CANDIDO PASCUAL, PLAINTIFF AND APPELLANT VS. EUGENIO DEL SAZ OROZCO ET AL., DEFENDANTS AND APPELLEES.

The plaintiff appeals from a judgment upon the merits in favor of the
defendants, and insists that the court erred:

“1. In holding that the interpretation placed upon article 30 of the bank’s
charter by the decision of the Supreme Court herein is not the law of the
case.

“2. In holding that the defendants had a right to deduct their compensation
from the gross profits of the bank.

“3. In holding that it was proper for defendants to compute their
compensation upon the gross profits before charging against such gross profits
the aggregate amount of accounts written off as uncollectible (dudosa y fallida)
as shown in Exhibits C-l to C-9, inclusive.

“4. In holding that any of the debit items appearing in Exhibits C-1 to C-9
and especially the industrial and internal revenue taxes, are items that should
be charged against capital and not against current profits.

“5. In holding that it was within the power of the stockholders of the bank
to ratify the so-called interpretation by defendants of said article
30.”

This action was commenced by the plaintiff as a shareholder of the Banco
Espanol-Filipino for the benefit of the bank and all of the stockholders
thereof. Its purpose is to require the defendants as former directors and
councilors of the bank to refund a portion of the compensation paid to them for
their services, on the ground that the amounts thereof have been wrongfully
computed.

The complaint contains three separate causes of action, of which the first
only is here involved. The defendants demurrer to this cause of action was
sustained upon the ground that the facts alleged therein were not sufficient to
entitle the plaintiff to the relief sought. Upon appeal this judgment was
reversed and the record returned for further proceedings. (19 Phil. Rep., 82.)
The complaint was not thereafter amended.

The question raised by the plaintiff in his first assignment of error
requires an examination of the pertinent allegations in the first cause of
action. These allegations are as follows:

“X. That, notwithstanding the fact that article 30 of the said by-laws
(Exhibit B) clearly and unequivocally prescribes that the net profits of the
said bank shall be apportioned as follows: Ten per cent for the board of
directors, five percent for the board of managers (composed of counselors and
trustees) in compensation for their services as such, and the remainder,
eighty-five per cent, integrally for the shareholders of the said bank,
the defendants, as such members of the, said boards of directors and managers,
respectively, did, during each and all of the years specified, fraudulently and
to the great detriment of the said Bank and its shareholders, and without the
knowledge, consent or acquiescence of the latter, appropriate to themselves for
their own use from the profits of the said Bank sums of money reaching an
approximate amount of twenty thousand pesos, or a total sum of one hundred
thousand pesos during the five years aforementioned, by deducting their said ten
and five per cent, respectively, from the gross profits instead of deducting
them from the net profits of the said bank.

“XI. That the said defendants, during the time mentioned, carefully concealed
in all the balances and reports of the said Bank published by them every
indication that might give the stockholders of the said Bank the slightest
suspicion that the said defendants were fraudulently appropriating to themselves
the funds of the same; and that the plaintiff learned of such appropriation, by
a mere chance, in the month of November, 1907.”

The Banco Espanol-Filipino was a banking corporation which, until January
1,1908, was controlled by the by-laws Arid regulations annexed to the complaint
as Exhibits A and B. On November 13, 1903, the plaintiff acquired 10 shares of
the capital stock and has been the registered holder of these shares since that
date. The defendants filled, during the time mentioned in the complaint, the
offices of director, consiliario, and sindico, and
collectively constituted the board of government. The only compensation to which
the defendants were entitled for their services is that prescribed by article 30
of the by-laws then in force.

This article reads: “Of the profits or gains which may result from the bank’s
operations, after deducting all the expenses of its administration and the part,
if any, which corresponds to the legal reserve fund, there shall be set apart
ten per cent for the directorate and five per cent for the board of government,
the distribution of which shall be made as provided in the regulations. The
eighty-five per cent remaining shall belong integrally to the shareholders pro
rata the number of shares owned by each.”

Since the date on which the plaintiff acquired his shares, the earnings of
each half-year of the bank have been liquidated in the manner set forth in the
Exhibits C-1 to C-9, inclusive, attached to the agreed statement of facts, and
the respective defendants have individually collected for their services the
sums specified in Exhibit D.

