G.R. No. 38084. December 21, 1933
DOLORES M. VIUDA DE BARRETTO ET AL., PLAINTIFFS AND APPELLANTS, VS. LA PREVISORA FILIPINA, MUTUAL BUILDING AND LOAN ASSOCIATION, DEFENDANT AND APPELLEE.
IMPERIAL, J.:
February 11, 1926, La Previsora Filipina, a mutual building and loan
association, was organized and incorporated by Antonio Ma. Barretto y
Rocha, Alfonso Rocha, Antonio M. Opisso, Jose A. Barretto y Moratinos,
Vicente L. Legarda, Henry Herman, George C. Sellner, Vicente Delgado,
Enrique Massip, Alexander Bachrach and Pedro Mata, in accordance with
the provisions of the Corporation Law. On the said date the
incorporators had subscribed for 1,560 accumulative shares, series A, E
and I of the par value of P200 each, paying a total sum of P337 on
account of their subscriptions, which was the sum required to be paid
by the articles of incorporation. The aforesaid incorporators were
appointed directors of the association at the same time. On February
25th of the same year, a general meeting of the stockholders was held,
during which there was submitted a draft of the proposed by-laws of the
association, prepared by Antonio Ma. Barretto y Rocha, which were
approved. It appeared later that said Antonio Ma. Barretto y Rocha was
the largest shareholder and, as such, was almost in absolute control of
the affairs of the corporation. A copy of the said by-laws of the
corporation is marked in the records of the case as Exhibit A. Article
68 thereof, as translated, reads as follows:
“Art.
68. Taking into account the preliminary work performed by Mr. Antonio
Ma. Barretto and considering the acquisition of the ‘Combined Tables of
Triple Transaction’, prepared by him and which were the result of his
labors, indispensable to the operation of its business, and inasmuch as
Mr. Barretto has consented to transfer all his property rights over the
aforesaid tables for its exclusive use and benefit, the corporation, in
consideration of such sale, cession and transfer of the aforesaid
tables in its favor by said Mr. Antonio Ma. Barretto, and in return for
all other services rendered by him in the founding and organization
thereof, obligates and binds itself to pay to said Mr. Barretto, his
heirs and successors in interest, the sum of two hundred thousand pesos
(P200,000), Philippine currency. This sum shall not bear interest and
shall appear on the books of the corporation as organization expenses,
to be paid to Mr. Barretto in installments, under the following
conditions:
At the end of the operation for the first year At the end of the operation for the second year At the end of the operation for the third year At the end of the operation for the fourth year At the end of the operation for the fifth year “Notwithstanding the periods above stipulated, no payment for any year
shall be made to Mr. Barretto, his heirs and successors in interest,
unless the corporation declares a dividend of not less than 12 per cent
of the paid-up capital in favor of the accumulative shares during such
year. Provided, however, That in case said Mr. Barretto, his
heirs and successors in interest fail to receive payment, either full
or partial, of the sum corresponding to him for any of the periods
above stipulated, the sum uncollected by him shall be carried over to
the year following and thus successively until the aforesaid amount of
two hundred thousand pesos (P200,000), Philippine currency, is paid.”
Article 72, the translation of which appears below, bears a close
relation to the foregoing article inasmuch as it prohibits modification
or discussion of the aforesaid article 68.
“Art.
72. These by-laws shall only be modified or amended in whole or in part
by resolutions approved at general or special meetings by a concurrence
of a majority vote representing not less than 4/5 of the total number
of shares issued: Provided, however, That article 68 hereof shall never be subject to modification or discussion.”
The amount of P200,000 thus granted to Antonio Ma. Barretto y Rocha was
immediately entered on the books of the corporation as part of the
assets thereof under the item “Organization Expense” and said Barretto
was credited with the same amount, which thenceforth appeared on the
books as a contingent obligation of the corporation. The Insular
Treasurer, who has supervision of all corporations, under the law,
became aware of such transaction and of articles 68 and 72 of the
by-laws, and without loss of time notified the officers of the
corporation that the said entries in the account books as well as the
afore-cited articles were null and void and in violation of the clear
and express provisions of the Corporation Law, relative to mutual
building and loan associations. Antonio Ma. Barretto, who had already
assumed office in his multiple capacity as founder, stockholder, and
managing director, called another general meeting of stockholders on
July 22, 1926, which, after being informed of the objections of the
Insular Treasurer, proceeded to amend article 72 by substituting it
with the following:
“Art. 72. These by-laws
shall only be modified or amended in whole or in part by resolutions
approved at general or special meetings, by a concurrence of a majority
vote of not less than one half plus one of the total number of votes
corresponding to the shares of stock issued and entitled to vote.” On
that same date, the same stockholders assembled at a general meeting,
repealed the original article 68 and substituted it with the following:“Art.
