Dan R.

Millado
1577-17

Law 307: Business Organization II

Government of Philippine Islands v. El Hogar Filipino,

G.R. No. L-26649, July 13, 1927

Summary:

Attorney-General Jaranilla and Solicitor-General Reyes instituted a

quo warranto proceeding for the Government of Philippine Islands against
El Hogar Filipino, seeking to deprive the defendant of its corporate
franchise, excluding it from all corporate rights and privileges, and effecting
a final dissolution of said corporation. The grounds relied upon by the
plaintiff are joined and enumerated into seventeen (17) distinct causes of
action, which were answered by the defendant upon the merits, that were
ruled upon by the Supreme Court one by one, and herein presented with
pertinent facts, issues and ruling per cause of action. Initial facts established
and admitted are: that the defendant was organized in 1911 as a building and
loan association; that since then, said corporation has been doing business in
the Philippine Islands; and that its principal office is in the City of Manila.

First Cause of Action

Facts:

In 1920, defendant’s borrower defaulted in their payments of a loan of

Php24,000.00, secured by a mortgage upon a tract of land in San Clemente,
Tarlac, which was then foreclosed and purchased by the defendant. The
deed conveying the property was executed and delivered on December 22,
1920. Then, it was sent and received by the Register of Deeds of Tarlac on
December 28, 1920, to request that the said property’s certificate of title be
cancelled and a new certificate of title be issued in the name of defendant.
However, it was only on May 7, 1921 that the new certificate of title was
received by the defendant. Thereafter, several undertakings were made by
the defendant to sell the said property including authorizing some agents,
advertised it in several newspapers of general circulation, and offered it to

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Case Digest – Government v. El Hogar Filipino, G.R. No. L-26649, July 13, 1927

some prospect buyers, but failed. On March 25, 1926, it even accepted the
offer of one Alcantara to purchase the same for only Php4,000.00 but it was
rescinded on April 30, 1926 when the latter failed to tender the initial
payment after the lapse of extension of time. Finally, said property was sold
to Doña Felipa Alberto for Php6,000.00 on July 30, 1926. From said facts,
the Attorney-General stressed that from December 22, 1920, when said
corporation acquired the title to said property until July 30, 1926, when it
was finally sold, the interval is thus more than five years.

Issue:

Whether or not the dissolution of defendant corporation should

be granted for illegally holding the title to real property for a period in
excess of five years after the property had been bought in by the
defendant at one of its own foreclosure sales, considering the plaintiff’s
contention that under section 75 of Act of Congress of July 1, 1902
(repeated in subsection 5 of section 13 of the Corporation Law,) while
corporations may loan funds upon real estate security and purchase real
estate when necessary for the collection of loans, they shall dispose of real
estate so obtained within five years after receiving the title.

Ruling:

No, the dissolution of defendant corporation through quo warranto

proceeding should not be granted.

Applying section 212 of the Code of Civil Procedure in Government

of the Philippine Islands vs. Philippine Sugar Estates Development Co.
(38 Phil., 15), it was held that, “When it is found and adjudged that a
corporation has offended in any matter or manner which does not by law
work as a surrender or forfeiture, or has misused a franchise or exercised a
power not conferred by law, but not of such a character as to work a
surrender or forfeiture of its franchise, judgment shall be rendered that it
be outset from the continuance of such offense or the exercise of such
power.” (Emphasis supplied)

In Director of Lands vs. Addison, 49, Phil., 19; Rodriguez vs.

Llorente, 49 Phil., 823, Supreme Court ruled that, “a purchaser of land
registered under the Torrens system cannot acquire the status of an innocent
purchaser for value unless his vendor is able to place in his hands an

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owner's duplicate showing the title of such land to be in the vendor.”

(Emphasis supplied)

In this case, as penned by Justice Street, that even if it appears that the
law cited by the plaintiff was violated by defendant corporation, and in
exercising the Court’s discretion, it cannot grant the dissolution of said
corporation as “it would be excessively severe and fraught with
consequences altogether disproportionate to the offense committed.”
That “under these circumstances the destruction of the corporation
would bring irreparable loss upon the thousands of innocent
shareholders of the corporation without any corresponding benefit to
the public.”