Under date of November 15, 1907, the plaintiff addressed to the defendants a
letter alleging that the earnings of the bank had not been apportioned in
accordance with the provisions of article 30, supra, and making demand
upon them for the refund to the bank of a portion of the amounts received by
them in compensation for their services. The defendants refused to comply with
this demand and on December 7, 1907, the plaintiff commenced an action seeking
the same relief herein prayed for. This action was dis missed, and on December
21, 1907, the shareholders of the bank were convened in a special meeting “for
the express purpose of discussing and taking action relative to the alleged
interpretation of article 30 of the by-laws.” At this shareholders’ meeting
there were present, either in person or by proxy, 183 persons and entities,
holding 6,499 shares of the total issue of 7,500. Among those present at this
meeting was plaintiff’s attorney. The plaintiff’s letter, referred to above, was
read, as was the complaint which the plaintiff had previously filed, and, after
a discussion in which the appellant’s attorney took part, a resolution was
adopted ratifying and approving the distribution of the bank’s earnings as made,
and authorizing the defendants to proceed in the same manner with the earnings
of the latter half of the year 1907. In favor of this resolution there was a
total of 555 votes, representing 5,550 shares. Soon thereafter the present
action was commenced.

As will be seen from the plaintiff’s first assignment of error and the
argument of counsel relating thereto, it is strongly urged that inquiry
respecting the interpretation and application of article 30, supra, has
been closed by the decision of this court rendered upon the demurrer of the
defendants to the complaint. Under the doctrine of stare decisis the
plaintiff insists that “the law of the case” has been established and that it
has been necessarily decided that the remuneration received by tne defendants
for their services was not in accordance with article 30.

The decision relied upon by the plaintiff is that of Pascual vs. Del
Saz Orozco (19 Phil.Rep.,82). “The law of the case,” established by that
decision, is the law of the case which was before the court and which the court
thereby decided.

The plaintiff, as will be seen from paragraphs 10 and 11, above quoted, whose
sufficiency was then and there under consideration, alleged that the defendants,
in violation of article 30, had fraudulently misappropriated to
themselves certain funds of the bank by computing their percentages upon the
gross earnings of the bank and, by a series of fraudulent concealments, had
witheld the knowledge thereof from the shareholders. The demurrer admitted the
facts as alleged and raised the question of the right of the plaintiff to
recover upon those facts. The ruling of the lower court was to the effect that,
even assuming the facts to be as alleged in the complaint, the plaintiff had no
right of action. On appeal the Supreme Court considered this very question and
necessarily none other, which relates to the point now under consideration, and,
in reversing the ruling of the lower court, decided that, assuming the facts to
be as alleged in the complaint, the plaintiff did have a cause of action. If
these were the facts o£ the case now under consideration, there would be neither
occasion nor opportunity to further discuss the law applicable thereto. But the
case which the present appeal presents is not that case at all. Since that
decision was rendered the case has been tried and the facts now before the court
for consideration are not the allegations that the defendants fraudulently
misappropriated to themselves certain funds of the bank, and by a series of
concealments withheld the knowledge thereof from the shareholders, but the real
facts as they have been stipulated in the agreed statement. These facts are that
the defendants did not, as alleged, fraudulently misappropriate certain funds of
the bank by computing their percentages upon the gross earnings, but did first
deduct the expenses of administration, and that none of the acts of the
defendants were tainted in any way with fraud.

In this particular the case now under consideration is clearly differentiated
and distinguished from the former case. In that case the court decided that the
defendants may not fraudulently compute their percentages upon the gross
earnings, and that a complaint which alleges that they have done so states a
cause of action. This was the question submitted and decided. The question
submitted upon the present appeal is whether the computation really made is in
accordance with article 30. This holding is not in conflict with the rule
announced in the cases cited and relied upon by counsel for the plaintiff.

For example, in the case of Heidt vs. Minor (113 Cal, 385), the
court said: “Moreover, the rule of the law of the case only applies when, on a
subsequent trial, the issues and the facts found remain substantially the
same.”

