G.R. No.

L-26649 July 13, 1927

THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-General),

plaintiff,
vs.
EL HOGAR FILIPINO, defendant.

Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.

Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for defendant.
Wm. J. Rohde as amicus curiae.

STREET, J.:

This is a quo warranto proceeding instituted originally in this court by the Government of the
Philippine Islands on the relation of the Attorney-General against the building and loan association
known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it
from all corporate rights and privileges, and effecting a final dissolution of said corporation. The
complaint enumerates seventeen distinct causes of action, to all of which the defendant has
answered upon the merits, first admitting the averments of the first paragraph in the statement of
the first cause of action, wherein it is alleged that the defendant was organized in the year 1911 as
a building and loan association under the laws of the Philippine Islands, and that, since its
organization, the corporation has been doing business in the Philippine Islands, with its principal
office in the City of Manila. Other facts alleged in the various causes of action in the complaint are
either denied in the answer or controverted in legal effect by other facts.

After issue had been thus joined upon the merits, the attorneys entered into an elaborate
agreement as to the fact, thereby removing from the field of dispute such matters of fact as are
necessary to the solution of the controversy. It follows that we are here confronted only with the
legal questions arising upon the agreed statement.

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, inclusive, 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. These provisions appear to be adopted from American statutes governing
building and loan associations and they of course reflect the ideals and principles found in American
law relative to such associations. The respondent, El Hogar Filipino, was apparently the first
corporation organized in the Philippine Islands under the provisions cited, and the association has
been favored with extraordinary success. 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. Under the law as it then stood, the capital
of the Association was not permitted to exceed P3,000,000, 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. Soon thereafter the association took advantage of this
enactment by amending its articles so as to provide that the capital should be in an amount not
exceeding the then lawful limit. 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 5,826
shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period
of its existence prior to the date last above-mentioned the association paid to withdrawing
stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of
dividends among its stockholders the sum of P7,621,565.81.

First cause of action. The first cause of action is based upon the alleged illegal holding by the
respondent of the title to real property for a period in excess of five years after the property had
been bought in by the respondent at one of its own foreclosure sales. The provision of law relevant
to the matter is found in section 75 of Act of Congress of July 1, 1902 (repeated in subsection 5 of
section 13 of the Corporation Law.) In both of these provisions it is in substance declared that 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 five years after receiving
the title.

In this connection it appears that in the year 1920 El Hogar Filipino was the holder of a recorded
mortgage upon a tract of land in the municipality of San Clemente, Province of Tarlac, as security
for a loan of P24,000 to the shareholders of El Hogar Filipino who were the owners of said property.
The borrowers having defaulted in their payments, El Hogar Filipino foreclosed the mortgage and
purchased the land at the foreclosure sale for the net amount of the indebtedness, namely, the sum
of P23,744.18. The auction sale of the mortgaged property took place November 18, 1920, and the
deed conveying the property to El Hogar Filipino was executed and delivered December 22, 1920.
On December 27, 1920, the deed conveying the property to El Hogar Filipino was sent to the
register of deeds of the Province of Tarlac, with the request that the certificate of title then standing
in the name of the former owners be cancelled and that a new certificate of title be issued in the
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name of El Hogar Filipino. Said deed was received in the office of the register of deeds of Tarlac on
December 28, 1920, together with the old certificate of title, and thereupon the register made upon
the said deed the following annotation:

The foregoing document was received in this office at 4.10 p. m., December 28, 1920, according
to entry 1898, page 50 of Book One of the Day Book and registered on the back of certificate of
title No. 2211 and its duplicate, folio 193 of Book A-10 of the register of original certificate.
Tarlac, Tarlac, January 12, 1921. (Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.

For months no reply was received by El Hogar Filipino from the register of deeds of Tarlac, and
letters were written to him by El Hogar Filipino on the subject in March and April, 1921, requesting
action. No answer having been received to these letters, a complaint was made by El Hogar Filipino
to the Chief of the General Land Registration Office; and on May 7, 1921, the certificate of title to
the San Clemente land was received by El Hogar Filipino from the register of deeds of Tarlac.

On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution authorizing
Vicente Bengzon, an agent of the corporation, to endeavor to find a buyer for the San Clemente
land. On July 27, 1921, El Hogar Filipino authorized one Jose Laguardia to endeavor to find a
purchaser for the San Clemente land for the sum of P23,000 undertaking to pay the said Laguardia
a commission of 5 per centum of the selling price for his services, but no offers to purchase were
obtained through this agent or through the agent Bengzon. In July, 1923, plans of the San Clemente
land were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi, as prospective
purchasers, but no offers were received from them. In January, 1926, the agent not having
succeeded in finding a buyer, the San Clemente land was advertised for sale by El Hogar Filipino in
El Debate, La Vanguardia and Taliba, three newspapers of general circulation in the Philippine
Islands published in the City of Manila. On March 16, 1926, the first offer for the purchase of the San
Clemente land was received by El Hogar Filipino. This offer was made to it in writing by one
Alcantara, who offered to buy it for the sum of P4,000, Philippine currency, payable P500 in cash,
and the remainder within thirty days. Alcantara's offer having been reported by the manager of El
Hogar Filipino to its board of directors, it was decided, by a resolution adopted at a meeting of the
board held on March 25, 1926, to accept the offer, and this acceptance was communicated to the
prospective buyer. Alcantara was given successive extensions of the time, the last of which expired
April 30, 1926, within which to make the payment agreed upon; and upon his failure to do so El
Hogar Filipino treated the contract with him as rescinded, and efforts were made at once to find
another buyer. Finally the land was sold to Doa Felipa Alberto for P6,000 by a public instrument
executed before a notary public at Manila, P. I., on July 30, 1926.

