GOVT OF THE PHIL ISLANDS v. EL HOGAR FILIPINO 2.
2. WON the holding and ownership a business lot is in excess of its reasonable
G.R. No. L-26649 / JUL 13, 1927 / STREET, J. / CORPO – Formation/Organization; Corporate Powers;
Duties of Directors/Controlling Stockholders / MEEMARCILLA
NATURE Original Quo Warranto Proceeding
PETITIONERS The Govt of the Philippine Islands (on relation of the Atty-General)
RESPONDENTS El Hogar Filipino
SUMMARY. Atty-General (AG) wants to dissolve EHF very badly. SC held the violations are
not enough to cancel EHF’s franchise.
*Warning: Mahaba-habang inuman (super fave case daw ni sir)
FACTS.
 On March 1, 1906, the Philippine Commission enacted what is known as the Corporation
Law (Act No. 1459) effective upon April 1 of the same year. Section 171 to 190 of this Act
are devoted to the subject of building and loan associations, defining their objects making
various provisions governing their organization and administration, and providing for the
supervision to be exercised over them.
o 1911: El Hogar Filipino (The Filipino Home) was apparently the first
corporation organized in the Philippine Islands under the provisions cited.
 The articles of incorporation bear the date of December 28, 1910, at which time capital
stock in the association had been subscribed to the amount of P150,000 of which the
sum of P10,620 had been paid in.
o Under the law then, the capital of the Association was not permitted to exceed
P3M, but by Act No. 2092, passed December 23, 1911, the statute was so
amended as to permit the capitalization of building and loan associations to
the amount of ten millions.
o El Hogar amended its articles so as to provide that the capital should be in an
amount not exceeding the then lawful limit.
o From the time of its first organization the number of shareholders has
constantly increased, with the result that on December 31, 1925, the
association had 5.8k shareholders holding 125k shares, with a total paid-up
value of P8.7M.
o During the period of its existence prior to the date last above-mentioned the
association paid to withdrawing stockholders the amount of P7.6M; and in the
same period it distributed in the form of dividends among its stockholders the
sum of P7.6M.
 The purpose of the corporation (from the dissent of J. Malcolm):
o for the accumulation of savings of shareholders
o the return of these savings to them
o encouragement of industry, frugality, and home building among its
shareholders
o the loan of its funds to its shareholders upon an adequate security and pledge
of capital stocks
o borrowing of money upon the credit of the corporation
o issuance of bonds or other documents evidencing the existence of such
obligations
 The complaint against El Hogar enumerates 17 distinct causes of action:
1. WON it illegally held acquired properties in excess of 5 years? NO.
requirements? NO.
3. WON it engaged in activities foreign to its purposes for which it was created and which
is not necessary to its legitimate ends? YES but only as to the management of properties
NOT MORTGAGED to the corporation.
4. WON Art. 10 in its by-laws is a patent nullity? NO.
5. WON its board of directors has become a permanent and self-perpetuating body for
failing to elect its board in accordance to the manner set forth by law? NO.
6. WON the distribution of 5% of the net profits to the board is a valid measure? YES
7. WON royalty of the founder is unconscionable and excessive? NO.
8. WON Art. 70 of its by-laws restricts the rights and privileges of its members to serve as
board members? NO.
9. WON the issuance of special shares is an abuse of its corporate franchise? NO.
10. WON the rate of depreciation (10-14%) is too excessive? NO
11. WON the maintenance of the reserve fund is too excessive? NO
12. WON the fixed annual dividend of 10% is unlawful? NO.
13. WON EHF has an obligation to monitor the use of the loans? NO.
14. WON extending large amount of loans to wealthy persons and large companies is not
valid? NO.
15. WON it is a misdemeanor to have reserve funds upon the dissolution of the
corporation? NO.
16. WON juridical persons can become shareholders and avail of loans from the
corporation? YES.
17. WON the practice of selling the acquired property at a credit is unlawful? NO.
ISSUES & RATIO.