In the case of Forgerson et al. vs. Smith (104 Ind., 246), the court
laid down this rule: “But where the questions are necessarily involved, * * *
the judgment on appeal rules the case throughout all its subsequent stages. The
decision is an adjudication concluding the courts and the parties. It is not, of
course, conclusive as to other cases, but it is conclusive as to the questions
in judgment in the case in which it was rendered, upon the parties and those in
privity with them. * * * We regard, the former decision as adjudicating all of
the controlling questions in the case, for it was not possible to reach the
conclusion there announced without deciding that the property in the promissory
notes in controversy was in the administrator of the estate of Mahala Shaw
deceased.”

In Standard Sewing Machine Co. vs. Leslie (118 Fed., 557), the court
used this language: “It is a familiar and entirely righteous rule that a court
of review is precluded from agitating the questions that were made, considered,
and ‘decided on previous reviews. The former decision furnishes ‘the law of the
case’ not only to the tribunal to which the cause is remanded, but to the
appellate tribunal itself on a subsequent writ or appeal.”

Now, has the remuneration of the defendants for their services been computed
in accordance with article 30 of the by-laws?

The item of “profit and loss” for each half year, during the entire period
covered by the complaint, was made up by crediting to it all the items of net
profits produced by the various accounts of the bank, including the accounts of
current debtors, the profits from exchange, the profits in the sale of money,
the profits from the discount of bills and notes, the net proceeds from the real
properties of the bank after the payment of all the expenses thereof, including
taxes, insurance, and repairs, and all other net profits obtained by the bank.
To the debit of this “profit and loss” account were entered all sums paid out by
the bank as interest upon fixed deposits or credit balances of current accounts.
The item of “general expenses” included salaries, light, water, stationery,
stamps, attorneys’ fees, and all other .items of general expenses incurred
either by the main office in Manila or by the branch office in Iloilo. In short,
it appears that every expenditure of whatever nature made from the funds of the
bank, with the exception of the industrial tax (later internal-revenue tax) and
amounts set off against bad accounts, was included in the item of “general
expenses,” or, what amounted to the same thing, deducted from the “profit and
loss” account before computing the remuneration received by the respective
defendants for their services. Upon this point it might be well to set out in
full Exhibit C-1. (Exhibits C-2 to C-9, inclusive, were made up in the same
manner.) This exhibit is as follows:

1903.
December 31.	Balance of the account of profit and loss..	$196,580.22
	Deduction of surplus of June 30, last……..	7,816.38
		188,763.84
	Do. General expenses …………………………..	51,753.77
		137,010.07
	Compensation for the board of government,15 per cent…………..	20,551.51
		116,458.56
	Dividend of 4 per cent on $1,500,000……..	60,000.00
		56,458.56
	Industrial tax (later internal revenue) 5 per cent of $60,000……..	3,000.00
		53,458.56
	Balance on June 30 carried forward……..	7,816.38
		61,274.94
	Amount for bad accounts………………	60,000.00
	Balance for next semester……	1,274.94

To this method of computing the defendants’ remuneration the objection of the
plaintiff is twofold:

“(a) That before computing the defendants’ remuneration there was
not first deducted from the earnings or gains the amount payable as industrial
tax (later internal revenue), and

“(b) That before computing the defendants’ remuneration there was not first
deducted from the earnings or gains the amount retained to cover bad
accounts.”

From an examination of article 30 it will be seen that only two items from
the gross profits of the bank are to be deducted before computing the
compensation of the directors and board of government (the defendants
constituted both the directors and the board of government), to wit: Expenses of
administration and the amount, if any, corresponding to the legal reserve fund.
On December 31, 1903, the legal reserve fund of P225,000 was not only completed,
but a voluntary reserve fund of P665,000, authorized by the charter, had
accumulated. From the various Exhibits, C-1 to C-9, inclusive, it is apparent
that nothing whatever was applied to this legal reserve fund, and, as the
correctness of these exhibits is not disputed, it is also apparent that nothing
was due this fund at any time during the period covered by the complaint.
Unless, therefore, the items of industrial tax (later internal-revenue tax) and
the amounts set aside to cover bad debts may be deemed “expenses of
administration,” it is clear that there is no merit in the plaintiff’s
contention.