Upon consideration of the facts above set forth it is evident that the strict letter of the law was
violated by the respondent; but it is equally obvious that its conduct has not been characterized by
obduracy or pertinacity in contempt of the law. Moreover, several facts connected with the incident
tend to mitigate the offense. The Attorney-General points out that the respondent acquired title on
December 22, 1920, when the deed was executed and delivered, by which the property was
conveyed to it as purchaser at its foreclosure sale, and this title remained in it until July 30, 1926,
when the property was finally sold to Felipa Alberto. The interval between these two conveyances is
thus more than five years; and it is contended that the five year period did not begin to run against
the respondent until May 7, 1921, when the register of deeds of Tarlac delivered the new certificate
of title to the respondent pursuant to the deed by which the property was acquired. As an equitable
consideration affecting the case this contention, though not decisive, is in our opinion more than
respectable. It has been held by this court that a purchaser of land registered under the Torrens
system cannot acquire the status of an innocent purchaser for value unless his vendor is able to
place in his hands an owner's duplicate showing the title of such land to be in the vendor (Director
of Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to
May 7, 1921, El Hogar Filipino was not really in a position to pass an indefeasible title to any
purchaser. In this connection it will be noted that section 75 of the Act of Congress of July 1, 1902,
and the similar provision in section 13 of the Corporation Law, allow the corporation "five years
after receiving the title," within which to dispose of the property. A fair interpretation of these
provisions would seem to indicate that the date of the receiving of the title in this case was the date
when the respondent received the owner's certificate, or May 7, 1921, for it was only after that date
that the respondent had an unequivocal and unquestionable power to pass a complete title. The
failure of the respondent to receive the certificate sooner was not due in any wise to its fault, but to
unexplained delay on the part of the register of deeds. For this delay the respondent cannot be held
accountable.

Again, it is urged for the respondent that the period between March 25, 1926, and April 30, 1926,
should not be counted as part of the five-year period. This was the period during which the
respondent was under obligation to sell the property to Alcantara, prior to the rescission of the
contract by reason of Alcantara's failure to make the stipulated first payment. Upon this point the
contention of the respondent is, in our opinion, well founded. The acceptance by it of Alcantara's
offer obligated the respondent to Alcantara; and if it had not been for the default of Alcantara, the
effective sale of the property would have resulted. The respondent was not at all chargeable with
the collapse of these negotiations; and hence in any equitable application of the law this period
should be deducted from the five-year period within which the respondent ought to have made the
sale. Another circumstance explanatory of the respondent's delay in selling the property is found in
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the fact that it purchased the property for the full amount of the indebtedness due to it from the
former owner, which was nearly P24,000. It was subsequently found that the property was not
salable for anything like that amount and in the end it had to be sold for P6,000, notwithstanding
energetic efforts on the part of the respondent to find a purchaser upon better terms.

The question then arises whether the failure of the respondent to get rid of the San Clemente
property within five years after it first acquired the deed thereto, even supposing the five-year
period to be properly counted from that date, is such a violation of law as should work a forfeiture
of its franchise and require a judgment to be entered for its dissolution in this action of quo
warranto. Upon this point we do not hesitate to say that in our opinion the corporation has not been
shown to have offended against the law in a manner that should entail a forfeiture of its charter.
Certainly no court with any discretion to use in the matter would visit upon the respondent and its
thousands of shareholders the extreme penalty of the law as a consequence of the delinquency
here shown to have been committed.

The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure,
as applied by this court in Government of the Philippine Islands vs. Philippine Sugar Estates
Development Co. (38 Phil., 15). This section (212), in prescribing the judgment to be rendered
against a corporation in an action of quo warranto, among other things says:

. . . When it is found and adjudged that a corporation has offended in any matter or manner
which does not by law work as a surrender or forfeiture, or has misused a franchise or exercised
a power not conferred by law, but not of such a character as to work a surrender or forfeiture of
its franchise, judgment shall be rendered that it be outset from the continuance of such offense
or the exercise of such power.

This provision clearly shows that the court has a discretion with respect to the infliction of capital
punishment upon corporation and that there are certain misdemeanors and misuses of franchises
which should not be recognized as requiring their dissolution. In Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15), it was found that the offending
corporation had been largely (though indirectly) engaged in the buying and holding or real property
for speculative purposes in contravention of its charter and contrary to the express provisions of
law. Moreover, in that case the offending corporation was found to be still interested in the
properties so purchased for speculative at the time the action was brought. Nevertheless, instead of
making an absolute and unconditional order for the dissolution of the corporation, the judgment of
ouster was made conditional upon the failure of the corporation to discontinue its unlawful conduct
within six months after final decision. In the case before us the respondent appears to have rid itself
of the San Clemente property many months prior to the institution of this action. It is evident from
this that the dissolution of the respondent would not be an appropriate remedy in this case. We do
not of course undertake to say that a corporation might not be dissolved for offenses of this nature
perpetrated in the past, especially if its conduct had exhibited a willful obduracy and contempt of
law. We content ourselves with holding that upon the facts here before us the penalty of dissolution
would be excessively severe and fraught with consequences altogether disproportionate to the
offense committed.

The evident purpose behind the law restricting the rights of corporations with respect to the tenure
of land was to prevent the revival of the entail (mayorazgo) or other similar institution by which
land could be fettered and its alienation hampered over long periods of time. In the case before us
the respondent corporation has in good faith disposed of the piece of property which appears to
have been in its hands at the expiration of the period fixed by law, and a fair explanation is given of
its failure to dispose of it sooner. Under these circumstances the destruction of the corporation
would bring irreparable loss upon the thousand of innocent shareholders of the corporation without
any corresponding benefit to the public. The discretion permitted to this court in the application of
the remedy of quo warranto forbids so radical a use of the remedy.

But the case for the plaintiff supposes that the discretion of this court in matters like that now
before us has been expressly taken away by the third section of Act No. 2792, and that the
dissolution of the corporation is obligatory upon the court a mere finding that the respondent has
violated the provision of the Corporation Law in any respect. This makes necessary to examine the
Act last above-mentioned with some care. Upon referring thereto, we find that it consists of three
sections under the following style:

No. 2792. An Act to amend certain sections of the Corporation Law, Act Numbered Fourteen
hundred and fifty-nine, providing for the publication of the assets and liabilities of corporations
registering in the Bureau of Commerce and Industry, determining the liability of the officers of
corporations with regard to the issuance of stock or bonus, establishing penalties for certain
things, and for other purposes.

The first two section contain amendments to the Corporation Law with respect to matters with
which we are not here concurred. The third section contains anew enactment to be inserted as
section 190 (A) in the corporation Law immediately following section 190. This new section reads as
follows:

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 SEC. 190. (A). Penalties. The violation of any of the provisions of this Act and its amendments
not otherwise penalized therein, shall be punished by a fine of not more than one thousand
pesos, or by imprisonment for not more than five years, or both, in the discretion of the court. If
the violation being proved, be dissolved by quo warranto proceedings instituted by the
Attorney-General or by any provincial fiscal, by order of said Attorney-General: Provided, That
nothing in this section provided shall be construed to repeal the other causes for the dissolution
of corporation prescribed by existing law, and the remedy provided for in this section shall be
considered as additional to the remedies already existing.

