action. Nor can it properly be made a basisfor depriving respondent of its franchise or enjoining it
fromcompliance with the provisions of its own by-laws. If a mistakehas been made, the remedy is to lie
rather in publicity andcompetition.
7)
That the promoter and organizer of El Hogar was Mr. Antonio Melianand that in the early stages of the
organization of the association, theboard of directors authorized the association to make a contract
withhim and that the royalty given to him as founder is
“unconscionable,excessive and out of proportion to the services rendered”-NOTSUSTAINEDThe mere
fact that compensation is in excess of what may beconsidered appropriate is not a proper consideration
for thecourt to resolve. That El Hogar is in contact with its promoter did not affect the association’s legal
character. The court is of the opinion that the traditional respect for the sanctity of
thecontract obligation should prevail over the radical andinnovating tendencies.
8)
That Art. 70 of El Hogar’s by-laws, requiring persons elected as boardof directors to be holders of shares
of the paid up value of P5,000which shall be held as security, is objectionable since a poor
member or wage earner cannot serve as a director irrespective of other qualifications- NOT
SUSTAINEDCorpo. Law expressly gives the power to the corporation toprovide in its by-laws for the
qualification of its directors andthe requirement of security from them for the proper dischargeof the
duties of their pffice in the manner prescribed in Art. 70is highly prudent and in conformity with good
practice.
9)
That respondent abused its franchise in issuing “special” sharesalleged to be illegal and inconsistent with
the plan and purposes of building and loan associations- WITHOUT MERITThe
said special shares are generally known as advancepayment shares which were evidently created for the
purposeof meeting the condition caused by the prepayment of duesthat is permitted. Sec. 178 of Corpo
Law allows payment of dues or interest to be paid in advance but the corporationshall not allow interest
on advance payment grater than 6%per annum nor for a period longer than one year. The
amountis satisfied by applying a portion of the shareholder’sparticipation in the annual earnings.The
mission of specialshares does not involve any violation of the principle that theshares must be sold at
par.
10)
That in making purchases at foreclosure sales constituting as securityfor 54 of the loans, El Hogar bids
the full amount after deducting thewithdrawal value, alleged to be pusuing a policy of depreciating at
therate of 10 percent per annum, the value of the real properties itacquired and that this rate is
excessive-UNSUSTAINABLEThe board of directors possess discretion in this matter. Thereis no provision
of law prohibiting the association from writingoff a reasonable amount for depreciation on its assets for
thepurpose of determining its real profits. Art. 74 of its by-lawsexpressly authorizes the board of
directors to determine eachyear the amount to be written down upon the expenses for
theinstallation and the property of the corporation. The courtcannot control the discretion of the board
of directors about anadministrative matter as to which they have no legitimatepower of action.
11)
That respondent maintains excessive reserve funds-UNFOUNDED

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The function of this fund is to insure stockholders againstlosses. When the reserves become excessive,
the remedy isin the hands of the Legislature.No prudent person would be inclined to take a policy in
acompany which had so improvidently conducted its affairs thatit only retained a fund barely sufficient
to pay its presentliabilities and therefore was in a condition where any changeby the reduction of
interest upon or depreciation in the valueof securities or increase of mortality would render
it insolventand subject to be placed in the hands of a receiver.12) That the board of directors has settled
upon the unlawful policy of paying a straight annual dividend of 10 percent per centum regardless
of losses suffered and profits made by the corporation, in contravention withthe requirements of Sec.
188 of the Corpo law- UNFOUNDED As provided in the previous cause of action, the profits andlosses
shall be determined by the board of directors and thismeans that they shall exercise the usual discretion
of goodbusinessmen in allocating a portion of the annual profits topurposes needful of the welfare of
the association. The lawcontemplates distribution of earnings and losses after legitimate obligations
have been met.13) That El Hogar has made loans to the knowledge of its officers whichwere intended to
be used by the borrowers for other purposes than thebuilding of homes and no attempt has been made
to control the borrowerswith respect to the use made of the borrowed funds- UNFOUNDEDThere is no
statute expressly declaring that loans may bemade by these associations SOLELY for the
purpose of building homes. The building of himes in Sec. 171 of CorpoLaw is only one among several
ends which building and loanassociations are designed to promote and Sec. 181authorizes the board of
directors of the association to fix thepremium to be charged.14) That the loans made by defendant for
purposes other than building or acquiring homes have been extended in extremely large amounts and
towealthy persons and large companies- WITHOUT MERITThe question of whether the making of large
loans constitutesa misuser of the franchise as would justify the court indepriving the association
of its corporate life is a matter confided to the discretion of the board of directors. The lawstates no
limit as to the size of the loans to be made by theassociation. Resort should be had to the legislature
because itis not a matter amenable to judicial control15) That when the franchise expires, supposing the
corporation is notreorganized, upon final liquidation of the corporation, a reserve fund mayexist which
is out of all proportion to the requirements that may fall upon itin the liquidation of the company-NO
MERITThis matter may be left to the discretion of the board
of directors or to legislative action if it should be deemedexpedient to require the gradual suppression
of reserve fundsas the time for dissolution approaches. It is no matter
for judicial interference and much less could the resumption of the franchise be justified on this
ground.16) That various outstanding loans have been made by the respondent
tocorporations and partnerships and such entities subscribed torespondents’ shares for the sole
purpose of obtaining such loans-NOMERITSec. 173 of Corpo Law declares that “any person” maybecome
a stockholder in building and loan associations. Thephrase ANY PERSON does not prevent a finding that
thephrase may not be taken in its proper and broad sense of either a natural or artificial person.17) That
in disposing real estate purchased by it, some of the propertieswere sold on credit and the persons and
entities to which it was sold
arenot members nor shareholders nor were they made members or shareholders, contrary to the
provision of Corpo Law requiring requiringloans to be stockholders only- NOT SUSTAINEDThe law does
not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder
in thecorporation. Such sales can be made upon the terms andconditions approved by the
parties.Respondent is
enjoined in the future from administering real property notowned by itself, except as may be permitted
to it by contract when aborrowing shareholder defaults in his obligation. In all other respects,
thecomplaint is
DISMISSED.

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