Corporate Law and Negotiable Instruments Law Case Digest: Llorente v. Star City Pty Ltd. (2020)

First Division
Llorente v. Star City Pty Ltd.(2020)
G.R. No. 212050/G.R. No. 212216, January 15, 2020
Caguioa, J.


Lessons Applicable: Capacity to Sue, Jurisdiction of RTC, Isolation Transaction Rule, Bank Drafts, Drawer Liability, Effect of Stop Payment Order

Laws Applicable: Sec. 150 of RA 11232, Section 84 of the NIL

FACTS:
•    Star City Pty Limited (SCPL) operates as a casino in Sydney, New South Wales, Australia and claims that it is not doing business in the Philippines and is suing for an isolated transaction. 
•    November 25, 2002: It filed a complaint for collection of sum of money with prayer for preliminary attachment against Llorente, who was a patron of its Star City casino and Equitable PCI Bank (EPCIB).
•    July 12, 2000: Llorente negotiated two (2) Equitable PCI bank drafts with check numbers 034967 and 034968 worth 150,000 USD each or for the total amount of 300,000 USD in order to play in the Premium Programme of the casino.
•    The Premium Programme offers the patron a 1% commission rebate on his turnover at the gambling table and a .10% rebate for complimentary expense
•    Before upgrading Llorente to this programme, SCPL contracted 1st EPCIB to check the status of the subject drafts    
•    After Llorente confirmed that the same were issued on clear funds without any stop payment orders, his front money account in the casino was credited with 300,000 USD
•    July 18, 2000: SCPL deposited the drafts with Tomas Cook Ltd.
•    August 1, 2000: SCPL received the advise of Bank of New York about the “Stop Payment Order” (SPO) prompting it to make several demands upon Llorente who refused to pay
•    August 30, 2000: SCPL sought settlement from EPCIB which denied it on the ground of the SPO by LLorente and no notice of dishonor was given.
•    January 28, 2003: RTC granted the issuance of writ of preliminary attachment based on the indicative acts of Llorente of his intention to avoid his obligation and defraud SCPL (i.e. leaving hotel premise without informing SPCL his whereabouts, failing to pay for services availed of, requesting SPO despite availing of services, failure to communicate for the settlement of his obligations)
•    Llorente alleged that he caused the SPO because of SCPL’s commission of fraud and unfair gaming practices during his stay in the casino from July 12 to July 17, 2000.  He also sought the dismissal of the case on the ground of lack of legal capacity to sue since the “isolated transaction rule” only covers transaction which occurred in the Philippines when the same occurred in Australia.
•    EPCIB in its answer also alleged lack of personality to sue before the Philippine courts and denied that it unjustifiably and maliciously refused to settle the obligation since it merely complied with Llorente’s instruction.  Moreover, it stated that SCPL has no action against it since there was no privity of contract between them.  It also filed a cross-claim against Llorente since it already reimbursed the face value of the subject drafts, it is relieved of all liabilities under said drafts.
•    RTC: Found SPCL to have legal capacity to sue and held Llorente (as payee of the drafts and indorser who signed on its back) and EPCIB (as drawer of the drafts) solidarily liable for the value of the drafts.
•    CA: Denied Llorante’s appeal but partially granted EPCIB’s discharhing it from any responsibility considering that it already paid Llorente
•    CA denied both Llorente’s motion for reconsideration and SCPL’s partial motion for reconsideration
•    Llorente and SCPL filed an instant Rule 45 petitions for review on certiorari

ISSUES:
1.    W/N SCPL has the capacity to sue
2.    W/N Philippine courts have jurisdiction over the case
3.    W/N EPCIB should be liable as drawer

HELD:
1.    YES.

• Sec. 150 of RA 11232 (Revised Corporation Code of the Philippines) (RCC) which became effective on February 23, 2019 (reproduction of Sec. 133 of BP 68) provides:
• SEC.  150. Doing  Business  Without  a  License.–No  foreign  corporation  transacting business  in  the  Philippines  without  a  license,  or  its  successors  or  assigns,  shall  be  permitted  to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws

• While the RCC grants to foreign corporations with Philippine license the right to sue in the Philippines, the Court, in the long line of cases under the regime of the Corporation Code has held that a foreign corporation not engaged in business in the Philippines may not be denied the right to file an action in the Philippines court for an isolated transaction. 
• The issue on whether a foreign corporation which does not have license to engage in business the Philippines can seek redress in Philippine courts depends on whether it is doing business or it merely entered into an isolated transaction – qualifying circumstance essential part of the plaintiff’s capacity to sue (as a matter of pleading and procedure) should be affirmatively pleaded  
• In the case at bar, SCPL alleged in its complaint that it is not doing business in the Philippines and is suing upon a singular and isolated transaction and appointed Jimeno, Jalandoni and Cope Law Offices as its attorney-in-fact.  The latter is irrelevant to its capacity to sue.
• Moreover, Llorente in his answer pleaded an affirmative relief for damages from SCPL by way of counterclaim – contrary to his position that plaintiff has no capacity to sue and admitted the capacity of plaintiff to be subject of judicial process.  It would be unfair to allow it to be sued and not allowing it to sue on an isolated transaction here.