In ruling this issue, the Supreme Court pointed several facts and
incidents that tend to mitigate the offense. These among others are:

a) According to the Court, the purpose of the law restricting the rights
of the corporation with regard the tenure of land is to prevent the
revival of entail (mayorazgo) or other similar institution that
hampered its alienation over a long period of time, but here, it
favored El Hogar Filipino because said corporation has acted in
good faith when it disposed the San Clemente property even if it
appears that they have done it after the expiration of the period
fixed by law, and explained sufficiently their failure to dispose it
sooner;

b) The correct interpretation of the wordings of the law: “five years

after receiving the title” is the date of the receiving of the title by
defendant which is on May 7, 1921, when the said certificate was
delivered to them and not on December 22, 1920, for it was only
after that date the respondent had the power to pass a complete
title. The Court likewise noted that such delay was not because of
the defendant’s fault;

c) The period between March 25, 1926, and April 30, 1926, should
not be counted as part of the five-year period. This was the
period when defendant corporation was under obligation to sell the
property to Alcantara, prior to the rescission of the contract by
reason of Alcantara's failure to pay. That were it not for the
latter’s failure to pay, the property could have been already sold;

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d) In the above-cited case of Philippine Sugar Estates Development

Co., the judgment of ouster was made conditional upon the failure
of the corporation to discontinue its unlawful conduct within six
months after final decision. Thus, applying the same for El Hogar
Filipino, it said that prior to institution of this action, it already
disposed the San Clemente property and in effect, it already
discontinued the alleged unlawful conduct; and

e) The Court invalidated the provision of section 3 of Act No. 2792

on the ground that the subject-matter of this section is not
expressed in the title of the Act since the wordings of the title “An
Act . . . establishing penalties for certain things, and for other
purposes.” are not sufficient to inform the public of what the
legislature is all about, and because under the Jones Law, it
requires that the subject-matter of the bill "shall be expressed in
the title of the bill." If said section is still valid, the contention of
the plaintiff would have been given merit when it argued that “the
dissolution of the corporation is obligatory upon the court by a
mere finding that the respondent has violated the provision of the
Corporation Law in any respect.”

Second Cause of Action

Facts:

On August 28, 1913, defendant corporation purchased a property

consisting of 1,413 square meters land with a nearly 50-year old building
located at the corner of Juan Luna Street and the Muelle de la Industria, in
the City of Manila. This property is located adjacent to HSBC. Defendant
corporation demolished the old building and caused to erect a modern
reinforced concrete building so that by 1920, said new building already had
four-stories and some part of 117.52 square meters had a five-story building.
When completed, defendant corporation used about 324 square meter floor
space and the remainder were rented out to other persons and entities. The
land and the improvements thereon were valued at Php690,000.00 and the
assessed valuation of the land and improvements is at Php786,478.00.

Issue:

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Whether or not the defendant corporation is owning and holding

a business lot, with the structure thereon, in the financial district of the
City of Manila in excess of its reasonable requirements and in
contravention of subsection 5 of section 13 of the Corporation Law.

Ruling:

No, the owning and holding a business lot of defendant corporation

was not in contravention of the above-cited law.

Under Subsection 5 of section 13 of the Corporation Law, “every

corporation has the power to purchase, hold and lease such real property as
the transaction of the lawful business of the corporation may reasonably and
necessarily require.”

In People v. Pullman’s Palace -Car Co. (175 Ill., 125; 64 L. R. A.,

366); Rector vs. Hartford Deposit Co.; and Association vs. Driver (129
Ky., 754), similar cases of quo warranto proceedings were initiated against
corporations for occupying only part of their property for their own use and
lease the remainder to others, but the Court all denied the remedy sought. It
ruled that, “there is nothing in the constitution, charter of the association
or statutes that limits upon the character of the building which a
corporation may erect as a home in which to conduct its business… and
the renting of the unused portions of the building is a mere incident in the
conduct of its real business.” (emphasis supplied)