At the outset it may be said that the proper disposition of this case is
rendered difficult by the inaccurate language used in article 30. This article
provides for a percentage of the profits (utilidades y ganancias), and it may be
at once said that these are not necessarily net profits, as claimed by
counsel for the plaintiff. Profits may be either gross profits or net profits,
and there are innumerable methods of computing each of these. Likewise,
“expenses of administration” may or may not include all amounts expended in the
conduct of business. Indeed, it is somewhat unusual that a provision of the
bank’s charter, so difficult of exact definition, should be so lacking in
precision. Hardly less unusual, from an American point of view, is the
incorporation into the bank’s charter of the measure of remuneration of the
board of government. This, in America, has generally been considered a detail in
the internal management of a corporation to be controlled by the shareholders
themselves, Who, in many instances, even delegate to the directors the power of
fixing their own salaries.

The remuneration received by the defendants is not even alleged to be
excessive. The two active managers of the bank received, during the period in
question, sums amounting to approximately P15,000 per year, while the other
defendants, not participating in the active management of the corporation,
received sums amounting in no instance to a salary of P2,500 per year. All of
the defendants received, during the four and a half years, P201,825.81, or an
approximate yearly average of P45,000 per year. Bearing in mind the magnitude of
the business and the fact that the bank prospered under the management of the
defendants, there is no wonder that no claim is made of excessive compensation.
During all these years the plaintiff, as well as the other shareholders of the
bank, remained silent, apparently content with the increased prosperity of the
business, although at the end of each fiscal year they had the opportunity to
examine the books of the bank and inform themselves of the method by which the
defendants computed their compensation. And, furthermore, an extraordinary
meeting of the shareholders was duly convened on December 21,1907, for the
express purpose, as we have indicated, of discussing the interpretation placed
upon article 30 by the defendants.

The industrial tax, which the appellant insists should be first deducted from
the earnings before computing the percentages, was fixed by law at 5 per cent of
the dividends distributed among the shareholders of the bank. In order to make
the deduction of this tax, its amount must first be a known quantity. Since its
amount is a percentage of the dividends, the amount of the latter must likewise
be a known quantity before the operation can be made. The amount available as
dividends is dependent upon the amount due and payable out of the profits to the
defendants for their services. Therefore, this amount due the defendants from
the profits must be known before the amount remaining for dividends can be
fixed. For example, if the remaining earnings, after deducting from the gross
earnings the general expenses, is the sum of P58,000, how much is to be deducted
therefrom as internal-revenue tax before computing the percentage of the
defendants? The law said that the amount of this tax should be 5 per cent of the
dividends distributed. The amount to be distributed depends upon how much may be
left after the remuneration of the defendants is paid. It is no reply to this
argument to point out that the total profits may be or are usually sufficiently
great to permit a declaration of the maximum dividend of P60,000 and that in
such cases it is a simple matter to compute 5 per cent of P60,000, for the rule
of computation, established by article 30, is a general one, applicable alike in
all cases, whether the earnings of the bank be great or1 small. This article
does not establish two rules of computations, one which is only feasible or
practicable when the earnings are sufficiently large to warrant a dividend in
the maximum amount and another and different rule when the dividend falls below
that amount.

Again, in our opinion the nature of the old industrial tax negatives the idea
that it is one of the items of “expenses of administration” referred to in
article 30. This tax was levied by law, not upon the earnings or profits of the
bank, but only upon such earnings or profits as were actually distributed among
the shareholders as dividends. It was purely a dividend tax, collected for
convenience in a lump sum from the company, but levied solely and exclusively
upon the distributed dividends. To deduct this tax from the amount upon which
the remuneration of the defendants was computed would have made the defendants
contributors to the tax levied upon the company-shareholders. Article 30 does
not require the defendants as employees of the bank to contribute to the payment
of the bank’s taxes. The discrimination made by article 30 between “expenses of
administration” and other disbursements is reasonable and in accordance with the
principles of the contract which existed between the bank and the defendants.
That was a contract of employment in which one of the contracting parties agreed
to supply the capital and the other his services, and to divide in a stipulated
proportion the proceeds of the application of the services of the one to the
capital of the other. Since it was incumbent upon the bank to furnish the
capital, so it was incumbent upon it to maintain the same. Any tax which tended
directly to impair the amount of the capital should consequently have been paid
by the hirer of the services and not by the servant. There could be no real
difference in principle between the failure to furnish the capital in the first
place and the failure to replace any part of it which disappears by reason of a
tax levied thereon. We, therefore, conclude that the method employed by the
defendants for the liquidation of the bank’s business, in so far as the
industrial tax (internal-revenue tax) is concerned, was strictly in accordance
with article 30 of the by-laws.