2.    Yes.

• Complaint is for civil case for collection of sum of money which under BP 129 Section 19 RTCs have jurisdiction – above 400,000 in Metro Manila
• Amount demanded: 300,000 USD plus legal interest from date of 1st demand on December 20, 2000 until full payment is 

• Criminal case territorial jurisdiction involving checks: any of the places where the check is drawn, issued, delivered or dishonored has jurisdiction – subject drafts drawn by EPCIB, a Philippine bank

3.    Yes.

• CA recognized SCPL as a holder in due course and it did not overturn the finding of the RTC that the subject demand/bank drafts are negotiable instruments.  In effect, 2 demand/bank drafts drawn by EPCIB with Llorante as the payee are negotiable instruments.
• A draft is a form of a bill of exchange used mainly in transactions between persons physically remote from each other.  It is an order by 1 person, say the buyer of goods, address to a person having in possession funds of such buyer, ordering the addressee to pay the purchase price to the seller of the goods.  Where the order is made by 1 bank to another = bank drafts – negotiable instruments governed by the provisions of Negotiable Instruments Law (NIL)

•  Both RTC and CA recognized EPCIB as the drawer of the subject demand/bank drafts. 
• Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.
• When the bank, as the drawer of a negotiable check, signs the instrument its engagement is then as absolute and express as if it were written on the check and a dual promise is implied from the issuance of the check:

•  Bank upon which it is drawn will pay the amount thereof
• If such bank should fail to make the payment, the drawer will pay the same to the holder
• Drawing a check = drawer admits the existence of the payee and his then capacity to endorse; impliedly represents that he (payee) has funds or credits available for its payment in the bank which it is drawn; engages that if the bill is not paid by the drawee and due proceedings on dishonor are taken by the holder, he will upon demand pay the amount of the bill together with the damages and expenses accruing to the holder by reason of the dishonor of the instrument; and if the drawee refuses to accept a bill drawn upon him, becomes liable to pay the instrument according to his original undertaking
• Liability of the drawer is secondary = after acceptance – conditional upon proper presentment and notice of dishonor, and, in case of a foreign bill of exchange, protest unless such conditions are excused or dispensed with. 
• Section 84 of the NIL: When instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder, subject to the provision of the NIL

• GR: Effect of countermand or stopping of payment by the drawer - Relation between the drawer and the payee = as if the instrument had been dishonored and notice thereof given to the drawer
• drawer of a bill (including a draft or check) may by notice to the drawee prior to acceptance or payment countermand his order and command the drawee not to pay, in which case the drawee is obliged to refuse to accept or pay  Drawer’s conditional liability is changed to one free from the condition > like that of the maker of a promissory note due on demand – liable on the instrument if he has no sufficient defense

•  EX: Draft drawn by 1 bank upon another and bought and paid for by a remitter, as the equivalent of money or as an executed sale of credit by the drawer, is not subject to rescission or countermand so as to avoid the drawer’s liability thereon.
• Right to stop payment cannot be exercised so as to prejudice the rights of holders in due course without rendering the drawer liable on the instrument to such holders

1. Liability of EPCIB as the drawer cannot be abrogated by the Indemnity Agreement because bank drafts are negotiable instruments nor can it argue that it has no privity of contract.  Its secondary liability under Section 61 of the NIL became primary when the payment of the subject demand/bank drafts had been stopped which had the same effect as if the instruments had been dishonored and notice thereof was given to the drawer pursuant to Section 84 of the NIL.
2. If EPCIB is made liable on the subject demand/bank drafts, it has a recourse against the indemnity bond.  In effect, the indemnity bond required by EPCIB is in effect an admission of his liability to SCPL and Llorente’s citing exceeding his obligation to pay as reason for the SPO weakens his allegation of fraud and unfair gaming practice against SCPL.
3. Unjust enrichment cannot apply to SPCL since party who received the benefit was Llorente.  Any payment to SCPL arising from the subject demand/bank drafts by EPCIB and/or Llorente can never be by mistake.
• Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises
• Art. 2163. It is presumed that there was a mistake in the payment if something which had never been due or had already been paid was delivered; but he from whom the return is claimed may prove that the delivery was made out of liberality or for any other just cause.