In People v. Pullman’s Palace -Car Co., supra, it was held that, “the
corporation should not necessarily be restricted to a building containing
the precise number of rooms its then business might require, and no more,
but that the future probable growth and volume of its business might be
considered and anticipated, and a larger building, and one containing more
rooms than the present volume of business required be erected, and the
rooms not needed might be rented by the corporation, — provided, of
course, such course should be taken in good faith, and not as a mere
evasion of the public law and the policy of the state relative to the
ownership of real estate by corporations.” (emphasis supplied)

Here, applying the same similar cases, the Supreme Court ruled that
the said lot was lawfully acquired by El Hogar Filipino and it is entitled to
full beneficial use of the said lot. They do not agree with the contention of

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the plaintiff because there is nothing in law and principle that denies the
owner the right to enjoy its own property. In crafting the corporation law,
the legislature would not have intended to deprive a corporation of this right
similar to any property owners.

Third Cause of Action

Facts:

Plaintiff alleged that defendant corporation is engaged in the

administration and management of properties belonging to delinquent
shareholders, including those parcel of lands with improvements located in
Manila, which are not under mortgage. For these services, El Hogar Filipino
rented the said properties to others and charges a commission of 2.5% on
sums collected.

Issue:

Whether or not El Hogar Filipino is engaged in activities foreign to

the purposes for which the corporation was created.

Ruling:

Yes, El Hogar Filipino is engaged in activities foreign to the purposes

for which the corporation was created.

As written by Justice Street: “It is a general rule of law that

corporations possess only such express powers.” And that “The
administration of property in the manner described is more befitting to the
business of a real estate agent or trust company than to the business of a
building and loan association.”

Here, from the above-stated facts, it appears that defendant

corporation’s engagement to such services is unauthorized by law but the
same does not favor the dissolution of the said corporation. It should merely
prohibit them from engaging further to such activities, with respect to those
properties not under mortgage.

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Fourth Cause of Action

Facts:

Plaintiff assails the validity of Article 10 of the by-laws of defendant

corporation for being contrary to Corporation Law. Said article reads: “The
board of directors of the association, by the vote of an absolute majority of
its members, is empowered to cancel shares and to return to the owner
thereof the balance resulting from the liquidation thereof whenever, by
reason of their conduct, or for any other motive, the continuation as
members of the owners of such shares is not desirable.”

Issue:

Whether or not said article of defendant-corporation’s by-laws is

valid.

Ruling:

The said article is not valid and a patent nullity.

Under Section 187 of the Corporation Law, the board of directors

shall not have the power to force the surrender and withdrawal of unmatured
stock except in case of liquidation of the corporation or of forfeiture of the
stock for delinquency.

Here, said article is in direct conflict of the above-cited law. Thus, the
invalid article of the by-laws is a nullity that cannot be enforced by the
corporation’s board of directors and that it must be stricken out from its by-
laws. However, the Court ruled that it does not justify the dissolution of the
corporation because as stated by the Court: “There is no provision of law
making it a misdemeanor to incorporate an invalid provision in the by-
laws of a corporation.”

Fifth Cause of Action

Facts:

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In 1911 and 1912, El Hogar Filipino duly elected their directors at the
annual general meeting and there was a quorum then. However, in 1921,
when a new directorate was elected, meetings have failed for lack of
quorum. Due to lack of quorum, and without any elections, it has been the
directorates’ practice to fill vacancies in the directorate by choosing suitable
persons from among the stockholders. According to plaintiff, it is in
contravention with its by-laws particularly Article 71 which reads: “The
directors shall elect from among the shareholders-members to fill the
vacancies that may occur in the board of directors until the election at the
general meeting.”

Issue:

Whether or not the failure of the corporation to hold annual meetings

and the filling of vacancies in the directorate in the manner described
constitute misdemeanors on the part of El Hogar Filipino.

Ruling:

No, it does not constitute misdemeanors.

In Quitman Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins vs.
Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn.,
466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs.
Home Town Matual Ins. Company, 180 Missouri, 153; Cassell vs.
Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486, it was held
that, “Unless the law or the charter of a corporation expressly provides that
an office shall become vacant at the expiration of the term of office for
which the officer was elected, the general rule is to allow the officer to
holdover until his successor is duly qualified. Mere failure of a corporation
to elect officers does not terminate the terms of existing officers nor dissolve
the corporation.”