The contention for the plaintiff is to the effect that the second sentence in this enactment has
entirely abrogated the discretion of this court with respect to the application of the remedy of qou
warranto, as expressed in section 212 of the Code of Civil Procedure, and that it is now mandatory
upon us to dissolved any corporation whenever we find that it has committed any violation of the
Corporation Law, however trivial. In our opinion in this radical view of the meaning of the
enactment is untenable. When the statute says, "If the violation is committed by a corporation, the
same shall, upon such violation being proved, be dissolved by quo warranto proceedings . . .," the
intention was to indicate that the remedy against the corporation shall be by action of quo
warranto. There was no intention to define the principles governing said remedy, and it must be
understood that in applying the remedy the court is still controlled by the principles established in
immemorial jurisprudence. The interpretation placed upon this language in the brief of the
Attorney-General would be dangerous in the extreme, since it would actually place the life of all
corporate investments in the official. No corporate enterprise of any moment can be conducted
perpetually without some trivial misdemeanor against corporate law being committed by some one
or other of its numerous employees. As illustrations of the preposterous effects of the provision, in
the sense contended for by the Attorney-General, the attorneys for the respondent have called
attention to the fact that under section 52 of the Corporation Law, a business corporation is
required to keep a stock book and a transfer book in which the names of stockholders shall kept in
alphabetical order. Again, under section 94, railroad corporations are required to cause all
employees working on passenger trains or at a station for passengers to wear a badge on his cap or
hat which will indicate his office. Can it be supposed that the Legislature intended to penalize the
violation of such provisions as these by dissolution of the corporation involved? Evidently such
could not have been the intention; and the only way to avoid the consequence suggested is to hold,
as we now hold, that the provision now under consideration has not impaired the discretion of this
court in applying the writ of quo warranto.

Another way to put the same conclusion is to say that the expression "shall be dissolved by quo
warranto proceedings" means in effect, "may be dissolved by quo warranto proceedings in the
discretion of the court." The proposition that the word "shall" may be construed as "may", when
addressed by the Legislature to the courts, is well supported in jurisprudence. In the case of Becker
vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of Pennsylvania had under
consideration a statute providing as follows:

It shall be the duty of the court . . . to examine, inquire and ascertain whether such corporation
does in fact posses the right or franchise to do the act from which such alleged injury to private
rights or to the rights and franchises of other corporations results; and if such rights or franchises
have not been conferred upon such corporations, such courts, it exercising equitable power,
shall, by injunction, at suit of the private parties or other corporations, restrain such injurious
acts.

In an action based on this statute the plaintiff claimed injunctive relief as a matter of right. But this
was denied the court saying:

Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to be granted
unless a proper case for injunction be made out, in accordance with the principles and practice
of equity. The word "shall" when used by the legislature to a court, is usually a grant of authority
and means "may", and even if it be intended to be mandatory it must be subject to the
necessary limitation that a proper case has been made out for the exercise of the power.

Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West
Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567;
70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572; 16 Misc.
Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard], 387, 394; Whipple vs. Eddy, 161
Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506; Beasley vs.
People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).

But section 3 of Act No. 2792 is challenged by the respondent on the ground that the subject-
matter of this section is not expressed in the title of the Act, with the result that the section is
invalid. This criticism is in our opinion well founded. Section 3 of our organic law (Jones Bill)
declares, among other things, that "No bill which may be enacted into law shall embrace more than
one subject, and that subject shall be expressed in the title of the bill." Any law or part of a law
passed by the Philippine Legislature since this provision went into effect and offending against its
requirement is necessarily void.

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Upon examining the entire Act (No. 2792), we find that it is directed to three ends which are
successively dealt with in the first three sections of the Act. But it will be noted that these three
matters all relate to the Corporation Law; and it is at once apparent that they might properly have
been embodied in a single Act if a title of sufficient unity and generality had been prefixed thereto.
Furthermore, it is obvious, even upon casual inspection, that the subject-matter of each of the first
two sections is expressed and defined with sufficient precision in the title. With respect to the
subject-matter of section 3 the only words in the title which can be taken to refer to the subject-
matter of said section are these, "An Act . . . establishing penalties for certain things, and for other
purposes." These words undoubtedly have sufficient generality to cover the subject-matter of
section 3 of the Act. But this is not enough. The Jones Law requires that the subject-matter of the
bill "shall be expressed in the title of the bill."

When reference is had to the expression "establishing penalties for certain things," it is obvious that
these words express nothing. The constitutional provision was undoubtedly adopted in order that
the public might be informed as to what the Legislature is about while bills are in process of
passage. The expression "establishing penalties for certain things" would give no definite
information to anybody as to the project of legislation intended under this expression. An
examination of the decided cases shows that courts have always been indulgent of the practices of
the Legislature with respect to the form and generality of title, for if extreme refinements were
indulged by the courts, the work of legislation would be unnecessarily hampered. But, as has been
observed by the California court, there must be some reasonable limit to the generality of titles that
will be allowed. The measure of legality is whether the title is sufficient to give notice of the general
subject of the proposed legislation to the persons and interests likely to be affected.

In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to revise the
Code of Civil Procedure of the State of California, by amending certain sections, repealing others,
and adding certain new sections." This title was held to embrace more than one subject, which were
not sufficiently expressed in the title. In discussing the question the court said:

* * * It is apparent that the language of the title of the act in question, in and of itself, express
no subject whatever. No one could tell from the title alone what subject of legislation was dealt
with in the body of the act; such subject so far as the title of the act informs us, might have
been entirely different from anything to be found in the act itself.