• Both Llorente and EPCIB are individually and primarily liable as endorser and drawer of the subject demand/bank drafts, repectively – SPCL may proceed to collect the damages awarded simultaneously or alternatively provided it is not more than the damages awarded
• 300,000 USD with interest at the legal rate of 12% per annum from date of extrajudicial demand against EPCIB: August 30, 2002) (that was made subsequent to the extrajudicial demand against Llorente) and 6% per annum from July 1, 2013 until full payment and the payment for attorney’s fees equivalent to 5% of the amount of demand with interest of 6% per annum from finality of Decision until full payment    

• Art. 1207. xxx There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.
• No contract nor does NIL provide for solidary obligation under the liability of the drawer

Jurisprudence: G.R. No. L-7991 January 29, 1914

EN BANC

G.R. No. L-7991            January 29, 1914

LEON J. LAMBERT, plaintiff-appellant,
vs.
T. J. FOX, defendant-appellee.

O'Brien and DeWitt and C. W. Ney, for appellant.
J. C. Hixon, for appellee.

MORELAND, J.:

This is an action brought to recover a penalty prescribed on a contract as punishment for the breach thereof.

Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery business, found itself in such condition financially that its creditors, including the plaintiff and the defendant, together with many others, agreed to take over the business, incorporate it and accept stock therein in payment of their respective credits. This was done, the plaintiff and the defendant becoming the two largest stockholders in the new corporation called John R. Edgar & Co., Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into the following agreement:

Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar and Co, Inc; and,

Whereas it is recognized that the success of said corporation depends, now and for at least one year next following, in the larger stockholders retaining their respective interests in the business of said corporation:

Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year from the date hereof.

Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be obtained.

Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc.

This sale was made by the defendant against the protest of the plaintiff and with the warning that he would be held liable under the contract hereinabove set forth and in accordance with its terms. In fact, the defendant Foz offered to sell his shares of stock to the plaintiff for the same sum that McCullough was paying them less P1,000, the penalty specified in the contract.

The learned trial court decided the case in favor of the defendant upon the ground that the intention of the parties as it appeared from the contract in question was to the effect that the agreement should be good and continue only until the corporation reached a sound financial basis, and that that event having occurred some time before the expiration of the year mentioned in the contract, the purpose for which the contract was made and had been fulfilled and the defendant accordingly discharged of his obligation thereunder. The complaint was dismissed upon the merits.

It is argued here that the court erred in its construction of the contract. We are of the opinion that the contention is sound. The intention of parties to a contract must be determined, in the first instance, from the words of the contract itself. It is to be presumed that persons mean what they say when they speak plain English. Interpretation and construction should by the instruments last resorted to by a court in determining what the parties agreed to. Where the language used by the parties is plain, then construction and interpretation are unnecessary and, if used, result in making a contract for the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504.)

In the case cited the court said with reference to the construction and interpretation of statutes: "As for us, we do not construe or interpret this law. It does not need it. We apply it. By applying the law, we conserve both provisions for the benefit of litigants. The first and fundamental duty of courts, in our judgment, is to apply the law. Construction and interpretation come only after it has been demonstrated that application is impossible or inadequate without them. They are the very last functions which a court should exercise. The majority of the law need no interpretation or construction. They require only application, and if there were more application and less construction, there would be more stability in the law, and more people would know what the law is."

What we said in that case is equally applicable to contracts between persons. In the case at bar the parties expressly stipulated that the contract should last one year. No reason is shown for saying that it shall last only nine months. Whatever the object was in specifying the year, it was their agreement that the contract should last a year and it was their judgment and conviction that their purposes would not be subversed in any less time. What reason can give for refusing to follow the plain words of the men who made the contract? We see none.

The appellee urges that the plaintiff cannot recover for the reason that he did not prove damages, and cites numerous American authorities to the effect that because stipulations for liquidated damages are generally in excess of actual damages and so work a hardship upon the party in default, courts are strongly inclined to treat all such agreements as imposing a penalty and to allow a recovery for actual damages only. He also cites authorities holding that a penalty, as such, will not be enforced and that the party suing, in spite of the penalty assigned, will be put to his proof to demonstrate the damages actually suffered by reason of defendants wrongful act or omission.

In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule that parties who are competent to contract may make such agreements within the limitations of the law and public policy as they desire, and that the courts will enforce them according to their terms. (Civil Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16 Phil. Rep., 1.) The only case recognized by the Civil Code in which the court is authorized to intervene for the purpose of reducing a penalty stipulated in the contract is when the principal obligation has been partly or irregularly fulfilled and the court can see that the person demanding the penalty has received the benefit of such or irregular performance. In such case the court is authorized to reduce the penalty to the extent of the benefits received by the party enforcing the penalty.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal results are concerned. Whatever differences exists between them as a matter of language, they are treated the same legally. In either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.

It is also urged by the appelle in this case that the stipulation in the contract suspending the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends public policy. We do not so regard it. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. We do not here undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement that the suspension in this particular case is legal and valid.

The judgment is reversed, the case remanded with instructions to enter a judgment in favor of the plaintiff and against the defendant for P1,000, with interest; without costs in this instance.

Arellano, C.J., Trent and Araullo, JJ., concur.

Separate Opinions

CARSON, J., dissenting:

I concur.

