Barretto v. La Previsora Filipina
REITERATIONFacts
1. The Antecedents: The underlying dispute concerns a claim by former directors of La Previsora Filipina, a mutual building and loan association, for a percentage of the corporation's net profits for the year 1929. This claim was based on an amendment to the corporation's by-laws, Article 68-A, adopted at a general meeting of stockholders. The amendment purportedly granted each of the named directors, including the plaintiffs, one percent of the net profits for any year in which they ceased to be a director, provided they had served gratuitously for several years. The plaintiffs sought to recover P507.02 each, representing their share of these profits. 2. Procedural History: The action was initiated in the Court of First Instance of Manila by the plaintiffs against La Previsora Filipina. Following the presentation of the plaintiffs' evidence, the defendant moved to dismiss the complaint, arguing a lack of cause of action. The trial court denied this motion, allowing the defendant to present its evidence. Subsequently, the plaintiffs petitioned the court to declare the case submitted without further defendant evidence, which the court granted, ruling that the defendant had implicitly waived its right to present evidence by filing the motion to dismiss. The court then rendered judgment in favor of the plaintiffs. The defendant moved for reconsideration and a new trial, both of which were denied. The defendant appealed this decision and the subsequent orders to the Supreme Court via a bill of exceptions. 3. The Petition: The case reached the Supreme Court on appeal from the Court of First Instance of Manila. The appellant, La Previsora Filipina, argued that the trial court erred in its decision. The core of the appeal centers on the validity and enforceability of Article 68-A of the by-laws. The appellant contended that such a by-law provision, granting a life gratuity or pension from net profits for past gratuitous services, is beyond the lawful powers of a mutual building and loan association, is inconsistent with statutory provisions governing such corporations, and lacks essential contractual elements like mutual consent and valid consideration. The Supreme Court was asked to reverse the lower court's decision and dismiss the complaint.
Issue(s)
Whether Article 68-A of the by-laws, granting former directors a percentage of net profits for life, creates a valid legal obligation on the part of the defendant mutual building and loan association. Whether the said by-law provision is within the lawful powers of a mutual building and loan association. Whether the by-law provision constitutes a valid contract between the corporation and the plaintiffs.
Ruling
The judgment of the court below is reversed, and the complaint is dismissed with costs against the appellees.
Ratio Decidendi
On the validity of Article 68-A and the lawful powers of the association: The Court held that Article 68-A of the amended by-laws does not create a legal obligation on the part of the defendant corporation to pay the plaintiffs a life gratuity or pension from its net profits. Such a provision is considered clearly beyond the lawful powers of a mutual building and loan association. While corporations are authorized to adopt by-laws for their government, these by-laws must not be inconsistent with the law. The Corporation Law, as interpreted, limits this authority to by-laws consistent with legal provisions. The provision in question is not merely for compensation for future services but an attempt to provide continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously. This would create an obligation unknown to the law and misapply the funds of the association to the prejudice of its shareholders. Building and loan associations are founded on strict mutuality and equality of benefits and obligations, and any contract or by-law provision contravening the statute is ultra vires and void. Diverting funds to unauthorized purposes violates the principles of mutuality among members. On whether the by-law provision constitutes a valid contract: The Court found that even irrespective of the ultra vires nature of the provision, it cannot establish a contractual relation because essential elements of a contract are lacking. The article was a by-law provision adopted by stockholders without action by the board of directors. Contracts with a corporation must be made by or under the authority of its board of directors, not solely by its stockholders, whose action in such matters is only advisory. Furthermore, the plaintiffs did not consent to the by-law; they objected to and voted against it. There was also no valid consideration for the supposed obligation, as it was an attempt to give future compensation for past gratuitous services, which is without consideration and imposes no enforceable obligation. Distinguishing cited cases: The Court distinguished the cases of El Hogar Filipino vs. Rafferty and Government of the Philippine Islands vs. El Hogar Filipino, stating that the causes of action and the facts upon which those decisions were based were entirely different from the present case.
Main Doctrine
A by-law provision by a mutual building and loan association granting continuous compensation to directors after their term for past gratuitous services is ultra vires, lacks valid consideration, and does not create a binding contractual obligation, as it is inconsistent with the principles of mutuality and the legislative scheme governing such associations, and contracts must be made by the board of directors, not solely by stockholders.