68. Beginning with the second year of the existence of the corporation
until the dissolution thereof, as provided for in the by-laws, there
shall be set aside annually an amount equal to 2½ per cent of the net
profits of the corporation, to be paid to Mr. Antonio Ma. Barretto or
his heirs by way of just compensation as agreed upon by the corporation
and said Mr. Barretto, for the services rendered by him in founding and
organizing the corporation and in consideration of the assignment and
transfer of the ‘Combined Tables of Triple Transaction’, which serves
as a basis for its operation, made by him in favor of the corporation. Provided, however,
That during the first ten (10) years of the existence of the
corporation, Mr. Barretto or his heirs shall not be entitled to the
annual compensation established in this article, for every year in
which the net profits to be credited to holders of accumulative shares
A, E, I, O and U, do not reach an amount equivalent to 10 per cent of
the capital of the corporation as defined in section 174 of Act No.
1459, deducting therefrom that part of the capital which earns a fixed
dividend; And provided, further, That if after an amount
equivalent to ten per cent (10%) of the capital has been set aside from
the profits of the corporation, to be paid to the holders of
accumulative shares, the balance thereof is less than 2½ per cent of
the said profits, Mr. Barretto shall not be entitled to collect an
amount greater than the aforesaid balance. Inasmuch as this article
constitutes a contract between the corporation and Mr. Barretto, it
shall not be susceptible of alteration or amendment except by mutual
consent of the parties.”
In 1926 the
operations of the corporation registered a loss amounting to P6,073.79
and in 1927 it suffered another loss of P3,427.42. In view of this
somewhat discouraging result, no dividend could be distributed as
expected, contrary to the repeated assurances given the public by the
general manager. In order to force the situation, said officer paid the
expenses of the corporation for the year 1926, amounting to P6,296.56,
and those of the year 1927, amounting to P6,154.42, out of his own
pocket. These two amounts were ordered by him to be entered in the
books as assets of the corporation. Through the liberality of the
general manager and the irregular transactions just stated, the said
officer entered a fictitious profit of P222.77 in the balance sheet for
the year 1926, and with such imaginary figures as a basis, likewise
declared a dividend of 15.0673.52 per cent on the paid-up accumulative
shares. The same thing happened in 1927 when a fictitious profit of
P2,727 was made to appear and a dividend of 17.2451.24 per cent
declared on the same kind of shares. Having been apprised of these
objectionable transactions, the Insular Treasurer called the attention
of the general manager thereto and informed him that the forced
dividends, which he had entered in the books, were in violation of the
provisions of article 16 of the Corporation Law, on the alleged ground
that they did not come from the net profits derived from the business.
As a result only dividends on accumulative shares, not exceeding 12½
per cent, were declared in subsequent years.
On February 23,
1929, article 68 of the by-laws was once more amended at a general
meeting of stockholders, and in lieu thereof, the following, copy of
which is Exhibit 1, was substituted:
“Art.
68. Beginning January 1, 1929, and during the existence of ‘La
Previsora Filipina’, Mutual Building and Loan Association, a sum
equivalent to four per cent (4%) of the net profits of the corporation
during the year shall be paid to Mr. Antonio Ma. Barretto or his heirs
at the end of every fiscal year. The payment of such remuneration shall
be deemed a just compensation agreed upon by the corporation and Mr.
Antonio Ma. Barretto (1) for the services rendered by him in founding
and organizing the association; (2) for disbursements and other
financial sacrifices made by him for the benefit of the association
during the first two years of its existence, that is, during the period
from February 25, 1926, to December 31, 1927; (3) for the assignment
and transfer to the association by Mr. Antonio Ma. Barretto, of the
‘Combined Tables of Triple Transaction’, invented and perfected by him,
which are actually serving as a basis for the business operations of
the corporation. On his part, Mr. Antonio Ma. Barretto assures that as
long as he is the general manager of the corporation, the same shall
realize a profit of not less than twelve and one-half per cent (12½%)
of the accumulative shares of series A, E, I, O and U at the end of
every fiscal year, and that during each and every year of his
incumbency as such general manager, wherein the dividends declared on
the accumulative shares of series A, E, I, O and U do not reach twelve
and one-half per cent (12½%) on the accumulated capital, Mr. Antonio
Ma. Barretto shall not receive the aforesaid four per cent (4%) from
the association, but only whatever excess resulting therefrom after
adjudication of the 12% per cent in favor of the accumulative shares of
series A, E, I, O and U. It is hereby understood that this article of
the by-laws constitutes a formal contract between the corporation and
Mr. Antonio Ma. Barretto, which contract shall not be susceptible of
modification except by mutual agreement of the parties.”