I think it proper to observe, however that the doctrine touching the construction and interpretation of penalties prescribed in ordinary civil contracts as set forth in the opinion is carried to is extreme limits and that its statement in this form is not necessary to sustain the decision upon the facts in this case.

Without entering upon an extended discussion of the authorities, it is sufficient for my purposes to cite the opinion of the supreme court of Spain, dated June 13, 1906, construing the provisions of article 6 of Book 4, Title 1 of the Civil Code which treats of "contracts with a penal clause." In that case the court held:

The rules and prescriptions governing penal matters are fundamentally applicable to the penal sanctions of civil character.

This as well as other cases which might be cited from American as well as Spanish authorities indicate that special rules of interpretations are and should be made use of by the courts in construing penal clauses in civil contracts, and that case may well arise wherein the broad doctrine laid down in the opinion of the court may not be applicable.

Jurisprudence: G.R. No. 153468 August 17, 2006

FIRST DIVISION

G.R. No. 153468 August 17, 2006

PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P. LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.

D E C I S I O N

PANGANIBAN, CJ.:

For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members’ meetings. Dead members shall not be counted.

The Case

The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks the reversal of the January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal filed by petitioners with the CA. Allegedly, without the proper authorization of the other petitioners, the Verification and Certification of Non-Forum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.

The Facts

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular members, who also constitute the board of trustees. [4] During the annual members’ meeting held on April 6, 1998, there were only eleven (11) [5] living member-trustees, as four (4) had already died. Out of the eleven, seven (7) 6 attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including the right to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles of incorporation, not simply the number of living members. 8 She explained that the qualifying phrase "entitled to vote" in Section 24 9 of the Corporation Code, which provided the basis for determining a quorum for the election of directors or trustees, should be read together with Section 89. 10

The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it prescribed the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29 12 of the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the Decision of the hearing officer in toto. 13 It found to be untenable their contention that the word "members," as used in Section 52 14 of the Corporation Code, referred only to the living members of a nonstock corporation. 15

As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached to show his authority to sign for the rest of the petitioners.

Hence, this Petition. 16

Issues

Petitioners state the issues as follows:

"Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK corporations, dead members should still be counted in determination of quorum for purposed of conducting the Annual Members’ Meeting.

"Petitioners have maintained before the courts below that the DEAD members should no longer be counted in computing quorum primarily on the ground that members’ rights are ‘personal and non-transferable’ as provided in Sections 90 and 91 of the Corporation Code of the Philippines.

"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even involve a non-stock corporation as petitioner GCHS.

"The Honorable Court of Appeals on the other hand simply refused to resolve this question and instead dismissed the petition for review on a technicality – the failure to timely submit an SPA from the petitioners authorizing their co-petitioner Padilla, their counsel and also a petitioner before the Court of Appeals, to sign the petition on behalf of the rest of the petitioners.

"Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in accord with law particularly the pronouncements of this Honorable Court in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have been given the petition below and the merits of the case decided in petitioners’ favor." 17

In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition below, on the basis of a defective Verification and Certification; and 2) whether dead members should still be counted in the determination of the quorum, for purposes of conducting the annual members’ meeting.

The Court’s Ruling

The present Petition is partly meritorious.

Procedural Issue:

Verification and Certification of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and Certification of Non-Forum Shopping were signed by only one, not by all, of the petitioners; further, it failed to show proof that the signatory was authorized to sign on behalf of all of them. Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf. 18

In the interest of substantial justice, this initial procedural lapse may be excused. 19 There appears to be no intention to circumvent the need for proper verification and certification, which are aimed at assuring the truthfulness and correctness of the allegations in the Petition for Review and at discouraging forum shopping. 20 More important, the substantial merits of petitioners’ case and the purely legal question involved in the Petition should be considered special circumstances 21 or compelling reasons that justify an exception to the strict requirements of the verification and the certification of non-forum shopping. 22

Main Issue:

Basis for Quorum

Generally, stockholders’ or members’ meetings are called for the purpose of electing directors or trustees 23 and transacting some other business calling for or requiring the action or consent of the shareholders or members, 24 such as the amendment of the articles of incorporation and bylaws, sale or disposition of all or substantially all corporate assets, consolidation and merger and the like, or any other business that may properly come before the meeting.

Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who are charged with the management of the corporation. 25 The board, in turn, periodically elects officers to carry out management functions on a day-to-day basis. As owners, though, the stockholders or members have residual powers over fundamental and major corporate changes.

While stockholders and members (in some instances) are entitled to receive profits, the management and direction of the corporation are lodged with their representatives and agents -- the board of directors or trustees. 26 In other words, acts of management pertain to the board; and those of ownership, to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval of the stockholders or members. 27

Conformably with the foregoing principles, one of the most important rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate affairs. 28 The right to choose the persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes and goals of the corporation may be achieved. 29 Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the general rule is that every member of a nonstock corporation, and every legal owner of shares in a stock corporation, has a right to be present and to vote in all corporate meetings. Conversely, those who are not stockholders or members have no right to vote. 30 Voting may be expressed personally, or through proxies who vote in their representative capacities. 31 Generally, the right to be present and to vote in a meeting is determined by the time in which the meeting is held. 32

Section 52 of the Corporation Code states:

"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations."