We cannot agree with the contention of some of respondent's counsel apparently to some
extent countenanced by a few authorities that the provision of the constitution in question
can be entirely avoided by the simple device of putting into the title of an act words which
denote a subject "broad" enough to cover everything. Under that view, the title, "An act
concerning the laws of the state," would be good, and the convention and people who framed
and adopted the constitution would be convicted of the folly of elaborately constructing a grave
constitutional limitation of legislative power upon a most important subject, which the
legislature could at once circumvent by a mere verbal trick. The word "subject" is used in the
constitution embrace but "one subject" it necessarily implies what everybody knows that
there are numerous subjects of the legislation, and declares that only one of these subjects shall
embraced in any one act. All subjects cannot be conjured into one subject by the mere magic of
a word in a title.

In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New Jersey made the
following observation:

* * * It is true, that it may be difficult to indicate, by a formula, how specialized the title of a
statute must be; but it is not difficult to conclude that it must mean something in the way of
being a notice of what is doing. Unless it does not enough that it embraces the legislative
purpose it must express it; and where the language is too general, it will accomplish the
former, but not the latter. Thus, a law entitled "An act for a certain purpose," would embrace
any subject, but would express none, and, consequently, it would not stand the constitutional
test.

The doctrine properly applicable in matters of this kind is, we think, fairly summed up in a current
repository of jurisprudence in the following language:

* * * While it may be difficult to formulate a rule by which to determine the extent to which the
title of a bill must specialize its object, it may be safely assumed that the title must not only
embrace the subject of proposed legislation, but also express it clearly and fully enough to give
notice of the legislative purpose. (25 R. C. L., p. 853.)

In dealing with the problem now before us the words "and for other purposes "found at the end of
the caption of Act No. 2792, must be laid completely out of consideration. They express nothing,
and amount to nothing as a compliance with the constitutional requirement to which attention has
been directed. This expression "(for other purposes") is frequently found in the title of acts adopted
by the Philippine Legislature; and its presence in our laws is due to the adoption by our Legislature
of the style used in Congression allegation. But it must be remembered that the legislation of
Page 5 of 21
Congress is subject to no constitutional restriction with respect to the title of bills. Consequently, in
Congressional legislation the words "and for other purposes" at least serve the purpose of
admonishing the public that the bill whose heading contains these words contains legislation upon
other subjects than that expressed in the title. Now, so long as the Philippine Legislature was
subject to no restriction with respect to the title of bills intended for enactment into general laws,
the expression "for other purposes" could be appropriately used in titles, not precisely for the
purpose of conveying information as to the matter legislated upon, but for the purpose ad
admonishing the public that any bill containing such words in the title might contain other subjects
than that expressed in the definitive part of the title. But, when congress adopted the Jones Law,
the restriction with which we are now dealing became effective here and the words "for other
purposes" could no longer be appropriately used in the title of legislative bills. Nevertheless, the
custom of using these words has still been followed, although they can no longer serve to cover
matter not germane to the bill in the title of which they are used. But the futility of adding these
words to the style of any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302)

In the brief for the plaintiff it is intimated that the constitutional restriction which we have been
discussing is more or less of a dead letter in this jurisdiction; and it seems to be taken for granted
that no court would ever presume to hold a legislative act or part of a legislative act invalid for non-
compliance with the requirement. This is a mistake; and no utterance of this court can be cited as
giving currency to any such notion. On the contrary the discussion contained in Central Capiz vs.
Ramirez (40 Phil., 883), shows that when a case arises where a violation of the restriction is
apparent, the court has no alternative but to declare the legislation affected thereby to be invalid.

Second cause of action. The second cause of action is based upon a charge that the respondent
is owning and holding a business lot, with the structure thereon, in the financial district of the City
of Manila is excess of its reasonable requirements and in contravention of subsection 5 of section
13 of the corporation Law. The facts on which this charge is based appear to be these:

On August 28, 1913, the respondent purchased 1,413 square meters of land at the corner of Juan
Luna Street and the Muelle de la Industria, in the City of Manila, immediately adjacent to the
building then occupied by the Hongkong and Shanghai Banking Corporation. At the time the
respondent acquired this lot there stood upon it a building, then nearly fifty years old, which was
occupied in part by the offices of an importing firm and in part by warehouses of the same firm. The
material used in the construction was Guadalupe stone and hewn timber, and the building
contained none of the facilities usually found in a modern office building.

In purchase of a design which had been formed prior to the purchase of the property, the directors
of the El Hogar Filipino caused the old building to be demolished; and they erected thereon a
modern reinforced concrete office building. As at first constructed the new building was three
stories high in the main, but in 1920, in order to obtain greater advantage from the use of the land,
an additional story was added to the building, making a structure of four stories except in one
corner where an additional story was place, making it five stories high over an area of 117.52
square meters. It is admitted in the plaintiffs brief that this "noble and imposing structure" to use
the words of the Attorney-General "has greatly improved the aspect of the banking and
commercial district of Manila and has greatly contributed to the movement and campaign for the
Manila Beautiful." It is also admitted that the competed building is reasonably proportionate in
value and revenue producing capacity to the value of the land upon which it stands. The total
outlay of the respondent for the land and the improvements thereon was P690,000 and at this
valuation the property is carried on the books of the company, while the assessed valuation of the
land and improvements is at P786,478.

Since the new building was completed the respondent has used about 324 square meters of floor
space for its own offices and has rented the remainder of the office space in said building,
consisting of about 3,175 square meters, to other persons and entities. In the second cause of
action of the complaint it is supposed that the acquisition of this lot, the construction of the new
office building thereon, and the subsequent renting of the same in great part to third persons, are
ultra vires acts on the part of the corporation, and that the proper penalty to be enforced against it
in this action is that if dissolution.

With this contention we are unable to agree. Under subsection 5 of section 13 of the Corporation
Law, every corporation has the power to purchase, hold and lease such real property as the
transaction of the lawful business of the corporation may reasonably and necessarily require. When
this property was acquired in 1916, the business of El Hogar Filipino had developed to such an
extent, and its prospects for the future were such as to justify its directors in acquiring a lot in the
financial district of the City of Manila and in constructing thereon a suitable building as the site of
its offices; and it cannot be fairly said that the area of the lot 1,413 square meters was in
excess of its reasonable requirements. The law expressly declares that corporations may acquire
such real estate as is reasonably necessary to enable them to carry out the purposes for which they
were created; and we are of the opinion that the owning of a business lot upon which to construct
and maintain its offices is reasonably necessary to a building and loan association such as the
respondent was at the time this property was acquired. A different ruling on this point would compel
important enterprises to conduct their business exclusively in leased offices a result which could

Page 6 of 21
serve no useful end but would retard industrial growth and be inimical to the best interests of
society.