The board of directors of La Previsora Filipina never authorized
payment of the sum of P200,000 to Antonio Ma. Barretto, until he died
on March 9, 1929. In fact, no amount was paid him to that effect.
Inasmuch as all the conditions imposed therein had been allegedly
complied with, according to the claim of the judicial administrators of
the deceased Antonio Ma. Barretto y Rocha and his heirs, they brought
this action demanding payment by the association of the sum of P150,000
which represents the first four installments specified in the original
article 68, and corresponding to the first four years during which the
said deceased rendered services to the corporation. Inasmuch as
judgment was rendered dismissing the complaint as well as the
cross-complaint filed therein, with costs against the plaintiffs, said
plaintiffs took the present appeal. The defendant respected the
judgment thus rendered.
The appellants assign the following alleged errors as committed by the trial court in its decision appealed from, to wit:
“I.
The trial court erred in sustaining the opposition of defendant to the
testimony of plaintiffs’ witness the Honorable Antonio M. Opisso,
incorporator, stockholder, director and first president of defendant
corporation, on the ground that the said witness being also the
attorney for the defendant corporation, his knowledge as to facts
pertinent to the case, was privileged.“II. The trial
court erred in finding that the adoption of articles 68 and 72 of the
by-laws of defendant corporation on the 25th day of February, 1926, was
not the voluntary act of the stockholders and directors of defendant
corporation, but was due to the dominating influence of the late
Antonio Ma. Barretto.“III. The trial court erred in
finding that no step was taken by the board of directors of defendant
corporation, in relation to the agreement evidenced by article 68 of
its by-laws (Exhibit A).“IV. The trial court erred in
finding that article 68 of the by-laws of defendant corporation was not
evidence of a contract between the late Antonio Ma. Barretto and
defendant.“V. The trial court erred in finding that there
was no consideration for the payment of P200,000 to the late Antonio
Ma. Barretto, as provided for in article 68 of the by-laws of defendant
corporation.“VI. The trial court erred in finding that
the ‘Combined Tables of Triple Transaction’ referred to in article 68
of the by-laws of defendant corporation, never existed, nor were they
sold, conveyed or delivered to defendant corporation, nor used by the
same.“VII. The trial court erred in finding that article
68 of the by-laws of defendant corporation is null and void for the
reason that same is in conflict with, and in contravention to, the
Corporation Law regarding mutual building and loan associations.“VIII. The trial court erred in finding that articles 50 and 72 of the
by-laws of defendant corporation, Exhibit A, were from their adoption
null and void, being in conflict with sections 21 and 22 of the
Corporation Law.“IX. The trial court erred in finding
that article 68 of Exhibits I and B had the lawful concurrence of the
shareholders of defendant corporation.“X. The trial court
erred in failing to find that defendant corporation was obligated to
pay plaintiffs the full amount due under article 68, by-laws of
defendant corporation, Exhibit A.“XI. The trial court erred in not granting plaintiffs’ motion for a new trial.”
In view of the conclusion to be arrived at later, the first assignment of error is left to be discussed last.
Inasmuch as assignments of error Nos. II to VII, inclusive, are
correlated with the validity of article 68 of the original by-laws of
the defendant corporation, upon which the plaintiffs’ action is based,
we shall discuss them jointly. Before entering into a full discussion
thereof, it is not amiss to state that in invoking the provisions of
the aforesaid original article 68, the plaintiffs are sustaining
inconsistent and antagonistic theories inasmuch as they are fully aware
of the fact that the article in question has been repealed several
times and substituted by other articles from which the provision
relating to the P200,000 has been completely eliminated. We do not mean
to insinuate herein that the amendments thereto were valid. Our only
purpose in referring to them is to show clearly the inconsistency of
the plaintiffs’ claim for the reason that if the original article was
valid then the amendments thereto, which were adopted in like manner,
would have to be equally binding, in which case the original article 68
in question would have ceased to exist.
