Barretto v. La Previsora Filipina
REITERATIONFacts
The Antecedents: La Previsora Filipina, a mutual building and loan association, was incorporated on February 11, 1926. Its original by-laws included Article 68, which obligated the corporation to pay P200,000 to Antonio Ma. Barretto y Rocha, the largest shareholder and founder, in installments, contingent upon the declaration of dividends of not less than 12 percent. Article 72 prohibited the modification of Article 68. Procedural History: The Insular Treasurer declared Articles 68 and 72 null and void for violating the Corporation Law. Subsequently, the by-laws were amended multiple times, with Article 68 being repealed and substituted with provisions that eliminated the P200,000 obligation. The corporation experienced losses in 1926 and 1927, with the general manager covering expenses and creating fictitious profits to declare dividends. Antonio Ma. Barretto died on March 9, 1929, without receiving any payment under the original Article 68. His heirs and judicial administrators filed a complaint demanding P150,000, representing the first four installments of the original P200,000 obligation. The trial court dismissed the complaint and the cross-complaint, leading to the present appeal. The Appeal: The plaintiffs-appellants assigned eleven errors, primarily arguing that the trial court erred in finding Article 68 of the original by-laws null and void, that it did not constitute a contract, that there was no consideration for the P200,000 payment, and that the "Combined Tables of Triple Transaction" did not exist or were not transferred. They contended that the by-law was a valid contract and that the corporation was obligated to pay the amount due.
Issue(s)
Whether Article 68 of the original by-laws of La Previsora Filipina, obligating the corporation to pay P200,000 to Antonio Ma. Barretto y Rocha, constituted a valid and enforceable contract. Whether the said Article 68 was null and void for being ultra vires and in contravention of the Corporation Law, particularly concerning mutual building and loan associations. Whether there was sufficient consideration for the purported obligation of P200,000 to Antonio Ma. Barretto y Rocha.
Ruling
The Supreme Court affirmed the judgment of the trial court, dismissing the complaint and holding that Article 68 of the original by-laws of La Previsora Filipina is illegal, null and void, and without force and effect. Consequently, the corporation is not obligated to pay the plaintiffs the sum demanded.
Ratio Decidendi
On the validity and enforceability of Article 68: The Court held that Article 68 of the original by-laws did not constitute a valid contract between the deceased and the corporation. By-laws and their amendments were adopted at stockholders' meetings, and under the Corporation Law, stockholders are not authorized to enter into contracts for and bind the corporation; such authority rests with the board of directors. Therefore, the provision in question was an ultra vires act. The Court also noted the inconsistency of the plaintiffs' claim, as they were aware that the original Article 68 had been repealed and substituted multiple times. On the ultra vires nature and contravention of law: The Court found a fundamental reason to declare Article 68 illegal, null, and void. It was evident that the provision was a mere liberality intended to compensate services rendered before incorporation, with the "Combined Tables of Triple Transaction" being a pretext. The Court agreed with the trial court that the invention likely did not exist or was not delivered to the corporation. Such a provision conflicts with the spirit of the law creating mutual building and loan associations, destroying the cooperation and mutuality among stockholders, which are their defining characteristics. The Court cited previous rulings emphasizing the strict mutuality and equality of benefits and obligations in these associations. On the existence of valid consideration: The Court found no valid consideration for the supposed obligation of P200,000. The article was an attempt to provide future compensation for past services rendered gratuitously. Such a provision lacks consideration and imposes no enforceable obligation on the corporation. Furthermore, the Court distinguished this case from El Hogar Filipino vs. Rafferty, where a similar gratuity was converted into a formal contract based on consideration of future services, expenses defrayed, free services as general manager, and a loan without interest, all of which were absent in the present case.
Main Doctrine
The Supreme Court reiterated that a by-law provision in a mutual building and loan association, such as Article 68 of La Previsora Filipina's by-laws, which grants continuous compensation to a founder for past services and the assignment of tables, is void and unenforceable. This is because such a provision is ultra vires, contravenes the principles of mutuality and equality inherent in building and loan associations, lacks valid consideration, and was not authorized by the board of directors. The Court emphasized that by-laws must conform to the Corporation Law and cannot create obligations unknown to the law or misapply corporate funds to the prejudice of shareholders.