Here, it appears that the practice of the directorate of filling vacancies

is valid, taking into consideration the Article 66 of its by-laws which
declares that directors shall hold office "for the term of one year on until
their successors shall have been elected and taken possession of their
offices."

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Sixth Cause of Action

Facts:

The directors of El Hogar Filipino have been receiving large

compensations that varies in amount from time to time instead of serving
without pay, or receiving nominal pay or fixed salary. According to
plaintiff, said payment of compensation is excessive and prejudicial to the
interests of the shareholders-at-large. Defendant-corporation contends that it
is beneficial to them because it secured a constant attendance on the part of
the membership and in obtaining intelligent attention to the affairs of the
association.

Issue:

Whether or not the compensation received by directors is valid.

Ruling:

Yes, the compensation received by directors is valid.

Section 21, Act No. 1459 provides: “The power to fixed the
compensation they shall receive, if any, is left to the corporation, to be
determined in its by-laws.”

Here, Supreme Court ruled that “the Corporation Law does not
undertake to prescribe the rate of compensation for the directors of
corporations.” Pursuant to the provision of the Act above-stated, and based
upon Article 92 of its by-laws, said compensation of the directors is valid.
The question of whether it is just and proper is a matter that should be
resolved by the shareholders of the corporation upon the framing of its by-
laws, and not by statutes or the Court.

Seventh Cause of Action

Facts:

Antonio Melian was the promoter and organizer of El Hogar Filipino,

and during the early stages of the corporation, the board of directors
authorized the association to make a contract with him. For the services he

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had rendered, and as a founder, he was compensated at 5% of the net profits

of the corporation, and same payment shall be made to his heirs during the
life of the said corporation.

Issue:

Whether or not this royalty of the founder is "unconscionable,

excessive and out of all proportion to the services rendered, besides being
contrary to and incompatible with the spirit and purpose of building and loan
associations."

Ruling:

No, this royalty is not unconscionable and excessive and likewise not
contrary to and incompatible with the spirits and purpose of building and
loan associations.

In El Hogar Filipino v. Rafferty (37 Phil., 995), it was held that, “our
traditional respect for the sanctity of the contract obligation should prevail
over the radical and innovating tendencies which find acceptance with
some and which, if given full rein, would go far to sink legitimate
enterprise in the Islands into the pit of populism and bolshevism.”
(emphasis supplied)

Here, the Court cannot pass upon a judgment for a mere fact that the
compensation paid to a person is excessive or not based on the contract of
the parties. If the allegation that the said contract is ultra vires, which is not
argued in this cause of action, its continuance might be enjoined or
prohibited.

Eight Cause of Action

Facts:

Plaintiff assailed article 70 and 76 of the defendant’s by-laws for

being unlawful. In Article 70, it requires that to be elected as board of

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directors, a person must be a holder of shares of the paid-up value of

Php5,000.00. In Article 76, it declares that board of directors waived their
rights to receive loans from association.

Issue:

Whether or not Article 70 and 76 of the defendant’s by-laws is

unlawful, considering that under Article 70, a poor member or a wage earner
cannot serve as director, and under Article 76, it limits the rights and
privileges upon its members.

Ruling:

No, Articles 70 and 76 are not unlawful.

Section 21 of the Corporation Law expressly gives the power to the

corporation to provide in its by-laws for the qualifications of directors.

Here, Article 70 is in conformity with the good practice, while Article

76, it is said to be designed to prevent the possibility of the looting of the
corporation by unscrupulous directors.

Ninth Cause of Action

Facts:

The plaintiff alleged that the defendant abused its franchise in issuing
“special shares”, in which he contends that it is illegal and inconsistent with
the plan and purpose of building and loan associations. It is likewise alleged
that they are held by well-to-wage-earners for accumulating their modest
savings for the building of homes.

Issue:

Whether or not “special shares” are valid.

Ruling:

Yes, special shares are valid.