We deem it
unnecessary to pay special attention to the multiple intervention of
the deceased in the affairs of the association and the powerful
influence which, according to the findings of the trial court, he
exerted over the directors and stockholders thereof during the four
years of his incumbency. It is our aim to confine the discussion to the
validity of the provision relating to the sum of P200,000 specified in
article 68 of the original by-laws of the corporation.
It is
unquestionable that the provision in question is null and void and
without force and effect on the ground that article 68 in question does
not constitute a contract between the deceased and the corporation. All
the by-laws and the amendments thereto were adopted and ratified at the
regular meetings of stockholders who, under the Corporation Law, were
not authorized to enter into a contract for and bind the corporation.
From this point of view, the provision relating to the sum in question
constituted an ultra vires act. It is of no consequence that
the by-laws and the amendments thereto were likewise signed by the
directors of the association in their capacity as such. The truth is
that, at that time, all of them attended the meeting as stockholders
and, strictly speaking, it was a stockholders’ and not a directors’
meeting. On this same ground, the appellants’ claim that said act of
the directors, in connection with the by-laws, constitutes a
ratification or confirmation of the alleged contract, is untenable.
There is another truly fundamental reason which compels us to hold that
the original article 68 is illegal, null and void. It is obvious that
the provision in question was due to the desire of the stockholders to
compensate the services rendered by the general manager before the
incorporation. From the findings of the trial court, it seems that all
that had been said relative to the “Combined Tables of Triple
Transaction” was a mere pretext in order to give the intended act of
liberality all the semblance of a legal transaction. In this respect,
we agree with the conclusion of the trial court that such invention was
not what it purported to be and that it was never delivered nor placed
at the disposal of the corporation, inasmuch as the documents seeming
to have had some similarity thereto were found locked in the private
wardrobe of the deceased, together with his other private papers.
Bearing this in mind, it is obvious that the assignment stated in the
article in question is in conflict with the spirit of the law creating
mutual building and loan associations and completely destroys the
cooperation and mutuality among the stockholders, which characterize
associations of this kind.
Fortunately, this is not the
first time that the question under consideration is raised in this
jurisdiction. In the case of Barretto vs. La Previsora Filipina
(57 Phil., 649), the same question had been decided adversely against
the claim of the plaintiffs. In the said case, the then plaintiffs
sought to recover from the association 1 per cent of the net profits
thereof, basing their claim on the provisions of article 68-A of the
same by-laws. We then held as follows:
“After
a careful consideration we fully agree with the appellant. Article 68-A
of the amended by-laws of the defendant corporation upon which the
action is based, does not under the law as applied to the express
provisions thereof create any legal obligation on its part to pay to
the persons named therein, including the plaintiffs, such a life
gratuity or pension out of its net profits. A by-law provision of this
nature must be regarded as clearly beyond the lawful powers of a mutual
building and loan association, such as the defendant corporation.“While
such associations are expressly authorized by the Corporation Law to
adopt by-laws for their government, section 20, of that Act, as
construed by this court in the case of Fleischer vs. Botica
Nolasco Co. (47 Phil., 583), expressly limits such authority to the
adoption of by-laws which are not inconsistent with the provisions of
the law. The appellees contend that the article in question is merely a
provision for the compensation of directors, which is not only
consistent with but expressly authorized by section 21 of the
Corporation Law. We cannot agree with this contention. The authority
conferred upon corporations in that section refers only to providing
compensation for the future services of directors, officers, and
employees thereof after the adoption of the by-law or other provision
in relation thereto, and cannot in any sense be held to authorize the
giving, as in this case, of continuous compensation to particular
directors after their employment has terminated for past services
rendered gratuitously by them to the corporation. To permit the
transaction involved in this case would be to create an obligation
unknown to the law, and to countenance a misapplication of the funds of
the defendant building and loan association to the prejudice of the
substantial right of its shareholders.“Building and loan
associations are peculiar and special corporations. They are founded
upon principles of strict mutuality and equality of benefits and
obligations, and the trend of the more recent decisions is that any
contract made or by-law provision adopted by such an association in
contravention of the statute is ultra vires and void. It
stands in a trust relation to the contributors in respect to the funds
contributed, and there is an implied contract with its members that it
shall not divert its funds or powers to purposes other than those for
which it was created. The fundamental law of building and loan
associations organized under the different statutes throughout the
American Union is that all members must participate equally in the
profits and bear the losses, if any, in the same proportion, and any
diversion of their funds to purposes not authorized by the law of their
creation is violative of the principles of mutuality between the
members. (See Bertche vs. Equitable Loan, etc. Association, 147 Mo., 343; 71 A. S. R., 571.) As correctly stated in the case of McCauley vs.