MAIN: WON the corporation should be deprived of its franchise and be dissolved because
of several violations of the law. – NO, the violations incurred are too trivial and does not
qualify as a misdemeanor worthy of the cancellation of the corporate franchise
1ST COA: Illegal holding of property for more than 5 years
Corpo Law: While corporations may loan funds upon real estate security and purchase real
estate when necessary for the collection of loans, they shall dispose of real estate so obtained
within 5 years after receiving the title
Facts: In 1920 a mortgage was made in favor of EHF of a parcel of land in San Clemente, Tarlac.
It was made as security for a loan of P24k to the owners who are also shareholders of EHF.
Upon their default, EHF foreclosed the mortgaged and bought the property for P23k. The
deed of sale was executed and delivered to EHF on Dec. 22, 1920 and was forwarded to the
Register of Deeds on Dec. 28, 1920. However, EHF only received the certificate of title on
May 7, 1921.
The company made several efforts to dispose of the land:
1. March 10, 1921 and July 27 Board Resolutions authorizing Vicente Bengzon and
Jose Laguardia as agents to find a purchaser for the land. However both of them
failed to find a buyer so the corporation advertised its public sale.
2. March 10, 1926 an offer was made by Alcantara for P4,000 to which the board
agreed to accept the offer on March 25. However Alcantara failed to pay the
 entire purchase price despite several extensions of time. As a result the contract
to sell was rescinded.
3. On July 30, 1926 the land was finally sold to Doña Alberto for P6,000.
Issue: Violated? YES. But not enough to cancel franchise.
Ratio:
When do you reckon the five year period?
The 5 year period commenced when the Register of Deeds issued its certificate of title on
May 7, 1921. It was only on that date the corporation had unequivocal and unquestionable
right to pass a complete title. It was also held in previous cases that an innocent purchaser of
value under the Torrens system could not acquire such status unless the vendor was able to
place in his hands an owner’s duplicate of certificate of title.
How about the effect of the first supposed sale to Alcantara?
The period of the acceptance of offer (March 25, 1926) to the perfection of the sale to Alberto
(July 30, 1926) should not be included in the period of five years. This and the fact that the
price of the sale (P6k v. P24k loan) was significantly lower than the cost of its acquisition made
the court equitably apply the law in favor of EHF.
Should the franchise of EHF be forfeited because of this violation?
No, the corporation did not offend the law in such a manner as to deprive it of its franchise.
The case of GP v. Phil Sugar Estates states that if there was a violation of the law but not of a
grave character as to warrant the surrender of its franchise, the court is allowed discretion to
impose the proper penalty. The facts of this case appears that EHF tried to sell the property
many months prior to this action. Imposing such penalty will be too severe and
disproportionate to the offense. The purpose of the law is to prevent the revival of the entail
(mayorazgo) or the hampering of alienation of land for a long period of time.
Attorney-General (AG) argued that the court has no such discretion and dissolving the
corporation is mandatory upon ANY violation of the Corporation Law.
He cited Sec. 190 on penalties which states that “if the violation being proved, be dissolved by
quo warranto proceedings instituted by AG or provincial fiscal.” However the court held that
the intention of the law was only to indicate the remedy against the corporation which is a
quo warranto proceeding. Adopting the argument of AG is too dangerous as many
corporations commit trivial violations of the rules (i.e. stock book must be kept in alphabetical
order).
2ND COA: holding and owning a business lot which is in excess of its reasonable requirements
Facts: EHF purchased a 1,413 sq. m of land. In 1920 the corporation built a new building (4
stories except one corner with 5 floors). The problem is that EHF only used 324 sq. m of
office spaces and leased out about 3,175 sq. m to other persons and entities. The argument
of AG is that the acquisition of the lot, construction of the building, and leasing out were ultra
vires acts of the corporation as these were in excess of its reasonable business requirements.
Issue: Exceeded the reasonable requirements of EHF? NO
Ratio:
Every corporation has the power to purchase, hold and lease such real property in its lawful
business transactions which it may reasonably and necessarily require. Owning of a business
lot upon which to construct its office building are reasonably necessary for its operations.
Having lawfully acquired the property, EHF is entitled to the full and beneficial ownership
thereof.
How about leasing out office spaces?