In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the Code thus:

"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding capital stock’ as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares." (Underscoring supplied)

The Right to Vote in

Stock Corporations

The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. 34 Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent 35 under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders; or, having so passed, have again been purchased by the corporation. 36 These shares are not to be taken into consideration in determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed from the corporation, and that may be voted. 37

Section 6 of the Corporation Code, in part, provides:

"Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, that there shall always be a class or series of shares which have complete voting rights.

x x x x x x x x x

"Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

"Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights."

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the lawmakers was to base the quorum mentioned in Section 52 on the number of outstanding voting stocks. 38

The Right to Vote in

Nonstock Corporations

In nonstock corporations, the voting rights attach to membership. 39 Members vote as persons, in accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or bylaws. 40 We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstock corporations, only those who are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not
the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum. 41

The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase "majority vote of the members"; likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of registered members of the association mentioned therein) plus one. The best evidence of who are the present members of the corporation is the "membership book"; in the case of stock corporations, it is the stock and transfer book. 43

Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers was to base the quorum in the meetings of stockholders or members on their absolute number as fixed in the articles of incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is that the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members’ meeting is to be reckoned as the actual number of members of the corporation, the next question to resolve is what happens in the event of the death of one of them.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. 44

On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. 45 In other words, the determination of whether or not "dead members" are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. 46 Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members’ meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members’ meeting, conducted with six 47 members present, was valid.

Vacancy in the

Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides:

"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by the remaining directors or trustees constituting a quorum is merely permissive, not mandatory. 48 Corporations, therefore, may choose how vacancies in their respective boards may be filled up -- either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special meeting called for the purpose. 49

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the remaining members of the board. 50

While a majority of the remaining corporate members were present, however, the "election" of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these remaining member-trustees must sit as a board in order to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of the corporation. The board of trustees must act, not individually or separately, but as a body in a lawful meeting. On the other hand, in their annual meeting, the members may be represented by their respective proxies, as in the contested annual members’ meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of the Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the board of trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in the board, in accordance with this Decision. No pronouncement as to costs in this instance.

SO ORDERED.

Corporate Case Digest: PNB v. Ritratto Group, Inc. (2001)

G.R. No. 142616            July 31, 2001

Lessons Applicable: Dealings with Corp. and Stockholders (Corporate Law)

FACTS:

• May 29, 1996: PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the Ritratto Group, Inc. (Ritartto) in the amount of US$300K secured by real estate mortgages constituted over 4 parcels of land in Makati City


• September 1996: increased successively to US$1,140,000.00 


• November 1996: to US$1,290,000.00 


• February 1997: US$1,425,000.00 


• April 1998: decreased to US$1,421,316.18


• Ritratto Group, Inc. made repayments of the loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong.


• April 30, 1998: outstanding amounted to US$1,497,274.70


• PNB-IFL, through its attorney-in-fact PNB, notified them of the foreclosure of all the real estate mortgages and that the properties subjected


• May 25, 1999:  Ritratto Group, Inc filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order before the RTC. -granted 72-hour TRO


• RTC and CA: dismissed motion to dismiss


• PNB-IFL, is a wholly owned subsidiary of defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-IFL


• Rittratto: entire credit facility is void as it contains stipulations in violation of the principle of mutuality of contracts 

ISSUE: W/N PNB is an alter ego of PNB-IFL

HELD: NO. Petition is granted

• PNB is an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. 


• not privy to the loan contracts entered into by PNB-IFL.


• mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. 


• If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. 


• general rule the stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. 


• The Circumstance rendering the subsidiary an instrumentality (common circumstances)

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

 

Corporate Law Case Digest: Remo Jr. v. IAC (1989)

G.R. No. L-67626 April 18, 1989

Lesson Applicable: Dealings Between Corporation and Stockholders (Corporate Law)

FACTS:

• December, 1977: the BOD of Akron Customs Brokerage Corporation (Akron), composed of Jose Remo, Jr., Ernesto Bañares, Feliciano Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution authorizing the purchase of 13 trucks for use in its business to be paid out of a loan the corporation may secure from any lending institution


• January 25, 1978: Feliciano Coprada, as President and Chairman of Akron, purchased the trucks from E.B. Marcha Transport Company, Inc. (Marcha) for P 525K as evidenced by a deed of absolute sale. 


• parties agreed on a downpayment in the amount of P50K and that the balance of P 475K shall be paid within 60 days from the date of the execution of the agreement. 


• They also agreed that until balance is fully paid, the down payment of P 50K shall accrue as rentals and failure to pay the balance within 60 days, then the balance shall constitute as a chattel mortgage lien covering the cargo trucks and the parties may allow an extension of 30 days and Marcha may ask for a revocation of the contract and the reconveyance of all trucks.


