IV. Corporate Contract LawC. In Pari Delicto Cases

Case No. 1 Hall vs Piccio

Petitioners Arnold Hall, Bradley Hall and Private Respondents Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the articles of incorporation of the Far Eastern Lumber and Commercial Co., Inc. organized to engage in a general lumber business to carry on as general contractors, operators and managers. Attached to the articles was an affidavit of the treasurer stating that 23, 428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation.Immediately after the execution of the articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers.Then, the articles of incorporation were filed in SEC for the issuance of the corresponding certificate of incorporation.Pending action on the articles of incorporation, Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella filed a civil caseagainst the Halls alleging among other things that Far Eastern Lumber and Commercial Co, was an unregistered partnership and that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses.The Halls filed a Motion to Dismiss contesting the court’s jurisdiction and the sufficiency of the cause of action but Judge Piccio ordered the dissolution of the company and appointed a receiver.

Issues:(1) Whether or not the court had jurisdiction to decree the dissolution of the company because it being a de facto corporation, dissolution may only be ordered in a quo warranto proceeding in accordance with Section 19.(2) Inasmuch as the Browns had signed the articles of incorporation, whether or not they are estopped from claiming that it is not a corporation but only a partnership.

Held:(1) YES. The court had jurisdiction but Section 19 does not apply.First, not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. – even its stockholders – may not probably

claim “in good faith” to be a corporation.

The immunity of collateral attack is granted to corporations “claiming in good faith to be corporation under this act.” Such a claim is compatible with the existence of errors and irregularities but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law, the claim to be a corporation “under this act” could not be made “in good faith.”Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence of a de jurecorporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.(2) NO. The Browns are not estopped. Because the SEC has not yet issued the corresponding certificate of incorporation, all of them know or ought to know that the personality of a corporation begins to exist only from the moment such certificate is issued and not before.The complaining associates have not represented to the others that they were incorporated any more than the latter had made similar representations to them.And as nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply. This is not an instance requiring the enforcement of contracts with the corporation through the rule of estoppel.

Case No.2 Inr’l Express Travel vs CA

Facts: In 1989, International Express Travel & Tour Services, Inc. (IETTI), offered to the Philippine Football Federation (PFF) its travel services for the South East Asian Games. PFF, through Henri Kahn, its president, agreed. IETTI then delivered the plane tickets to PFF, PFF in turn made a down payment. However, PFF was not able to complete the full payment in subsequent installments despite repeated demands from IETTI. IETTI then sued PFF and Kahn was impleaded as a co-defendant.

Kahn averred that he should not be impleaded because he merely acted as an agent of PFF which he averred is a corporation with separate and distinct personality from him. The trial court ruled against Kahn and held him personally liable for the said obligation (PFF was declared in default for failing to file an answer). The trial court ruled that Kahn failed to prove that PFF is a corporation. The Court of Appeals however reversed the decision of

the trial court. The Court of Appeals took judicial notice of the existence of PFF as a national sports association; that as such, PFF is empowered to enter into contracts through its agents; that PFF is therefore liable for the contract entered into by its agent Kahn. The CA further ruled that IETTI is in estoppel; that it cannot now deny the corporate existence of PFF because it had contracted and dealt with PFF in such a manner as to recognize and in effect admit its existence.

ISSUE: Whether or not the Court of Appeals is correct.

HELD: No. PFF, upon its creation, is not automatically considered a national sports association. It must first be recognized and accredited by the Philippine Amateur Athletic Federation and the Department of Youth and Sports Development. This fact was never substantiated by Kahn. As such, PFF is considered as an unincorporated sports association. And under the law, any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent. Kahn is therefore personally liable for the contract entered into by PFF with IETTI.

There is also no merit on the finding of the CA that IETTI is in estoppel. The application of the doctrine of corporation by estoppel applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, IETTI is not trying to escape liability from the contract but rather is the one claiming from the contract.