Building and Saving Assn. (97 Tenn., 421; 56 A. S. R., 813, 818),
‘Strict mutuality and equality of benefits and obligations must be kept
the groundwork and basis of these associations, and if they are not so
founded, they are not truly building and loan associations, entitled to
the protection given such associations by the statute.’ When we
consider the fundamental nature and purposes of building and loan
associations, as above stated, in relation to the subject matter of
this by-law, it is obvious that the provisions thereof are entirely
foreign to the government of defendant corporation, inconsistent with
and subversive of the legislative scheme governing such associations,
and contrary to the spirit of the law, and cannot therefore be the
basis of a cause of action against the defendant corporation.“Irrespective of our conclusion that the provision in question is ultra vires,
we are of the opinion that said by-law cannot be held to establish a
contractual relation between the parties to this action, because the
essential elements of a contract are lacking. The article which the
appellees rely upon is merely a by-law provision adopted by the
stockholders of the defendant corporation, without any action having
been taken in relation thereto by its board of directors. The law is
settled that contracts between a corporation and third persons must be
made by or under the authority of its board of directors and not by its
stockholders. Hence, the action of the stockholders in such matters is
only advisory and not in any wise binding on the corporation. (See Ramirez vs.
Orientalist Co. and Fernandez, 38 Phil., 634.) There could not be a
contract without mutual consent, and it appears that the plaintiffs did
not consent to the provisions of the by-law in question, but, on the
contrary, they objected to and voted against it in the stockholders’
meeting in which it was adopted. Furthermore, the said by-law shows on
its face that there was no valid consideration for the supposed
obligation mentioned therein. It is clearly an attempt to give in the
future to certain directors compensation for past services gratuitously
rendered by them to the corporation. Such a provision is without
consideration, and imposes no obligation on the corporation which can
be enforced by action at law. (4 Fletcher on Corporations, p. 2762, and
cases cited.)”
In view of the foregoing
considerations, we do not hesitate to reiterate that the aforesaid
original article 68 is illegal and without force and effect, to the
extent that it cannot serve as a ground for the action brought by the
plaintiffs.
The plaintiffs claim that the question relative
to the validity of a similar clause had already been settled and upheld
by this court in the case of El Hogar Filipino vs. Rafferty (37
Phil., 995). In the said case, question was raised against the validity
of the clause in the by-laws, which reads as follows:
“5
per cent of net profits as per annual accounting, to founder, or his
heirs during the existence of the society, as compensation for his
studies, labors and sacrifices made by him to establish ‘El Hogar’, and
executed on January 11, 1911.”
The same argument was employed in the case of Barretto vs. La Previsora Filipina, supra, wherein the following was held:
“The appellees in their brief refer to the cases of El Hogar Filipino vs. Rafferty (37 Phil., 995), and Government of the Philippine Islands vs.
El Hogar Filipino (50 Phil., 399), and contend that those decisions are
authority for sustaining the validity of the by-law in this case. We
have carefully examined those decisions, and find that those cases are
clearly distinguishable from the present action. It is sufficient to
say that the causes of action are not of the same nature, and the facts
upon which those decisions are based are entirely different from the
facts of the present case.”
Aside from the
difference stated in the aforesaid decision, it may be added also that
in the case of El Hogar the gratuity appropriated in favor of the
founder had been converted into a formal contract on the ground that it
had been adopted by the board of directors thereof, and furthermore, it
was granted him in consideration of future services which he was to
render to the association, for having defrayed the expenses for the
organization thereof, rendered free service as general manager for the
period of one year, granted the association a loan of P6,000 without
interest, and finally, having bound himself to the effect that the
capital of the corporation would increase to P400,000 within one year
from the date of incorporation.
Having arrived at the
foregoing conclusions, it becomes unnecessary to discuss the VIII and
IX assignments of error, and much less the last two which are mere
corollaries of the former ones.
The arguments advanced in
support of the first assignment of error are of no consequence or
importance. Even taking for granted that the witness Opisso could
legally testify on the facts as maintained by the counsel for the
plaintiffs, nevertheless, the error committed in preventing him from
testifying would not be sufficient to justify modification of our
conclusions or change the result of the case in the least. For this
reason, we prefer to refrain from discussing it extensively and to
leave it undecided.
Wherefore, the judgment appealed from is hereby affirmed, with the costs against the appellants. So ordered.
Malcolm, Villa-Real, Hull, and Diaz, JJ., concur.