• The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated that the balance shall be paid from the proceeds of a loan obtained from the Development Bank of the Philippines (DBP) within 60 days


• After the lapse of 90 days, Marsha tried to collect from Coprada but the Coprada promised to pay only upon the release of the DBP loan. 


• Marsha sent Coprada a letter of demand dated May 10, 1978.


• Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which payment of the obligation shall be made. 


• Meanwhile, 2 of the trucks were sold under a pacto de retro sale to a Mr. Bais of the Perpetual Loans and Savings Bank at Baclaran. 


• March 15, 1978: sale was authorized by board resolution


• Marsha found that no loan application was ever filed by Akron with DBP. 


• Akron paid rentals of P 500/day pursuant to a subsequent agreement, from April 27, 1978 (the end of the 90-days to pay the balance) to May 31, 1978. Thereafter, no more rental payments were made.


• June 17, 1978: Coprada wrote Marsha begging for a grace period of until the end of the month to pay the balance of the purchase price; that he will update the rentals within the week; and in case he fails, then he will return the 13 units should Marsha elect 


• August 1, 1978: Marsha through counsel, wrote Akron demanding the return of the 13 trucks and the payment of P 25K back rentals from June 1 to August 1, 1978.


• August 8, 1978: Coprada asked for another grace period of up to August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan application from a financing company, and that 10 trucks have been returned to Bagbag, Novaliches. 


• December 9, 1978: Coprada informed Marsha that he had returned 10 trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed of assignment to Marsha of P 475K from the proceeds of a loan obtained by Akron from the State Investment House, Inc. 


• In due time, Marsha filed a compliant for the recovery of P 525K or the return of the 13 trucks with damages against Akron and its officers and directors


• Remo Jr. sold all his shares in Akron to Coprada. It also appears that Akron amended its articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the liability of Akron to Marsha.


• CA affirmed RTC: favor of Marsha

ISSUE: W/N Remo Jr. should be held personally liable together with Akron Transport International, Inc.

HELD: NO. Petition is granted.

• The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of Akron and hold petitioner personally liable


• While it is true that in December, 1977 petitioner was still a member of the board of directors of Akron and that he participated in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that said resolution was intended to defraud anyone 


• Coprada, President and Chairman of Akron, who negotiated 


• The word "WE' in the said promissory note must refer to the corporation which Coprada represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the said promissory note so he cannot be personally bound thereby.


• As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a board resolution, Remo Jr. asserts that he never signed the resolution. 


• Be that as it may, the sale is not inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the corporation is free to dispose of the same. Of course, it was stipulated that in case of default , a chattel mortgage lien shall be constituted on the 13 units. 


• the new corporation confirmed and assumed the obligation of the old corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation


• it is his inherent right as a stockholder to dispose of his shares of stock anytime he so desires.


• Fraud must be established by clear and convincing evidence. If at all, the principal character on whom fault should be attributed is Feliciano Coprada, the President of Akron. Fortunately, a judgment against him from the trial court has long been final and executory.

Corporate Law Case Digest: Lee v. CA (1992)

G.R. No. 93695 February 4, 1992

Lessons Applicable: Voting Trust Agreements (Corporate Law)

FACTS:

• November 15, 1985: a complaint for a sum of money was filed by the International Corporate Bank, Inc. (ICB) against the private respondents


• March 17, 1986: private respondents, in turn, filed a 3rd-party complaint against ALFA and ICB


• September 17, 1987: petitioners filed a motion to dismiss the third party complaint - denied


• July 12, 1988: trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP


• consequence of the petitioner's letter that ALFA management was transferred to DBP 


• July 22, 1988: DBP claimed that it was not authorized to receive summons on behalf of ALFA


• August 4, 1988: trial court issued an order advising the private respondents to take the appropriate steps to serve the summons to ALFA


• September 12, 1988: petitioners filed a motion for reconsideration submitting that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA - denied


• January 19, 1989: 2nd motion for reconsideration was filed by the petitioners reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA


• attached a copy of the voting trust agreement between all the stockholders of ALFA and the DBP whereby the management and control of ALFA became vested upon the DBP


• April 25, 1989: trial court reversed itself by setting aside its previous Order dated January 2, 1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA


• October 17, 1989: trial court (NOT notified of the petition for certiorari) declared final its decision on April 25, 1989

ISSUE: W/N the voting trust agreement is valid despite being contrary to the general principle that a corporation can only be bound by such acts which are within the scope of its officers' or agents' authority

HELD:

• voting trust 


• trust created by an agreement between a group of the stockholders of a corporation and the trustee or by a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, either for certain purposes or for all purposes, is to be lodged in the trustee, either with or without a reservation to the owners, or persons designated by them, of the power to direct how such control shall be used (Ballentine's Law Dictionary) 


• Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the share for a period rights pertaining to the shares for a period not exceeding 5 years at any one time: Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding 5 years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement.