Case No. 3 Lozano vs de los Santos

Facts:

Reynaldo Lozano was the president of KAMAJDA (Kapatirang Mabalacat-Angeles Jeepney Drivers’ Association, Inc.). Antonio Anda was the president of SAMAJODA (Samahang Angeles-Mabalacat Jeepney Operators’ and Drivers’ Association, Inc.). In 1995, the two agreed to consolidate the two corporations, thus, UMAJODA (Unified Mabalacat-Angeles Jeepney Operators’ and Drivers Association, Inc.). In the same year, elections for the officers of UMAJODA were held. Lozano and Anda both ran for president. Lozano won but Anda alleged fraud and the elections and thereafter he refused to participate with UMAJODA. Anda continued to collect fees from

members of SAMAJODA and refused to recognize Lozano as president of UMAJODA. Lozano then filed a complaint for damages against Anda with the MCTC of Mabalacat (and Magalang), Pampanga. Anda moved for the dismissal of the case for lack of jurisdiction. The MCTC judge denied Anda’s motion. On certiorari, Judge Eliezer De Los Santos of RTC Angeles City reversed and ordered the dismissal of the case on the ground that what is involved is an intra-corporate dispute which should be under the jurisdiction of the Securities and Exchange Commission (SEC).

ISSUE: Whether or not the RTC Judge is correct.

HELD: No. The regular courts have jurisdiction over the case. The case between Lozano and Anda is not an intra-corporate dispute. UMAJODA is not yet incorporated. It is yet to submit its articles of incorporation to the SEC. It is not even a dispute between KAMAJDA or SAMAJODA. The controversy between Lozano and Anda does not arise from intra-corporate relations but rather from a mere conflict from their plan to merge the two associations.

NOTE: Regular courts can now hear intra-corporate disputes (expanded jurisdiction).

V. Articles of Incorporation

A. Ultra Vires Doctrine

Case No. 4 Montelibano vs Bacolod-Murcia Milling

Facts: Plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-partnership Gonzaga and Company, had been and are sugar planters adhered to the defendant-appellee’s sugar central mill under identical milling contracts. Originally executed in 1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop, and provided that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was proposed to execute amended milling contracts, increasing the planters’ share to 60% of the manufactured sugar and resulting molasses, besides other concessions, but extending the operation of the milling contract from the original 30 years to 45 years. The Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution granting further concessions to the planters over and above those contained in the printed Amended Milling Contract. The appellants initiated the present action, contending that three Negros sugar centrals with a total annual production exceeding one-third of

the production of all the sugar central mills in the province, had already granted increased participation (of 62.5%)to their planters, and that under the resolution the appellee had become obligated to grant similar concessions to the plaintiffs. The appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that the stipulations contained in the resolution were made without consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt.

Issue: WON the board resolution is an ultra vires act and in effect a donation from the board of directors?

Held: No. There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. Whether the business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation and not by the court. The appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.

Case No 5 Phil Realty vs Ley Construction

The Court finds that the signature of Abcede is sufficient to bind PRHC. As its construction manager, his very act of signing a letter embodying the P 36 million escalation agreement produced legal effect, even if there was a blank space for a higher officer of PHRC to indicate approval thereof. At the very least, he indicated authority to make such representation on behalf of PRHC. On directexamination, Abcede admitted that, as the construction manager, he represented PRHC in running its affairs with regard to the execution of the aforesaid projects. Abcede had signed, on behalf of PRHC, other documents that were almost identical to the questioned letter-agreement. PRHC does not question the validity of these agreements; it thereby effectively admits that this individual had actual authority to sign on its behalf with respect to these construction projects.

Case No. 6 Atrium Management vs CA

Facts:

In 1981, Hi-Cement Corporation through Lourdes De Leon (its Treasurer) and Antonio De Las Alas (its Chairman, now deceased) issued four postdated checks to E.T. Henry and Co. The checks amount to P2 million. The checks are crossed checks and are only made payable to E.T. Henry’s account. However, E.T. Henry still indorsed the checks to Atrium Management Corporation (AMC). AMC then made sure that the checks were validly issued by requesting E.T. Henry to get some confirmation from Atrium. Interestingly, De Leon confirmed the checks and advised that the checks are okay to be rediscounted by AMC notwithstanding the fact that the checks are crossed checks payable to no other accounts but that of E.T. Henry. So when AMC presented the check, it was dishonored because Hi-Cement stopped payment. Eventually, AMC sued Hi-Cement, E.T. Henry, and De Leon. The trial court ruled in favor of AMC and made all the respondents liable.