The court discussed several cases to prove that leasing out office spaces does not exceed the
reasonable needs of a corporation:
1. Rector v. Hartford Deposit Co. – In planning and constructing a building, the
corporations consideration is not limited to the precise number of rooms it may
require, but includes the future probable growth and volume of its business. Such
rooms may rented out for the mean time, and such lease must be done in good
faith.
2. Association v. Driver – Renting of the unused portions of the building is a mere
incident in the conduct of its business.
3. Wingert v. First Nat’l Bank – Leasing out office spaces can be done to offset the
great cost of the lot and improvements therein
4. Brown v. Scheleir – Banking associations are given discretion to act as a prudent
person in making an investment in real estate. As long as the property is acquired
for a legitimate person, it is free to deal with the property as a prudent owner
3RD COA: engaging in activities foreign to its purposes for which it was created and which is
not necessary to its legitimate ends
Facts:
There are 3 acts being complained of under this cause of action:
1. Administration of offices in the El Hogar building not used by the corporation but
leased out to the public (facts under second cause of action) VALID
2. EHF administers and manages properties belonging to delinquent shareholders
of the association as payment for the interest, premium, and dues. The
corporation charges a commission of 2.5% on the sums collected on these
properties which it applies to the obligations of its delinquent shareholders. AG
argues that the only remedy for EHF in case of default (accdg to Corpo Law) is to
collect the whole loan. VALID
3. The corporation also managed real estate belonging to its shareholders but NOT
MORTGAGED TO IT (In 1925 there were 14 properties). The services being
rendered by EHF were renting out, payment of taxes, insurance, necessary
repairs, and collection of rent. As consideration for its services it charges
commission ranging from 2.5%-5% commission on the sums collected. INVALID
Issue: Are the acts valid? YES, EXCEPT FOR #3!
Ratio:
1. See discussion on second cause of action
2. AG argued that the proper remedy for delinquent shareholders is an action for
collection of the whole loan under Section 185 (Case did not provide the details).
Under Sec. 185 f the Corpo Law, the association may treat the entire indebtedness
as due “at the option of the Board” and the remedy is not exclusive.
3. General rule is that corporations possess only such express powers as are
actually conferred and such implied powers as are reasonably necessary to the
exercise of the express powers. Since there is no express provision in the law
 authorizing corporations to manage and administer properties of shareholders,
such is not authorized by law. The administration of such properties in such
manner is more befitting to a business of real estate or trust company and not to
a building and loan association. The corporation exceeded the powers conferred to
it by law but only as regards the properties which are not mortgaged to the
association. Requiring the real property owners to subscribe to one or more shares
is of no moment.
What is the effect of this ultra vires act?
The court merely enjoined the corporation from further activities of this sort.
4TH COA: a patent nullity in its by-laws
Facts:
Void provision in its by-laws namely Art.10 which gives the board of directors the power to
cancel shares and return to the owner thereof the balance resulting to the liquidation of his
shares. This may be done by a vote of absolute majority of the board and for reasons involving
their conduct or for any other motive that their continuation as shareholders is undesirable.
EHF then resolved to eliminate this provision in the annual meeting of its shareholders but no
such meeting was conducted because it was not attended by a sufficient number to constitute
a quorum. Such power had not been exercised by the board.
Issue: Is Art. 10 valid? NO. (but not enough to cancel franchise)
Ratio:
It is a patent nullity because it conflicts with Sec. 187 of the Corpo Law which states that the
board shall not have power to force the surrender and withdrawal of an unmatured stock
except in liquidation of the corporation or forfeiture of the stock due to delinquency. But there
is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-
laws.
5TH COA: failure to fill the board in the manner provided for by Sec. 31 of the Corpo Law
Facts:
For the years 1911 and 1912, the board was elected in the manner provided for by law.
However, it had difficulties in getting the required quorum (Art. 61 of its by-laws: quorum is
50% + 1 of the shares) during annual meetings. It made several efforts to increase attendance
for the Feb 1923 meeting but only 3,899 out of 106,491 shares attended the meeting.
It had been the practice of the board to fill the vacancies therein by choosing suitable persons
from its stockholders. This practice is sanctioned by Art. 71 of its by-laws which states that the
directors shall elect from among the shareholders members to fill the vacancies in the board
UNTIL THE ELECTION at the general meeting. Those chosen are experienced and successful
businessmen, members of prominent families (who are related by blood or by marriage), and
a member of a prominent American lawfirm in Manila.