We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the
respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered
which would deny to one owner the right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to discriminate between owners in this respect is
not lightly to be imputed to the Legislature. The point here involved has been the subject of
consideration in many decisions of American courts under statutes even more restrictive than that
which prevails in this jurisdiction; and the conclusion has uniformly been that a corporations whose
business may properly be conducted in a populous center may acquire an appropriate lot and
construct thereon an edifice with facilities in excess of its own immediate requirements.

Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it appeared that the
respondent corporation owned and controlled a large ten-story business block in the City of
Chicago, worth $2,000,000, and that it occupied only about one-fourth thereof for its own purposes,
leasing the remainder to others at heavy rentals. The corporate charter merely permitted the
holding of such real estate by the respondent as might be necessary for the successful prosecution
of its business. An attempt was made to obtain the dissolution of the corporation in a quo warranto
proceeding similar to that now before us, but the remedy was denied.

In Rector vs. Hartford Deposit Co., a question was raised as to the power of the Deposit Company to
erect and own a fourteen-story building containing eight storerooms, one hundred suites of
offices, and one safety deposit vault, under a statute authorizing the corporation to possess so
much real estate "as shall be necessary for the transaction of their business." The court said:

That the appellee company possessed ample power to acquire real property and construct a
building thereon for the purpose of transacting therein the legitimate business of the
corporation is beyond the range of debate. Nor is the contrary contended, but the insistence is
that, under the guise of erecting a building for corporate purposes, the appellee company
purposely constructed a much larger building than its business required, containing many rooms
intended to be rented to others for offices and business purposes, among them, the
basement rooms contracted to be leased to the appellant, and that in so doing it designedly
exceeded its corporate powers. The position off appellant therefore is that the appellee
corporation has flagrantly abused its general power to acquire real estate and construct a
building thereon . . . It was within the general scope of the express powers of the appellee
corporation to own and possess a building necessary for its proper corporate purposes. In
planning and constructing such a building, as was said in People vs. Pullman's Palace Car Co.,
supra, the corporation should not necessarily be restricted to a building containing the precise
number of rooms its then business might require, and no more, but that the future probable
growth and volume of its business might be considered and anticipated, and a larger building,
and one containing more rooms than the present volume of business required be erected, and
the rooms not needed might be rented by the corporation, provided, of course, such course
should be taken in good faith, and not as a mere evasion of the public law and the policy of the
state relative to the ownership of real estate by corporations. In such state of case the question
is whether the corporation has abused or excessively and unjustifiably used the power and
authority granted it by the state to construct buildings and own real estate necessary for its
corporate purposes.

In Home savings building Association vs. Driver (129 Ky., 754), one of the questions before the court
was precisely the same as that now before us. Upon this the Supreme Court of Kentucky said:

The third question is, has the association the right to erect, remodel, or own a building of more
than sufficient capacity to accommodate its own business and to rent out the excess? There is
nothing in the Constitution, charter of the association, or statutes placing any limitation upon
the character of a building which a corporation may erect as a home in which to conduct its
business. A corporation conducting a business of the character of that in which appellant is
engaged naturally expects its business to grow and expand from time to time, and, in building a
home it would be exercising but a short-sighted judgment if it did not make provision for the
future by building a home large enough to take care of its expanding business, and hence, even
if it should build a house larger and roomier than its present needs or interests require, it would
be acting clearly with the exercise of its corporate right and power. The limitation which the
statute imposes is that proper conduct of its business, but it does not attempt to place any
restriction or limitation upon the right of the corporation or association as to the character of
building it shall erect on said real estate; and, while the Constitution and the statutes provide
that no corporation shall engage in any business other than that expressly authorized by its
charter, we are of opinion that, in renting out the unoccupied and unused portions of the
building so erected, the association could not be said to engaged in any other business than
that authorized by its charter. The renting of the unused portions of the building is a mere
incident in the conduct of its real business. We would not say that a building association might
embark in the business of building houses and renting or leasing them, but there is quite a
difference in building or renting a house in which to conduct its own business and leasing the

Page 7 of 21
 unused portion thereof for the time being, or until such time as they may be needed by the
association, and in building houses for the purpose of renting or leasing them. The one might
properly be said to be the proper exercise of a power incident to the conduct of its legitimate
business, whereas the other would be a clear violation of that provision of the statute which
denies to any corporation the right to conduct any business other than that authorized by its
charter. To hold otherwise would be to charge most of the banking institutions, trust companies
and other corporations, such as title guaranty companies, etc., doing with violating the law; for
it is known that there are few of such institutions that do not, at times, rent out or lease the
unneeded portions of the building occupied by them as homes. We do not think that in so doing
they are violating any provisions of the law, but that the renting out of the unused or
unoccupied portions of their buildings is but an incident in the conduct of their business.

In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a stockholder sought to
enjoin the bank from building a six-story building owned by the bank in the commercial district of
Hagerstown of which only the first story was to be used by the bank, the remaining stories to be
rented out for offices and places of business, on the theory that such action was ultra vires and in
violation of the provisions of the national banking act confining such corporations to the holding,
only, of such real estate "as shall be necessary for its immediate accommodation in the transaction
of its business."

The injunction was denied, the court adopting the opinion of the lower court in which the following
was said:

'The other ground urged by the complainant is that the proposed action is violative of the
restriction which permits a national bank to hold only such real estate as shall be necessary for
its immediate accommodation in the transaction of its business, and that, therefore, the
erection of a building which will contain offices not necessary for the business of the bank is not
permitted by the law, although that method of improving the lot may be the most beneficial use
that can be made of it. It is matter of common knowledge that the actual practice of national
banks is to the contrary. Where ground is valuable, it may probably be truly said that the
majority of national bank buildings are built with accommodations in excess of the needs of the
bank for the purpose of lessening the bank's expense by renting out the unused portion. If that
were not allowable, many smaller banks in cities would be driven to become tenants as the
great cost of the lot would be prohibitive of using it exclusively for the banking accommodation
of a single bank. As indicative of the interpretation of the law commonly received and acted
upon, reference may be made to the reply of the Comptroller of the Currency to the injury by
the bank in this case asking whether the law forbids the bank constructing such a building as
was contemplated.