On appeal, Hi-Cement averred that De Leon’s act in signing the check was ultra vires hence De Leon should be personally liable for the check. De Leon, on the other hand, insisted that the checks were authorized by the corporation.

ISSUE: Whether or not De Leon’s act of signing the check constitutes an ultra vires act hence making her personally liable.

HELD: No, the act is not ultra vires but De Leon is still personally liable. The act is not ultra vires because the act of issuing the checks was well within the ambit of a valid corporate act. De Leon as treasurer is authorized to sign checks. When the checks were issued, Hi-Cement has sufficient funds to cover the P2 million.

As a rule, there are four instances that will make a corporate director, trustee or officer along (although not necessarily) with the corporation personally liable to certain obligations. They are:

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by a specific provision of law, to personally answer for his corporate action.

In the case at bar, De Leon is negligent. She was aware that the checks were only payable to E.T. Henry’s account yet she sent a confirmation to Atrium to the effect that the checks can be negotiated to them (Atrium) by E.T. Henry. Therefore, she may be held personally liable along with E.T. Henry (but not with Hi-Cement where she is an officer).

Case No. 7 Rural Bank of Milaor vs Ocfemia

FACTS: Several parcels of land were mortgaged by the respondents during the lifetime of the respondent’s grandparents to the Rural bank of Milaor as shown by the Deed of Real Estate Mortgage and the Promissory Note. Spouses Felicisimo Ocfemia and Juanita Ocfemia, one of the respondents, were not able to redeem the mortgaged properties consisting of seven parcels of land and so the mortgage was foreclosed and thereafter ownership was transferred to the petitioner bank. Out of the seven parcels of land that were foreclosed, five of them are in the possession of the respondents because these five parcels of land were sold by the petitioner bank to the respondents as evidenced by a Deed of Sale. However, the five parcels of land cannot be transferred in the name of the parents of Merife Nino, one of the respondents, because there is a need to have the document of sale registered. The Register of deeds, however, said that the document of sale cannot be registered without the board resolution of the petitioner bank confirming both the Deed of sale and the authority of the bank manager, Fe S. Tena, to enter such transaction.

The petitioner bank refused her request for a board resolution and made many alibis. Respondents initiated the present proceedings so that they could transfer to their names the subject five parcel of land and subsequently mortgage said lots and to use the loan proceeds for themedical expenses of their ailing mother.

ISSUE: May the Board of Directors of a rural banking corporation be compelled to confirm a deed of absolute sale of real property owned by the

corporation which deed of sale was executed by the bank manager without prior authority of the board of directors of the rural banking corporation?

HELD: YES. The bank acknowledges, by its own acts or failure to act, the authority of Fe S. Tena to enter into binding contracts. After the execution of the Deed of Sale, respondents occupied the properties in dispute and paid the real estate taxes. If the bank management believed that it had title to the property, it should have taken measured to prevent the infringement and invasion of title thereto and possession thereof. Likewise, Tena had previously transacted business on behalf of the bank, and the latter had acknowledged her authority. A bank is liable to innocent third persons where representation is made in the course of its normalbusiness by an agent like Manager Tena even though such agent is abusing her authority. Clearly, persons dealing with her could not be blamed for believing that she was authorized to transact business for and on behalf of the bank.

The bank is estopped from questioning the authority of the bank to enter into contract of sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority

Case No. 8 Advance Paper Corp vs Arma Traders

Corporations; doctrine of apparent authority. The doctrine of apparent authority provides that a corporation will be estopped from denying the agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, and it holds him out to the public as possessing the power to do those acts. The doctrine of apparent authority does not apply if the principal did not commit any acts or conduct which a third party knew and relied upon in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s acts or conduct must have produced a change of position to the third party’s detriment. Advance Paper Corporation and George Haw, in his capacity as President of Advance Paper Corporation v. Arma Traders Corporation, Manuel Ting, et al., G.R. No. 176897, December 11, 2013 .