THE GOVERNMENT OF THE PHILIPPINE ISLANDS, PLAINTIFF AND APPELLEE, VS. EL AHORRO INSULAR, DEFENDANT AND APPELLANT.

On
September 28, 1931, the Government of the Philippine Islands, through
the Attorney-General, instituted quo warranto proceedings against El
Ahorro Insular, a mutual building and loan association, organized under
Act No. 1459 commonly known as the “Corporation Law”, as amended.

The action was based on eight alleged causes of action under which the
plaintiff sought the following remedies: (1) That the defendant be
deprived of all its corporate rights, privileges and franchises; (2)
that the defendant corporation be dissolved; and (3) that the plaintiff
be granted such other just and equitable relief. The dispositive part
of the judgment rendered therein reads as follows:

“For
the foregoing reasons, the defendant corporation is hereby ordered to
comply with the orders and instructions of the Bank Commissioner and
the Secretary of Finance mentioned in the first, second, third, fourth
and seventh causes of action within two months after this decision
shall become final. If the defendant fails or refuses to comply with
this order, the defendant corporation shall be dissolved.

“It
seems to the court that it would work a great hardship on the defendant
and be impracticable to require it to carry into effect the orders
mentioned in the first and fourth causes of action from the beginning
of its operations. Said orders will therefore be given effect from the
first of January, 1932.

“The defendant will pay the costs. It is so ordered.”

The defendant excepted to the decision in toto.
However, in its brief it assigns as alleged error only that part
thereof relative to the first, third and seventh causes of action.
Inasmuch as the present decision hinges only on the four alleged errors
relied upon, it relieves us of the task of discussing the questions
involved in the other causes of action alleged in the complaint. The
assignments of error in question, as translated, read as follows:

“I. The trial court erred in prohibiting the defendant from paying a certain compensation to its incorporators:

“(a) Because the said incorporators were not parties to the suit.

“(b) Because the compensation was just and valid.

“II. The trial court erred in ordering the defendant to demand the payment of certain loans obtained on ‘fundadores’ shares:

“(a) Because the plaintiff failed to prove the facts as alleged therein.

“(b) Because a suit involving the same transaction is pending before this Honorable Court.

“(c) Because the whole transaction was perfectly valid and legal.

“III.
The trial court erred in holding it illegal for the defendant to
maintain a certain proportion between its shares by means of closing
the issuance of certain shares.

“IV. The trial court erred in denying the defendant’s motion for a new trial.”

The facts relative to the first assignment of error are as follows: On
February 23, 1930, at the general meeting of the stockholders of the
defendant corporation, the resolution Exhibit J granting a compensation
of P140,000 to six incorporators was adopted. For one reason or
another, or perhaps because they already doubted the legality thereof,
the beneficiaries renounced said compensation. At another general
meeting of the stockholders held on February 22, 1931, the resolution
Exhibit L was unanimously approved, whereby the board of directors was
ordered to set aside annually a sum equivalent to between 2 per cent
and 8 per cent of the net profits of the corporation, which sum must
not exceed P140,000, for the purpose of compensating equally six
incorporators. The incorporators likewise renounced such compensation.
Notwithstanding said renunciations, at least the last resolution
subsists. However, neither the board of directors nor the stockholders
would repeal it in spite of the instructions given by the Bank
Commissioner to the effect that they were illegal on the ground that
they are in conflict with the spirit and purpose of mutual building and
loan associations and with the express provisions of the Corporation
Law.

The defendant contends that the compensation voted by
the stockholders to be given to the incorporators is valid and is
within the scope of its corporate powers. In the cases of Barretto vs. La Previsora Filipina (57 Phil., 649), and Viuda de Barretto vs. La Previsora Filipina (p. 212, post),
in which the decisions rendered have been published recently, it was
held that compensations and remunerations of similar character are null
and void and illegal on the ground that they do not constitute a
contract between the beneficiaries and the corporation, and that they
are violative of the mutuality and cooperation which are the
characteristic purposes that distinguish mutual building and loan
associations from other ordinary corporations.

However, the defendant insists that the trial court erred in that respect: (a) Because judgment was rendered against the incorporators-beneficiaries without giving them a chance to be heard, and (b) because in the case of Government of the Philippine Islands vs.
El Hogar Filipino (50 Phil., 399), another clause granting 5 per cent
of the net profits of the corporation in favor of the founder thereof
was held to be valid.

In fact and in conformity, with the
provisions of the procedural law, no judgment has been rendered in the
present case against the incorporators in whose favor the compensation
was granted. It should be observed that the action instituted by the
Government is in the nature of quo warranto proceedings for the sole
purpose of testing the validity of certain resolutions adopted by the
defendant. It is for this reason that the incorporators were not
included as parties defendant. Neither was there any necessity of doing
so. Whether the incorporators acquired any enforceable right under such
resolutions or not, is a question to be decided between them and the
defendant, to the exclusion of the herein plaintiff.

The
case of El Hogar Filipino invoked by the defendant, was also taken into
consideration when similar questions raised in the Barretto cases were
decided. It was then held that there was no similarity in the facts
involved therein on the ground that in the El Hogar case there had been
a contract ratified by it through its board of directors and because
some of the considerations of the said contract had been: the important
services which the founder thereof was to render; the loan of P6,000
which he granted without interest; his payment of the organization
expenses out of his own pocket and his promise to the effect that the
capital of the corporation would not be less than P400,000. None of
these considerations are found in the case of the incorporators. As we
understand, the only consideration of the proposed compensation is the
alleged services rendered by them prior and up to the time of the
incorporation of the defendant.