'The reply was follows: "Your letter of the 9th instant received, stating that the directors
contemplate making improvements in the bank building and inquiring if there is anything in the
national banking laws prohibiting the construction of a building which will contain floors for
offices to be rented out by the bank as well as the banking room. Your attention is called to the
case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the court held that: 'If the
land which a national bank purchases or leases for the accommodation of its business is very
valuable it may exercise the same rights that belong to other landowners of improving it in a
way that will yield the largest income, lessen its own rent, and render that part of its funds
which are invested in realty most productive.'" This seems to be the common sense
interpretation of the act of Congress and is the one which prevails.'

It would seem to be unnecessary to extend the opinion by lengthy citations upon the point under
consideration, but Brown vs. Schleier (118 Fed., 981), may be cited as being in harmony with the
foregoing authorities. In dealing with the powers of a national bank the court, in this case, said:

When an occasion arises for an investment in real property for either of the purposes specified in
the statute the national bank act permits banking associations to act as any prudent person
would act in making an investment in real estate, and to exercise the same measure of judgment
and discretion. The act ought not to be construed in such as way as to compel a national bank,
when it acquires real property for a legitimate purpose, to deal with it otherwise than a prudent
land owner would ordinarily deal with such property.

In the brief of the Attorney-General reliance is place almost entirely upon two Illinois cases, namely
Africani Home Purchase and Loan Association vs. Carroll (267 Ill., 380), and First Methodist
Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our opinion these cases are either
distinguishable from that now before us, or they reflect a view of the law which is incorrect. At any
rate the weight of judicial opinion is so overwhelmingly in favor of sustaining the validity of the acts
alleged in the second cause of action to have been done by the respondent in excess of its powers
that we refrain from commenting at any length upon said cases. The ground stated in the second
cause of action is in our opinion without merit.

Third cause of action. Under the third cause of action the respondent is charged with engaging in
activities foreign to the purposes for which the corporation was created and not reasonable

Page 8 of 21
necessary to its legitimate ends. The specifications under this cause of action relate to three
different sorts of activities. The first consist of the administration of the offices in the El Hogar
building not used by the respondent itself and the renting of such offices to the public. As stated in
the discussion connected with the second cause of action, the respondent uses only about ten per
cent of the office space in the El Hogar building for its own purposes, and it leases the remainder to
strangers. In the years 1924 and 1925 the respondent received as rent for the leased portions of
the building the sums of P75,395.06 and P58,259.27, respectively. The activities here criticized
clearly fall within the legitimate powers of the respondent, as shown in what we have said above
relative to the second cause of action. This matter will therefore no longer detain us. If the
respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there
decided, the beneficial administration by it of such parts of the building as are let to others must
necessarily be lawful.

The second specification under the third cause of action has reference to the administration and
management of properties belonging to delinquent shareholders of the association. In this
connection it appears that in case of delinquency on the part of its shareholders in the payment of
interest, premium, and dues, the association has been accustomed (pursuant to clause 8 of its
standard mortgage) to take over and manage the mortgaged property for the purpose of applying
the income to the obligations of the debtor party. For these services the respondent charges a
commission at the rate of 2 per centum on sums collected. The case for the government
supposes that the only remedy which the respondent has in case of default on the part of its
shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in
section 185 of the Corporation Law. It will be noted, however, that, according to said section, the
association may treat the whole indebtedness as due, "at the option of the board of directors," and
this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the
association the right to take over the property which constitutes the security for the delinquent
debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the
immediate enforcement of the entire obligation, and the validity of the clause allowing this course
to be taken appears to us to be not open to doubt. The second specification under this cause of
action is therefore without merit, as was true of the first.

The third specification under this cause of action relates to certain activities which are described in
the following paragraphs contained in the agreed statements of facts:.

El Hogar Filipino has undertaken the management of some parcels of improved real estate
situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out
by advertisement as prepared to do so. The number of properties so managed during the years
1921 to 1925, inclusive, was as follows:

1921 eight properties

1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.

This service is limited to shareholders; but some of the persons whose properties are so
managed for them became shareholders only to enable them to take advantage thereof.

The services rendered in the management of such improved real estate by El Hogar Filipino
consist in the renting of the same, the payment of real estate taxes and insurance for the
account of the owner, causing the necessary repairs for upkeep to be made, and collecting rents
due from tenants. For the services so rendered in the management of such properties El Hogar
Filipino receives compensation in the form of commissions upon the gross receipts from such
properties at rates varying from two and one-half per centum to five per centum of the sums so
collected, according to the location of the property and the effort involved in its management.

The work of managing real estate belonging to non-borrowing shareholders administered by El

Hogar Filipino is carried on by the same members of the staff who attend to the details of the
management of properties administered by the manager of El Hogar Filipino under the
provisions of paragraph 8 of the standard mortgage form, and of properties bought in on
foreclosure of mortgage.

The practice described in the passage above quoted from the agreed facts is in our opinion
unauthorized by law. Such was the view taken by the bank examiner of the Treasury Bureau in his
report to the Insular Treasurer on December 21, 1925, wherein the practice in question was
criticized. The administration of property in the manner described is more befitting to the business
of a real estate agent or trust company than to the business of a building and loan association. The
practice to which this criticism is directed relates of course solely to the management and
administration of properties which are not mortgaged to the association. The circumstance that the
owner of the property may have been required to subscribe to one or more shares of the
association with a view to qualifying him to receive this service is of no significance. It is a general
rule of law that corporations possess only such express powers. The management and

Page 9 of 21
administration of the property of the shareholders of the corporation is not expressly authorized by
law, and we are unable to see that, upon any fair construction of the law, these activities are
necessary to the exercise of any of the granted powers. The corporation, upon the point now under
the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not
result that the dissolution of the corporation is in order, and it will merely be enjoined from further
activities of this sort.

Fourth cause of action. It appears that among the by laws of the association there is an article
(No. 10) which reads as follows:

The board of directors of the association, by the vote of an absolute majority of its members, is
empowered to cancel shares and to return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for any other motive, the
continuation as members of the owners of such shares is not desirable.