Corporate Law Case Digest: San Juan Structural v. CA (1998)

G.R. No. 129459 September 29, 1998

Lessons Applicable: Definition of a Close Corporation (Corporate Law)

FACTS:

• February 14 1989: San Juan Structural and Steel Fabricators, Inc.'s (San Juan) entered into an agreement with Motorich Sales Corporation (Motorich) for the transfer to it of a parcel of land containing an area of 414 square meters


• San Juan paid the down payment of P100,000, the balance to be paid on or before March 2, 1989


• March 1, 1989: Mr. Andres T. Co, president of San Juan, wrote a letter course through Motorich's broker requesting for a computation of the balance to be paid


• Linda Aduca, who wrote the computation of the balance


• March 2, 1989: San Juan was ready with the amount corresponding to the balance, covered by Metrobank Cashier's Check, payable to Motorich


• they were supposed to meet in the office of  San Juan but Motorich's treasurer, Nenita Lee Gruenberg, did not appear


• Motorich refused to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title


• ACL Development Corp. (ACL) is impleaded as a necessary party since Transfer Certificate of Title No. (362909) 2876 is still in its name


• JNM Realty & Development Corp. (JNM) is impleaded as a necessary party in view of the fact that it is the transferor of right in favor of Motorich


• April 6, 1989: ACL and Motorich entered into a Deed of Absolute Sale 


• the Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales Corporation, represented by Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571


• as a result of Nenita Lee Gruenberg and Motorich's bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment, San Juan suffered moral and nominal damages of P500,000 and exemplary damages of P100,000.00 and P100,000 attorneys fees


• San Juan lost the opportunity to construct a residential building in the sum of P100,000.00 Pesos


• CA affirmed RTC for dismissing


• San Juan argues that the veil of corporate fiction of Motorich should be pierced because it is a close corporation. 


• Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital stock" of Motorich, San Juan argues that Gruenberg needed no authorization from the board to enter into the subject contract. 


• being solely owned by the Spouses Gruenberg, the company can treated as a close corporation which can be bound by the acts of its principal stockholder who needs no specific authority

ISSUE: W/N Motorich is a close corp. which does not need to be bound by its principal SH

HELD: NO.  petition is hereby DENIED

• Gruenberg, treasurer of Motorich, and Andres Co signed the contract but that cannot bind Motorich, because it never authorized or ratified such sale or even the receipt of the earnest money


• A corporation is a juridical person separate and distinct from its stockholders or members


• San Juan failed to prove otherwise


• The document is a hand-written one, not a corporate receipt, and it bears only Nenita Gruenberg's signature


• GR: acts of corporate officers within the scope of their authority are binding on the corporation. But when these officers exceed their authority, their actions "cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming them.


• statutorily granted privilege of a corporate veil may be used only for legitimate purposes


• utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation - none here

Sec. 96. Definition and Applicability of Title. — A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. . . . .

• The articles of incorporation of Motorich Sales Corporation does not contain any provision stated in Sec. 96


• mere ownership by a single stockholder or by another corporation of all or capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities


• A narrow distribution of ownership does not, by itself, make a close corporation


• Even if veil is peice it will then be a sale of conjugal property which Nenita alone could not have effected


• Gruenberg did not represent herself as authorized by Respondent Motorich despite the receipt issued by the former specifically indicating that she was signing on behalf of Motorich


• The amount paid as "earnest money" was not proven to have redounded to the benefit of Motorich 


• it was deposited with the account of Aren Commercial c/o Motorich


• Andres Co being a President of San Juan for more than 10 years cannot feign ignorance of the scope of the authority of a corporate treasurer 


• However, Nenita Gruenberg should be ordered to return to petitioner the amount she received as earnest money, as "no one shall enrich himself at the expense of another.

Corporate Law Case Digest: Gelano v. CA (1981)

G.R. No. L-39050 February 24, 1981

Lessons Applicable: Who are liable after dissolution and winding-up? (Corporate Law)

FACTS:

• Insular Sawmill, Inc. leased the paraphernal property of Guillermina M. Gelano (wife) for P1.2K/month


• November 19, 1947-December 26, 1950:  Carlos Gelano (husband) obtained cash advances of P25,950 on account of rentals


• agreement: Insular Sawmill, Inc. could deduct the same from the monthly rentals of the leased premises until the cash advances are fully paid


• Carlos Gelano was able to pay only P5,950.00 thereby leaving an unpaid balance of P20,000.00 which he refused to pay 


• Guillermina M. Gelano refused to pay on the ground that said amount was for the personal account of her husband asked for by, and given to him, without her knowledge and consent and did not benefit the family


• May 4, 1948 to September 11, 1949: Spouses Gelanos purchased lumber materials on credit leaving P946.46 unpaid 


• July 14, 1952: Joseph Tan Yoc Su, as accomdating party, executed a joint and several promissory note with Carlos Gelano in favor of China Banking Corporation bank in the amount of P8,000.00 payable in 60 days to help renew the previous loan of the spouses


• the bank collected P9,106.00 including interests by debiting the current account of the corp.