Issue: Practice to fill vacancies is contrary to law? NO
Ratio:
Sec. 31 (Corpo Law) states that during election of board members owners of at least a majority
of the stockholdings entitled to vote must be present either personally or by proxy.
Principle of HOLDOVER allows an officer to hold his position upon the expiration of his term
or its vacancy until his successor is duly qualified. This is not applicable if such is prohibited by
law or by the charter of the corporation. Since the manner of election of the board is expressly
stated in its by-laws (Art. 66) stating that the term of the board is for one year until their
successors have been elected and taken possession of their offices, the practice is valid.
The court cannon fault the corporation for the failure of its stockholders to reach a quorum
for purposes of electing members of the board. Such absence may be an indication of their
satisfaction as to how the corporation is being handled.
The argument of AG that the board had become self-perpetuating body composed of wealthy
men and not wage earners and those of moderate means is UNTENABLE. The possession of
means does not disqualify a man for these things.
6TH COA: Salaries of the Directors
Facts:
Sec. 92 of its by-laws distributes 5% of the net profit of the corporation to its board of directors
in proportion to their attendance at meetings of the board. This liberal policy had
extraordinary results of 7-8 out of 9 directors attending every meeting.
Issue: Policy valid? YES
Ratio:
The Corpo Law did not prescribe any compensation to the board so it is left to the discretion
of the corporation as may be determined in its by-laws. The policy is provided by EHF’s by-
laws. (If the salaries are too excessive, then change the by laws)
7TH COA: royalty of the founder is unconscionable, excessive and out of all proportion to the
services rendered
Facts:
The promoter and organizer of EHF was Mr. Antonio Melian. During the early stages of the
corporation, the board made a contract with Melian stating that he is to be the manager of
the association to render services thereto paying for his own account the expenses in
organizing the corporation and that he will loan P6k without interest (to meet office expenses)
until such time that the association has sufficient funds to pay for the loan. He also undertook
the obligation that by the end of 1 year, the amount of the corporation’s capital is P400k.
As compensation for all these services, the board agreed to give him 5% of the net profits
earned by the corporation each year during the period fixed for the duration of the
association by its articles of incorporation. This is to be transferred to his heirs upon his death,
and that the condition precedent to the acquisition of part of profits is the fulfillment of the
obligations undertaken by him. As consequence of this contract, a provision in its by-laws
giving 5% of the net profits to Melian during the life of the corporation was inserted.
Issue: Excessive as to warrant EHF’s dissolution? NO
Ratio:
A corporation has a power to enter into contracts of services to be rendered by a promoter in
connection with organizing and maintaining the corporation. The AG does not even assail this
act of the corporation as ultra vires, but assuming arguendo that it is, the cause of action
suffers an infirmity as to the failure of the AG to implead Mr. Melian. An action to annul the
contract cannot be maintained without joining both contracting parties. Also the proper party
to bring the case is the corporation or the shareholders. The court upheld the sanctity of the
contract obligation.
8th COA: Art. 70 of its by-laws restricts the rights and privileges of its members to serve as
board members
Facts:
The provision in question are Art. 70 and 76 which requires that persons elected to the board
must be shareholders of shares with P5k paid up value. This shall be held as security which
may be put up in behalf of any director by some other holder of shares. Directors waive their
right as shareholders to receive loans from the association. AG argues that these
requirements limit the rights and privileges of qualified stockholders but lacking in financial
capability to participate in the board of directors.
Issue: Arts. 70 and 76 valid? YES
Ratio:
Sec 21 of the Corpo Law expressly gives the power to the corporation to provide in its by-
laws the qualifications of directors. The requirement of giving a security for the proper
discharge of their functions is a prudent measure and is in conformity with good practice. The
rationale for the prohibition of the directors from obtaining a loan is to prevent the possibility
of looting of the corporation by unscrupulous directors.
9th COA: EHF abused its franchise by issuing special shares
Facts:
The company issued special shares wherein a shareholder upon subscribing either pays 80%
of the par value in cash (and the other 20% to be paid from the dividends/profits he earns
each year) or by paying monthly dues of P10 until the total amount paid is P160 per share.