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Case Digest – Government v. El Hogar Filipino, G.R. No. L-26649, July 13, 1927

Under Section 178 of the Corporation Law, “payment of dues or

interest may be made in advance, but the corporation shall not allow
interest on such advance payment at a greater rate than six per centum per
annum nor for a longer period than one year.”

Here, special shares are similar to, or generally known as “advance

payment share”. Focusing on the last sentence of the above-cited provision,
Supreme Court said that: “it is created for the purpose of meeting the
condition cause by the prepayment of dues that is there permitted.”

Tenth Cause of Action

Facts:

In 1910 to 1925, El Hogar Filipino had made 1,373 loans to its

shareholders secured by first mortgage and pledge of the shares of the
borrowers. Of which, the defendant purchased at foreclosure sale of real
estate constituting the security of 54 of the said loans that they had always
bid the full amount of the debtors’ due. However, the shareholder has been
called upon to pay a deficiency judgment on foreclosure because of the
policy of the defendant regarding depreciation of this property at the rate of
10% and the actual average of such depreciation is valued at 14.138% which
is, according to plaintiff is excessive.

Issue:

Whether or not the defendant’s policy of depreciation is excessive.

Ruling:

No, the defendant’s policy of depreciation is not excessive.

Section 13(7) of Act No. 1459 provides the power of the corporation
to make by-laws for the administration of the corporate affairs of the
association and for the management of its business, as well as the care,
control and disposition of its property.

Here, under Article 74 of the defendant’s by-laws, it authorizes the

board of directors to determine each year the amount to be written down
upon the expenses of installation and the property of the corporation. The

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Court cannot now pass upon a judgment in undertaking to control the

discretion of the board of directors in determining the internal policy of a
business corporation because it is an internal administrative matter that the
latter have legitimate power of action. It was likewise ruled that it should be
the legislature and not within the Court’s jurisdiction that would define the
extent of depreciation allowed by a building and loan association.

Eleventh and Twelfth Cause of Action

Facts:

Article 92 of the defendant’s by-laws provides for a 5% of the net

profits earned each year to be carried to a reserve fund. While Article 93 of
the said by-laws authorizes the directors to carry funds to a special reserve,
based upon their own judgment, provided that the dividend in the year in
which funds are carried to a special reserve fund shall not exceed 8%. This
special reserve was used to pay the amount necessary to pay dividends.
Thus, plaintiff alleged that defendant maintains excessive reserve funds and
the board of directors is settling upon an unlawful policy of paying a straight
annual dividend of 10% regardless of losses suffered by the corporation,
which are all in contravention of Section 188 of the Corporation Law, as
maintaining a reserve fund is not necessary in a building and loan
association.

Issue:

Whether or not Articles 92 and 93 of the defendant’s by-laws are

valid.

Ruling:

Yes, Articles 92 and 93 of the defendant’s by-laws are valid.

In Boheman Bldg. and Loan Association vs. Knolt (1916), it was

held that, “The apparent function of this fund is to insure the stockholders
against losses.” Similarly, “It is optional with the association whether to
maintain such a fund or not, but justice and good business policy seem to
require it.” (Sundheim)

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Here, the Court ruled that there is no reason to doubt the defendant to
maintain these reserves. While it is true that it is not expressly provided
under the Corporation Law, however, it is to be implied. Thus, as stated by
the Supreme Court: “It is a fact of common observation that all commercial
enterprises encounter periods when earnings fall below the average, and the
prudent manager makes provision for such contingencies. To regard all
surplus as profit is to neglect one of the primary canons of good business
practice. Building and loan associations, though among the most solid of
financial institutions, are nevertheless subject to vicissitudes. Fluctuations
in the dividend rate are highly detrimental to any fiscal institutions, while
uniformity in the payments of dividends, continued over long periods,
supplies the surest foundations of public confidence.” (Justice Street)

Thirteenth Cause of Action

Facts:

El Hogar Filipino, with their knowledge, had made loans which are
intended by the borrowers for other purpose other than the building of
homes. However, said defendant did not make any attempt to control the
use of the borrowed funds so long as the collateral for the said loans are
sufficient. Thus, the plaintiff alleged that defendant illegally departed from
its character as a building and loan association and thus amenable to its
dissolution.

