Alexis B.

Dulay

By-Laws; Binding Effect; Sec. 46-48

Case No. 48
G.R. No. L-26649
July 13, 1927
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the AttorneyGeneral), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
FACTS:
The Philippine Commission enacted Act No. 1459, also known as the
Corporation Law, on March 1, 1906. El Hogar Filipino, organized in 1911 under 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. 2092 amended 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 El Hogar 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 effecting 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 the contract 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 owners 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 not due to its fault. Likewise, the period from March 25, 1926 to
April 20, 1926 must 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
contracts rescission due to Alcantaras 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 Hogars efforts to find a purchaser upon better terms.
ISSUE: W/N 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 five years from
receipt of title-Cause of delay is not respondents fault
2) That respondent is owning and holding a business lot with the structure thereon
in excess of its reasonable requirements and in contravention 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 would 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 endsVALID
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 and withdrawal of unmatured stock except in case of liquidation or
forfeiture of stock for delinquency-WITHOUT MERIT
There is no provision of law making it a misdemeanor to incorporate an invalid
provision in the by-laws of a corporation; and if there were such, the hazards incident to
corporate effort would be largely increased.
5) Art. 61 of El Hogars by-laws which states that attendance in person or by proxy
by shareholders owning one-half plus one of the shareholders shall be necessary
to constitute a quorum for the election of directors is contrary to Sec. 31 of the
Corpo Law which provides that owners of the majority of the subscribed capital

stock entitled to vote must be present either in person or by proxy at all elections
of directors- WITHOUT MERIT
No fault can be imputed to the corporation on account of the failure of the shareholders
to attend the annual meetings and their non-attendance in meetings is doubtless to be
interpreted in part as expressing their satisfaction of the way in which things have been
conducted. Mere failure of a corporation to elect officers does not terminate the terms of
existing officers nor dissolve the corporation. The general rule is to allow the officer to
holdover until his successor is duly qualified.
6) That the directors of El Hogar, instead of receiving nominal pay or serving without
pay, have been receiving large compensation, varying in amount from time to
time, out of respondents profits- WITHOUT MERIT
With the growth of the corporation, the amount paid as compensation to the directors
has increased beyond what would probably be necessary is a matter that cannot be
corrected in this action. Nor can it properly be made a basis for depriving respondent of
its franchise or enjoining it from compliance with the provisions of its own by-laws. If a
mistake has been made, the remedy is to lie rather in publicity and competition.
7) That the promoter and organizer of El Hogar was Mr. Antonio Melian and that in
the early stages of the organization of the association, the board of directors
authorized the association to make a contract with him and that the royalty given
to him as founder is unconscionable, excessive and out of proportion to the
services rendered-NOT SUSTAINED
The mere fact that compensation is in excess of what may be considered appropriate is
not a proper consideration for the court to resolve. That El Hogar is in contact with its
promoter did not affect the associations legal character. The court is of the opinion that
the traditional respect for the sanctity of the contract obligation should prevail over the
radical and innovating tendencies.
8) That Art. 70 of El Hogars by-laws, requiring persons elected as board of
directors to be holders of shares of the paid up value of P5,000 which shall be
held as security, is objectionable since a poor member or wage earner cannot
serve as a director irrespective of other qualifications- NOT SUSTAINED
Corpo. Law expressly gives the power to the corporation to provide in its by-laws for the
qualification of its directors and the requirement of security from them for the proper
discharge of the duties of their pffice in the manner prescribed in Art. 70 is highly
prudent and in conformity with good practice.
9) That respondent abused its franchise in issuing special shares alleged to be
illegal and inconsistent with the plan and purposes of building and loan
associations- WITHOUT MERIT
The said special shares are generally known as advance payment shares which were
evidently created for the purpose of meeting the condition caused by the prepayment of
dues that is permitted. Sec. 178 of Corpo Law allows payment of dues or interest to be
paid in advance but the corporation shall not allow interest on advance payment grater
than 6% per annum nor for a period longer than one year. The amount is satisfied by
applying a portion of the shareholders participation in the annual earnings.The mission
of special shares does not involve any violation of the principle that the shares must be
sold at par.

10) That in making purchases at foreclosure sales constituting as security for 54 of

the loans, El Hogar bids the full amount after deducting the withdrawal value,
alleged to be pusuing a policy of depreciating at the rate of 10 percent per
annum, the value of the real properties it acquired and that this rate is excessiveUNSUSTAINABLE
The board of directors possess discretion in this matter. There is no provision of law
prohibiting the association from writing off a reasonable amount for depreciation on its
assets for the purpose of determining its real profits. Art. 74 of its by-laws expressly
authorizes the board of directors to determine each year the amount to be written down
upon the expenses for the installation and the property of the corporation. The court
cannot control the discretion of the board of directors about an administrative matter as
to which they have no legitimate power of action.
11) That respondent maintains excessive reserve funds-UNFOUNDED
The function of this fund is to insure stockholders against losses. When the reserves
become excessive, the remedy is in the hands of the Legislature.
No prudent person would be inclined to take a policy in a
company which had so improvidently conducted its affairs that it only retained a fund
barely sufficient to pay its present liabilities and therefore was in a condition where any
change by the reduction of interest upon or depreciation in the value of securities or
increase of mortality would render it insolvent and 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 with the requirements of Sec. 188 of
the Corpo law- UNFOUNDED
As provided in the previous cause of action, the profits and losses shall be determined
by the board of directors and this means that they shall exercise the usual discretion of
good businessmen in allocating a portion of the annual profits to purposes needful of
the welfare of the association. The law contemplates distribution of earnings and losses
after legitimate obligations have been met.
13) That El Hogar has made loans to the knowledge of its officers which were
intended to be used by the borrowers for other purposes than the building of homes and
no attempt has been made to control the borrowers with respect to the use made of the
borrowed funds- UNFOUNDED
There is no statute expressly declaring that loans may be made by these
associations SOLELY for the purpose of building homes. The building of himes in Sec.
171 of Corpo Law is only one among several ends which building and loan associations
are designed to promote and Sec. 181 authorizes the board of directors of the
association to fix the premium 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 to wealthy persons and
large companies- WITHOUT MERIT
The question of whether the making of large loans constitutes a misuser of the
franchise as would justify the court in depriving the association of its corporate life is a
matter confided to the discretion of the board of directors. The law states no limit as to

the size of the loans to be made by the association. Resort should be had to the
legislature because it is not a matter amenable to judicial control
15) That when the franchise expires, supposing the corporation is not reorganized,
upon final liquidation of the corporation, a reserve fund may exist which is out of all
proportion to the requirements that may fall upon it in the liquidation of the company-NO
MERIT
This matter may be left to the discretion of the board of directors or to legislative
action if it should be deemed expedient to require the gradual suppression of reserve
funds as 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 to
corporations and partnerships and such entities subscribed to respondents shares for
the sole purpose of obtaining such loans-NO MERIT
Sec. 173 of Corpo Law declares that any person may become a stockholder in
building and loan associations. The phrase ANY PERSON does not prevent a finding
that the phrase 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 properties were sold
on credit and the persons and entities to which it was sold are not members nor
shareholders nor were they made members or shareholders, contrary to the provision of
Corpo Law requiring requiring loans to be stockholders only- NOT SUSTAINED
The law does not prescribe that the property must be sold for cash or that the
purchaser shall be a shareholder in the corporation. Such sales can be made upon the
terms and conditions approved by the parties.
Respondent is enjoined in the future from administering real property not owned
by itself, except as may be permitted to it by contract when a borrowing
shareholder defaults in his obligation. In all other respects, the complaint is
DISMISSED.