• Carlos only paid P5,000


• Guillermina refused to pay on the ground that she had no knowledge of such accomodation


• May 29, 1959: Insular thru Atty. German Lee, filed a complaint for collection against the spouses before the CFI


• In the meantime, private respondent amended its Articles of Incorporation to shorten its term of existence up to December 31, 1960 only


• November 20, 1964: CFI favored Insular holding Carlos Gelano liable


• August 23, 1973: held spouses jointly ad severally liable

ISSUE: W/N a corporation, whose corporate life had ceased by the expiration of its term of existence, could still continue prosecuting and defending suits after its dissolution and beyond the period of 3 years provided for under Act No. 1459, otherwise known as the Corporation law, to wind up its affairs, without having undertaken any step to transfer its assets to a trustee or assignee.

HELD: YES. Affirmed with mod - conjugal property is liable

• time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to 3 years from the time the period of dissolution commences; but that there is no time limited within which the trustees must complete a liquidation placed in their hands


• only the conveyance to the trustees must be made within the 3-year period


• effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders


• trustee may commence a suit which can proceed to final judgment even beyond the 3-year period


• "trustee" =  general concept - include the counsel to whom was entrusted in the instant case


• The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditor and stockholders


• Debtors may not take advantage of the failure of the corporation to transfer its assets to a trustee

Section 77 of the Corporation Law, when the corporate existence is terminated in any legal manner, the corporation shall nevertheless continue as a body corporate for 3 years after the time when it would have been dissolved, for the purpose of prosecuting and defending suits by or against it

Corporate Law Case Digest: Edward J. Nell Co. v. Pacific Farms Inc. (1965)

G.R. No. L-20850           November 29, 1965

Lessons Applicable: Types of Acquisitions / Transfers (Corporate Law)

FACTS:

• March 21, 1958: Pacific Farms Inc. (Pacific) purchased as highest bidder from a bank auction 1,000 shares of stock of Insular Farms for P285,126.99 and BOD of Insular as reorganized, then caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to be sold to Insular for P10,000.00 and paid for the other assets of Insular Farms.
• October 9, 1958:  Edward J. Nell Co. (Edward) in Civil Case No. 58579 of the Municipal Court of Manila against Insular Farms, Inc. (Insular) a judgment for the sum of P1,853.80 unpaid balance for a pump sold with interest plus P125 attorney's fees and P84.00 as costs. 
• August 14, 1959: A writ of execution, issued after the judgment had become final returned unsatisfied, stating that Insular Farms had no leviable property. 
• November 13, 1959:  Edward filed the present action against Pacific upon the theory that Pacific is the alter ego of Insular Farms
• CA affirmed Municipal Court: dismissed the complaint

ISSUE: W/N Pacific Farms is an alter ego of Insular Farms

HELD: NO.  Appeal Affirmed

• GR: where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor
• EX: 

1. where the purchaser expressly or impliedly agrees to assume such debts - no proof
2. where the transaction amounts to a consolidation or merger of the corporations - not claimed
3. where the purchasing corporation is merely a continuation of the selling corporation; - no proof
4. where the transaction is entered into fraudulently in order to escape liability for such debts - no proof
• price paid was fair and reasonable

Corporate Law Case Digest: Fleischer v. Botica Nolasco Co. (1925)

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

Lessons Applicable: Right of First Refusal (Corporate Law)

FACTS:

• March 13, 1923: Manuel Gonzales made a written statement to the Botica Nolasco, Inc., requesting that 5 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 
• June 14, 1923: he withdraw and cancelled his written statement of March 13, 1923 
• Nolasco replied 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.,
• November 15, 1923:  Fleischer 
• filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of 5 shares of fully paid stock of Botica Nolasco Co (Nolasco) by purchase from their original owner, Manuel Gonzalez
• Despite repeated demands, Nolasco refused to register said shares in his name in the books of the corporation 
• caused him damages amounting to P500
• Nolasco's defense: 
• article 12 of its by-laws: it had preferential right to buy the shares at the par value of P100/share, plus P90 as dividends corresponding to the year 1922
• offer was refused by Fleischer
• Trial Court: favored Fleischer and ordered the shared be registered

ISSUE: W/N article 12 of Nolasco's by-laws is in conflict with Act No. 1459 (Corporation Law), especially with section 35 (Now Sec. 63)

HELD: Affirmed. mandamus will lie to compel the officers of the corporation to transfer said stock upon 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.
• section 35 of Act No. 1459 (now Sec. 63)
• 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
• GR: 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
• 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.
• by-law cannot operate to defeat his rights as a purchaser who obtained them in good faith and for a valuable consideration