DEDUCTION OF AMOUNTS TO COVER BAD ACCOUNTS.

When the defendant Orozco took over the management of the bank, he reported
to the board of directors its financial situation, embracing among other things
a loss from bad accounts for the past of over P500,000. It probably would have
been possible to cover this entire amount of losses from funds in the reserve,
existing for just such purposes, but to have done so would have left the bank
without a present reserve. It was decided to preserve the reserve fund intact,
and carry the bad accounts as accounts in suspense until the same could be
gradually and conveniently wiped out. Consequently, in each half yearly
liquidation the dividends distributed to the shareholders were strictly limited
to 4 per cent per semester, and the earnings after payment of the expenses of
administration, the remuneration of defendants, the taxes, and the said
dividends were applied pro tanto to the extinction of the bad accounts held in
suspense. It does not clearly appear whether these funds, which were used for
that purpose, first went into the voluntary reserve fund and were then applied
to the extinction of the bad accounts in suspense or were applied directly by
the semiannual liquidations from the profit and loss accounts. The process
followed is immaterial since the result must be the same. The important fact is
that in each semester there was an excess of net profits over and above the 4
per cent provided in article 31 of the by laws. This excess of net profits was
divisible under that article, one-half to the shareholders and one-half to the
legal reserve, voluntary reserve, or additional dividends as the case might be.
Instead, the entire excess of net profits went to extinguish bad accounts whose
extinction would have exhausted the reserve fund and required its replenishment.
To the extent that one-half of the excess of net profits were not distributed as
dividends, but were put to the purposes of reserve, the shareholders made a
sacrifice for their own welfare. Whether this was valicjly done or not is of no
importance at this time for the reason that the remuneration of the defendants
was not affected in any way thereby. As to the remaining half of the excess net
profits, the application made was in direct accord with the by-laws, since the
application of the funds to the purposes of the .reserve fund is exactly the
same as if the reserve fund had been employed for the purpose and then
replenished by these funds.

According to article 30, the net profits belonged to the shareholders.
According to article 31, these net profits, belonging to the shareholders,
should be partially divided among them and partially kept intact in the bank,
according to the amount thereof, to the status of the legal reserve, and to the
wishes of the board of government respecting a voluntary reserve. From the fact
that part of the net profits was preserved intact in the bank as part of either
the legal or voluntary reserve, it cannot be said that such portion of the net
profits had ceased to belong to the share holders. These excess net profits are,
in a sense, still in the bank and still belong to the shareholders within the
meaning of article 30. To hold that the bad accounts of the bank should have
been extinguished by the gross earnings instead of the net profits, would, in
effect, compel the defendants, as employees, to contribute to the replenishing
of the depleted reserves of the bank.

It would be wholly unjust to include under “expenses of administration”
during the time the defendants were in charge, the losses previously sustained
by the defendants’ predecessors in office. These defendants were in no wise
connected with the bank nor were they in any way responsible for those losses.
To interpret article 30 so would result in the incoming manager becoming an heir
to an insolvent inheritance. Under such conditions no one would be found to
accept the office and the bank would have to cease its operations.

As to the responsibility of the defendants for the losses which occurred
during the period covered by the complaint, it might be said in the first place
that the greater part of these losses constitutes the third cause of action of
appellant’s complaint and was made the subject of a separate appeal to this
court. In the second place, it has not been shown that any part of such losses
were written off as bad debts during the period of time in question. And it is
upon this fact that we rest our holding on this point. Therefore, we are not now
called upon to decide whether the defendants could have treated these losses in
the same manner as they did those occurring prior to December 31, 1905.

The judgment appealed from was affirmed.1 In this opinion it has been our
intention to set forth at some length our reasons for affirming this judgment at
the close of the last session.

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