The second assignment of error has its origin in a clause in the by-laws, which reads as follows:

“Paid-up
shares denominated ‘fundadores’ shares shall have a par value of two
hundred pesos (P200) each, fully paid, and shall be issued from the
date the association is incorporated until such time as the Board of
Directors deems such issuance closed, provided that shares of this
series shall not exceed two thousand five hundred (2,500) in number.
Until January 1, 1933, these shares shall bear interest at the rate of
10 per cent per annum payable on the 31st of December of every calendar
year. However, from the aforesaid date forward, they shall bear
interest at the rate of 12 per cent per annum payable at the expiration
of every semester. Holders of this kind of shares shall have no other
participation in the profits of the corporation than the right to
collect the afore-stated fixed dividend * * *.”

Several organizers and directors of the defendant corporation, their
relatives and business associates subscribed for the “fundadores”
shares paying only 20 per cent or less of the par value thereof and
issuing promissory notes for the unpaid balance, secured by the pledge
of the same shares so issued. The Bank Commissioner objected to this
method of operation and ordered that said shares be cancelled or full
payment thereof be demanded of the subscribers. The defendant appealed
to the Secretary of Finance who granted it a period of ten days within
which to demand the payment in cash of all the promissory notes secured
by the “fundadores” shares, adding that in case said promissory notes
are not paid for within the required period, the validity of the shares
already issued shall not thenceforth be questioned, provided however
that no loan on said “fundadores” shares would from that time on be
granted unless made within six months from the date they are fully paid
for and the Bank Commissioner is satisfied that it is a bona fide
transaction and permits it. He ruled, further, that in case the
promissory notes in question were not paid within ten days, the
corresponding “fundadores” shares would be considered null and void and
must be cancelled.

Instead of complying with the
above-mentioned resolutions, the defendant instituted civil case No.
37703 of the Court of First Instance of Manila which resulted in a
decision sustaining the Bank Commissioner and the Secretary of Finance
and holding their disputed resolutions valid. Said case was appealed
and registered in this court as G. R. No. 35982.^[1]
The said appeal, however, was dismissed upon petition of the herein
defendant, then plaintiff-appellant, as evidenced by the resolution of
this court dated August 11, 1932.

As hereinbefore stated,
the court in sustaining the Bank Commissioner and the Secretary of
Finance held that the transaction in question was illegal and the
instructions given by the aforesaid administrative authorities should
have been complied with. However, the defendant claims in its second
assignment of error that the judgment of the trial court is untenable
and erroneous: (a) Because the plaintiff has not proven the facts as alleged by it; (b) because a suit involving the transaction in question is pending before this court; and (c) because the whole transaction is valid and legal.

With respect to the first point, we are of the opinion that the facts
stated therein are beyond question. The defendant itself admits them
implicitly in the course of its arguments. The existence of such kind
of shares cannot be denied.

As to the pending suit, it may
be noted that the case instituted by the defendant against Unson and
Martin, G. R. No. 39982, supra, has already been decided,
having resulted in the dismissal of the appeal taken therein. If the
alleged pendency of the said case was a bar to the discussion of the
point in controversy in this case, undoubtedly the defendant wished to
convey the idea that the final judgment that would be rendered therein
should be respected by the parties. If such is the theory, as it
undoubtedly is, it is unnecessary to pass upon this point of the
present appeal, on the ground that it had already been decided
conclusively in the judgment rendered by the trial court in the
aforesaid case, which judgment became final upon the dismissal of the
appeal taken therefrom. For this reason the Attorney-General abstained
from discussing the second assignment of error in detail in his brief.
We deem it likewise our duty to abstain from passing upon this same
point which had already been decided finally and in which the parties
abided by the judgment rendered therein.

In our opinion, the
third assignment of error involves purely academic and imaginary
questions. We have read the decision of the trial court carefully but
we have not found anything therein to the effect that it has held
illegal the maintenance by the defendant of a certain proportion
between its shares by means of closing the issuance of other shares.
What the trial court really said in connection with paragraph (c)
of the second cause of action was that the tables contained in the
defendant’s prospectus, whereby it assured that the accumulative shares
would mature after a certain number of years and would earn as general
average a dividend of 18 per cent, were illegal and misleading to the
public on the ground that the defendant and its board of directors
could not make any such promises nor give similar assurances to anybody
inasmuch as the results thereof were dependent upon circumstances over
which it had absolutely no control. It is a far cry from this
pronouncement to the proposition submitted by the defendant in its
third assignment of error. The Attorney-General has called attention to
this same fact in his brief. We conclude that the question raised by
the defendant in its aforesaid assignment of error is purely imaginary
and anticipatory. Therefore, it merits no discussion nor solution.

Being a mere corollary of the former ones, the last assignment of error does not deserve any further consideration.

Wherefore, being convinced that the judgment appealed from is in
accordance with the law in so far as it refers to the questions
hereinbefore discussed and decided, it is hereby affirmed, with the
costs against the defendant-appellant. So ordered.

Street, Malcolm, Butte, and Diaz, JJ., concur.

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^[1] El Ahorro Insular vs. Unson and Martin.