Since 1915 it has also been the practice of EHF to accumulate to each special share 1/10 of the
dividend declared and to pay the remainder in cash. When the amount paid in upon any
special share plus the accumulate dividends accruing to it amount to par value of P200, the
share matures and ceases to participate further in the earning. The amount of the value of the
share (P200) is returned to the shareholder and the share is cancelled.
Issue: Special shares unlawful because they’re not mention in the Corpo Law? NO
Ratio:
The mechanism of the special shares is the same as that of advance payment shares. Sec.
178 of Corpo Law allows for the prepayment of dues or interest in advance (before its
maturity) subject to the condition that the corporation shall not allow interest on such
payment to exceed 6% per annum and it must not be for a period longer than one year. And
assuming arguendo that the law does not expressly authorize such shares, the association has
implied authority to issue them.
It is a principle of corporation law that shares must be sold at par. Under the first option of
obtaining a special share (payment of 80%), the shareholder still pays the 20% albeit indirectly
(as the company deducts the 20% from the profits).
The court had previously upheld the validity of these shares in two cases (EHF v. Refferty and
Severino v. EHF). It did not anymore elaborate on such matter but validated its previous
rulings that such shares did not affect the character of EHF as building and loan association
nor does such scheme makes the loans usurious.
10th COA: rate of depreciation is too excessive
Facts:
The company made 1,373 loans to its shareholders secured by mortgages on real property.
There were several foreclosure sales of 54 of the mortgaged properties. The amount of the
purchase price is the amount of the indebtedness of a stockholder minus the withdrawal value
of the shares pledged as collateral. In its inventory, this amount is recorded and is
depreciated at the rate of 10-14%.
Issue: Too excessive? NO
Ratio:
The power to adopt by-laws includes making the rules for administration of the corporate
affairs, management of its business and the care, control and disposition of its property.
The board possesses a discretion as to the amount of depreciation allowed every year. There
is no law prohibiting a corporation to write off a reasonable amount of depreciation on its
assets to determine the real profits.
What if the amount of depreciation is too large?
The remedy is not upon the courts but upon the legislation to define the extent of the
allowable depreciation. The court could not impair the discretion given to the board on such
matters they have legitimate power of action.
11TH AND 12TH COA: excessive reserve funds and unlawful policy of straight annual
dividend of 10%
Facts:
Art. 92 of the by-laws states that 5% of the net profits earned each year shall be carried to a
general reserve fund. Art. 93 authorized the board to carry funds therein whenever advisable
to do so provided that the annual dividends carried to special reserve exceeds 8%.
It is the policy of EHF to place in the special reserve any balance in the profits left after the
payment of the dividends and other charges and losses. In 1926, the amount is 5% of the paid-
in value of shares.
AG assails the validity of the maintenance of this general reserve. According to him this
practice is inconsistent with Sec. 188 of the Corpo Law and the fixed dividends of 10% is
contrary to the intention of the statute [again the case did not state the law].
Issue: Valid practices? YES
Ratio:
The right to maintain a reserve even if not expressly granted is implied. It is a prudent
measure to guard against possible losses when the earnings fall beyond the average. A
prudent manager guards against contingencies and fluctuations. No prudent person would
retain funds barely sufficient to pay for its present liabilities. Discretion is given to the directors
of the board to determine the allocation for such contingencies. (Greeff v. Equitable Life
Assurance Society).
The fund is also an insurance for stockholders against losses. It is as legitimate an expense as
the premiums paid on any insurance policy. **If the fund is too excessive, the remedy lies in
the Legislature, not the court.
13TH COA: failure of EHF to monitor the purpose of the loans
Facts:
On Dec 1925, there were 544 outstanding loans to EHF but it made no attempt to monitor and
control the borrowers as to the use of their loans. According to the AG the purpose of the
loans must be limited to building of homes. However it appears that from the voluntary
statements of the borrowers as to what purpose they will be using the funds, a large amount
(P5.7M) was borrowed without disclosing its purpose.