Issue:

Whether or not the dissolution of El Hogar Filipino should be granted

for departing from its character as a building and loan association.

Ruling:

No, the dissolution of El Hogar Filipino should not be granted.

Section 171 of the Corporation Law mentions that the building of

homes is only one among several ends which building and loan associations
are designed to promote.

In Sundheim, Building and Loan Association, sec. 111, it states that,

“Loans are made for the purpose of purchasing a homestead, or other real

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estate, or for any lawful purpose or business, but there is no duty or

obligation of the association to inquire for what purpose the loan is
obtained, or to require any stipulation from the borrower as to what use he
will make of the money, or in any manner to supervise or control its
disbursement.”

Here, it was ruled that no statutes expressly declared that loans may
be made solely for the purpose of building homes. On the contrary, as
expressly provided by Section 171 of the Corporation Law, building of
homes is only one among several purposes that a loan may be granted by the
said corporation.

Fourteenth Cause of Action

Facts:

Defendant granted extremely large amount of loans that resulted to a

large reduction of their assets. Thus, they were compelled to make use the
provision of their by-laws and authorized the postponement of withdrawal
claims. Said delay reached up to ten months.

Issue:

Whether or not the defendant misused its franchise in granting large

amount of loans.

Ruling:

No, the defendant did not misuse its franchise.

There is no law that limits the corporation regarding the amount of

loans to be made. This matter is given upon the discretion of the board of
directors and the Court cannot take over the control of such discretion of the
chosen officials of the corporation.

Fifteenth Cause of Action

Facts:

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Plaintiffs alleged that under Article 95 of the defendant’s by-laws, that

upon an expiration of the defendant’s franchise, or earlier liquidation of its
business, the accumulated reserve funds and other properties will accrue to
the founder, or his heirs, then directors of the corporation and to those
persons who may at that time to be holders of the ordinary and special shares
of the corporation.

Issue:

Whether or not Article 95 of defendant’s by-laws is valid.

Ruling:

Yes, Article 95 of defendant’s by-laws is valid.

Here, the said cause of action by the plaintiff is not directed to any
misdemeanor allegedly committed by the corporation. Said provision of the
by-laws is left to the discretion of the board of directors or legislature, and it
is not a matter of judicial interference.

Sixteenth Cause of Action

Facts:

Several juridical entities particularly 16 corporations and 14

partnerships were made shareholders of El Hogar Filipino for the purpose of
qualifying themselves in obtaining loan from the defendant.

Issue:

Whether or not juridical entities may become shareholders of a

corporation.

Ruling:

Yes, juridical entities may become shareholders of a corporation.

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Under Section 173 of the Corporation Law, that "any person" may
become a stockholder in building and loan associations.

Here, the word “person” is used in a general sense which means that it
includes both natural and juridical persons. Hence, said juridical entities is
qualified to become shareholders.

Seventeenth Cause of Action

Facts:

Defendant disposed its real properties on credit, transferred the title

thereto to the purchaser, and said properties sold are then mortgaged to said
defendant to secure the payment of the purchase price. This amount is
considered as a loan, and carried into the books of the defendant. It was
likewise alleged that these purchasers are not members or shareholders of
the defendant corporation.

Issue:

Whether or not such practice of the defendant in selling real properties

on credit and treated it as a loan in their books even said purchaser are not
shareholders thereof is valid.

Ruling:

No, such practice of the defendant is not valid.

Under the Corporation Law, loans are for stockholders only and on
the security of real properties and shares in the corporation, or of shares
alone.

Here, from express provision of the law, such practice of the

defendant is prohibited because the obligation of the purchaser becomes a
true loan, and loans are only for shareholders. Thus, the defendant is
ordered not to continue with such practice. While it is true that it does not
prescribe that the property must be sold in cash or for shareholders only,
however, if it is purchased on credit, it must be made upon terms and
conditions agreed by the parties. In such case, the obligation of the
purchaser cannot be described as arising out of a loan.

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