Issue: Is the failure enough to dissolve EHF? NO
Ratio:
There is no provision of law declaring that loans may be made solely for the purpose of
building homes. Sec. 178 of the Corpo Law states that building of homes is ONLY ONE of the
several ends which a building and loan association may promote. It is not an abuse of their
powers or departure from their main purposes but is a natural and expansion along healthy
and legitimate lines.
Furthermore, there is no duty or obligation for the association to inquire into what purpose
the loan is obtained or require the borrower to disclose its intended use.
14TH COA: extending large amount of loans to wealthy persons and large companies
Facts:
For several years, EHF made loans amounting to 120k to 390k in favor or Roxas Estates and
1.1M to 2.3M to Pacific Warehouse Company. This significantly reduced the available funds
for the shareholders of the corporation as it had to postpone payment of claims resulting from
withdrawal applications.
Issue: Violation of franchise? NO
Ratio:
The law does not state a limit as to the size of the loans to be made by the association. It
is a matter confided to the discretion of the board of directors. The loans in question only
compose 10 out of the 544 outstanding loans to the corporation. Furthermore, there was no
allegation that such loans were not backed up by sufficient security.
15TH COA: misdemeanor to maintain its reserve funds
Facts:
Art. 95 of its by-laws states that funds obtained by the liquidation of the association shall be
applied in the first lace to the repayment of shares and the balance (if any) shall be distributed
in accordance with the system established for the distribution of annual profits.
AG argues that upon the expiration of the franchise of the corporation, the reserve funds will
be given to the founder, his heirs, the directors and holders of ordinary and special shares.
Issue: Is there something wrong with Art. 95? NO
Ratio:
This argument is about what may happen in the future upon the expiration of the franchise.
The funds left if any upon the liquidation of the corporation is subject to the discretion of the
board. It is not a matter for judicial interference.
16TH COA: allowing corporations and partnerships to become shareholders to obtain loans
Facts:
On Dec. 31, 1925, out of the 5,826 shareholders of EHF, 30 are juridical entities (16 corp + 14
partnerships). Loans were also extended to 9 corps and 5 partnerships.
Issue: Can juridical entities become shareholders? YES
Ratio:
Sec. 173 of the Corpo Law states that any person may become a stockholder in building and
loan associations. The term person is used in its general sense which includes BOTH
NATURAL AND ARTIFICIAL PERSONS. This is different from the meaning of persons as used
in Sec. 2 of the same law which mandates that incorporators be NATURAL PERSONS only.
AG argues that these juridical persons availed of the shareholdings for the sole purpose of
obtaining a loan. The court did not consider the motive of the shareholder in making a
subscription to the stock. What matters is that they are competent to make contracts.
17th COA: faulty bookkeeping
Facts:
EHF sold some of the real estate it foreclosed on CREDIT. How? By transferring the title of
the property to the buyer on the condition that the same will be mortgaged to the corporation
as security for payment of the purchase price.
Issue: Illegal? NO
Ratio:
The law requires that real properties acquired by the corporation must be disposed within 5
years upon the transfer of title. However the law does not prescribe that the consideration
for the property be in CASH or that the purchaser be a shareholder in the corporation.
After all such sale is still a contract wherein the parties can impose terms and conditions.
DECISION.
EHF is enjoined in the future from administering real property not owned by itself, except as
may be permitted to it by contract when a borrowing shareholder defaults in his obligation. In
all other respects the complaint is DISMISSED.
NOTES.
Malcolm, J. DISSENT.
 Dissent quotes cases and books re: what a building and loan association should be
(purpose is to help its members, presumably people with small incomes, build homes).
Their basic and essential idea is MUTUALITY. Primary object is to encourage thrift and
to assist in home building.
 The violations allegedly committed by the corporation constitute GRAVE ABUSES. EHF
has become an octopus whose tentacles have reached out to embrace and stifle public
interest.
 For these abuses, the court is justified in decreeing a dissolution of the corporation.
 But the EHF is an important possessor of property rights which if disturbed will result in
a catastrophe. It is an institution which should be encouraged in the community
 So the proper remedy is to confine EHF to its legitimate functions and to eliminate its
illegitimate purposes. It must be given a reasonable time to fulfill the conditions lain
down in this decision.

Romualdez, J. DISSENT. (Same as J. Malcolm)