This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section
187 of the Corporation Law, which expressly declares that the board of directors shall not have the
power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the
corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-
laws has never been enforced, and in fact no attempt has ever been made by the board of directors
to make use of the power therein conferred. In November, 1923, the Acting Insular Treasurer
addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing
the view that said article was invalid. It was therefore suggested that the article in question should
be eliminated from the by-laws. At the next meeting of the board of directors the matter was called
to their attention and it was resolved to recommend to the shareholders that in their next annual
meeting the article in question be abrogated. It appears, however, that no annual meeting of the
shareholders called since that date has been attended by a sufficient number of shareholders to
constitute a quorum, with the result that the provision referred to has no been eliminated from the
by-laws, and it still stands among the by-laws of the association, notwithstanding its patent conflict
with the law.

It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of
the association is a misdemeanor on the part of the respondent which justifies its dissolution. In this
view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be
enforced even if the directors were to attempt to do so. There is no provision of law making it a
misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there were
such, the hazards incident to corporate effort would certainly be largely increased. There is no merit
in this cause of action.

Fifth cause of action. In section 31 of the Corporation Law it is declared that, "at all elections of
directors there must be present, either in person or by representative authorized to act by written
proxy, the owners of the majority of the subscribed capital stock entitled to vote. . . ." Conformably
with this requirement it is declared in article 61 of the by-laws of El Hogar Filipino that, "the
attendance in person or by proxy of shareholders owning one-half plus one of the shareholders shall
be necessary to constitute a quorum for the election of directors. At the general annual meetings of
the El Hogar Filipino held in the years 1911 and 1912, there was a quorum of shares present or
represented at the meetings and directors were duly elected accordingly. As the corporation has
grown, however, it has been fond increasingly difficult to get together a quorum of the
shareholders, or their proxies, at the annual meetings; and with the exception of the annual
meeting held in 1917, when a new directorate was elected, the meetings have failed for lack of
quorum. It has been foreseen by the officials in charge of the respondent that this condition of
affairs would lead to embarrassment, and a special effort was made by the management to induce
a sufficient number of shareholders to attend the annual meeting for February, 1923. In addition to
the publication of notices in the newspapers, as required by the by-laws, a letter of notification was
sent to every shareholder at his last known address, together with a blank form of proxy to be used
in the event the shareholder could not personally attend the meeting. Notwithstanding these
special efforts the meeting was attended only by shareholders, in person and by proxy,
representing 3,889 shares, out of a total of 106,491 then outstanding and entitled to vote.

Owing to the failure of a quorum at most of the general meetings since the respondent has been in
existence, it has been the practice of the directors to fill vacancies in the directorate by choosing
suitable persons from among the stockholders. This custom finds its sanction in article 71 of the by-
laws, which reads as follows:

ART. 71. The directors shall elect from among the shareholders members to fill the vacancies
that may occur in the board of directors until the election at the general meeting.

The person thus chosen to fill vacancies in the directorate have, it is admitted, uniformly been
experienced and successful business and professional men of means, enjoying earned incomes of
from P12,000 to P50,000 per annum, with an annual average of P30,000 in addition to such income
as they derive from their properties. Moreover, it appears that several of the individuals constituting
the original directorate and persons chosen to supply vacancies therein belong to prominent Filipino

Page 10 of 21
families, and that they are more or less related to each other by blood or marriage. In addition to
this it appears that it has been the policy of the directorate to keep thereon some member or
another of a single prominent American law firm in the city.

It is supposed in the statement of the fifth cause of action in the complaint that the failure of the
corporation to hold annual meetings and the filling of vacancies in the directorate in the manner
described constitute misdemeanors on the part of the respondent which justify the resumption of
the franchise by the Government and dissolution of the corporation; and in this connection it is
charge that the board of directors of the respondent has become a permanent and self
perpetuating body composed of wealthy men instead of wage earners and persons of moderate
means. We are unable to see the slightest merit in the charge. No fault can be imputed to the
corporation on account of the failure of the shareholders to attend the annual meetings; and their
non-attendance at such meetings is doubtless to be interpreted in part as expressing their
satisfaction of the way in which things have been conducted. Upon failure of a quorum at any
annual meeting the directorate naturally holds over and continues to function until another
directorate is chosen and qualified. Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of the term of office for which the
officer was elected, the general rule is to allow the officer to holdover until his successor is duly
qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing
officers nor dissolve the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins
vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill
Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, 180 Missouri, 153;
Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above stated finds
expressions in article 66 of the by-laws of the respondent which declares in so many words that
directors shall hold office "for the term of one year on until their successors shall have been elected
and taken possession of their offices."

It result that the practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to then personality of the individuals chosen by
the directors to fill vacancies in the body. Certainly it is no fair criticism to say that they have
chosen competent businessmen of financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not disqualify a man for filling positions of
responsibility in corporate affairs.

Sixth cause of action. Under the sixth cause of action it is alleged that the directors of El Hogar
Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, as the
complaint supposes would be proper, have been receiving large compensation, varying in
amount from time to time, out of the profits of the respondent. The facts relating to this cause of
action are in substance these:

Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the
annual balance sheet is distributed to the directors in proportion to their attendance at meetings of
the board. The compensation paid to the directors from time to time since the organization was
organized in 1910 to the end of the year 1925, together with the number of meetings of the board
held each year, is exhibited in the following table:

Compensation Number of Rate per

Year paid directors meetings meeting
as a whole held as a whole

1911 .................................. P 4,167.96 25 P 166.71

1912 .................................. 10,511.87 29 362.47

1913 .................................. 15,479.29 27 573.30

1914 .................................. 19,164.72 27 709.80

1915 .................................. 24,032.85 25 961.31

1916 .................................. 27,539.50 28 983.55

1917 .................................. 31,327.00 26 1,204.88

1918 .................................. 32,858.35 20 1,642.91

1919 .................................. 36,318.78 21 1,729.46

1920 .................................. 63,517.01 28 2,268.46

1921 .................................. 36,815.33 25 1,472.61

1922 .................................. 43,133.73 25 1,725.34

Page 11 of 21
 1923 .................................. 39,773.61 27 1,473.09

1924 .................................. 38,651.92 26 1,486.61

1925 .................................. 35,719.27 26 1,373.81

It will be note that the compensation above indicated as accruing to the directorate as a whole has
been divided among the members actually present at the different meetings. As a result of this
practice, and the liberal measure of compensation adopted, we find that the attendance of the
membership at the board meetings has been extraordinarily good. Thus, during the years 1920 to
1925, inclusive, when the board was composed of nine members, the attendance has regularly
been eight meeting with the exception of two years when the average attendance was seven. It is
insisted in the brief for the Attorney-General that the payment of the compensation indicated is
excessive and prejudicial to he interests of the shareholders at large. For the respondent, attention
is directed to the fact that the liberal policy adopted by the association with respect to the
compensation of the directors has had highly beneficial results, not only in securing a constant
attendance on the part of the membership, but in obtaining their intelligent attention to the affairs
of the association. Certainly, in this connection, the following words from the report of the
government examiners for 1918 to the Insular Treasurer contain matter worthy of consideration:

The management of the association is entrusted to men of recognized ability in financial affairs and
it is believed that they have long foreseen all possible future contingencies and that under such
men the interests of the stockholders are duly protected. The steps taken by the directorate to
curtail the influx of unnecessary capital into the association's coffers, as mentioned above, reveals
how the men at grasp the situation and to apply the necessary remedy as the circumstances were
found in the same excellent condition as in the previous examination.

In so far as this court is concerned the question here before us is not one concerning the propriety
and wisdom of the measure of compensation adopted by the respondent but rather the question of
the validity of the measure. Upon this point there can, it seems to us, be no difference of intelligent
opinion. The Corporation Law does not undertake to prescribe the rate of compensation for the
directors of corporations. The power to fixed the compensation they shall receive, if any, is left to
the corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this authority
the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as
already stated. The justice and property of this provision was a proper matter for the shareholders
when the by-laws were framed; and the circumstance that, with the growth of the corporation, the
amount paid as compensation to the directors has increased beyond what would probably be
necessary to secure adequate service from them is matter that cannot be corrected in this action;
nor can it properly be made a basis for depriving the respondent of its franchise, or even for
enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, or
the rule adopted in the by-laws meeting to change the rule. The remedy, if any, seems to lie rather
in publicity and competition, rather than in a court proceeding. The sixth cause of action is in our
opinion without merit.

Seventh cause of action. It appears that the promoter and organizer of El Hogar Filipino was Mr.
Antonio Melian, and in the early stages of the organization of the association the board of directors
authorized the association to make a contract with him with regard to the services him therefor.
Pursuant to this authority the president of the corporation, on January 11, 1911, entered into a
written agreement with Mr. Melian, which is reproduced in the agreed statement of facts and of
which the important clauses are these:

1. The corporation "El Hogar Filipino Sociedad Mutua de Construccion y Prestamos," and on its
behalf its president, Don Antonio R. Roxas, hereby confers on Don Antonio Melian the office of
manager of said association for the period of one year from the date of this contract.

2. Don Antonio Melian accepts said office and undertakes to render the services thereto
corresponding for the period of one year, as prescribed by the by-laws of the corporation,
without salary.

3. Don Antonio Melian furthermore undertakes to pay for his own account, all the expenses
incurred in the organization of the corporation.

4. Don Antonio Melian further undertakes to lend to the corporation, without interest the sum of
six thousand pesos (P6,000), Philippine Currency, for the purpose of meeting the expense of
rent, office supplies, etcetera, until such time as the association has sufficient funds of its own
with which to return this loan: Provided, nevertheless, That the maximum period thereof shall
not exceed three (3) years.

5. Don Antonio Melian undertakes that the capital of the association shall amount to the sum of
four hundred thousand pesos (P400,000), Philippine currency, par value, during the first year of
its duration.

Page 12 of 21
 6. In compensation of the studies made and services rendered by Don Antonio Melian for its
organization, the expenses incurred by him to that end, and in further consideration of the said
loan of six thousand pesos (P6,000), and of the services to be rendered by him as manager, and
of the obligation assumed by him that the nominal value of the capital of the association shall
reach the sum of four hundred thousand pesos (P400,000) during the first year of its duration,
the corporation 'El Hogar Filipino Sociedad Mutua de Construccion y Prestamos' hereby grants
him five per centum (5%) of the net profits to be earned by it in each year during the period
fixed for the duration of the association by its articles of incorporation; Provided, that this
participation in the profits shall be transmitted to the heirs of Seor Melian in the event of his
death; And provided further, that the performance of all the obligations assumed by Seor
Melian in favor of the association, in accordance with this contract, shall and does constitute a
condition precedent to the acquisition by Seor Melian of the right to the said participation in
the profits of the association, unless the non-performance of such obligations shall be due to a
fortuitous event or force majeure.

In conformity with this agreement there was inserted in section 92 of the by-laws of the association
a provision recognizing the rights of Melian, as founder, to 5 per centum of the net profits shown by
the annual balance sheet, payment of the same to be made to him or his heirs during the life of the
association. It is declared in said article that this portion of the earnings of the association is
conceded to him in compensation for the studies, work and contributions made by him for the
organization of El Hogar Filipino and the performance on his part of the contract of January 11,
1911, above quoted. During the whole life of the association, thus far, it has complied with the
obligations assumed by it in the contract above- mentioned; and during the years 1911 to 1925,
inclusive, it paid to him as founder's royalty the sum of P459,011.19, in addition to compensation
received from the association by him in to remuneration of services to the association in various
official capacities.

As a seventh cause of action it is alleged in the complaint that this royalty of the founder is
"unconscionable, excessive and out of all proportion to the services rendered, besides being
contrary to and incompatible with the spirit and purpose of building and loan associations." It is not
alleged that the making of this contract was beyond the powers of the association (ultra vires); nor
it alleged that it is vitiated by fraud of any kind in its procurement. Nevertheless, it is pretended
that in making and observing said contract the respondent committed an offense requiring its
dissolution, or, as is otherwise suggested, that the association should be enjoined from performing
the agreement.

It is our opinion that this contention is entirely without merit. Stated in its true simplicity, the
primary question here is whether the making of a (possibly) indiscreet contract is a capital offense
in a corporation, a question which answers itself. No possible doubt exists as to the power of a
corporation to contract for services rendered and to be rendered by a promoter in connection with
organizing and maintaining the corporation. It is true that contracts with promoters must be
characterized by good faith; but could it be said with certainty, in the light of facts existing at the
time this contract was made, that the compensation therein provided was excessive? If the amount
of the compensation now appears to be a subject of legitimate criticism, this must be due to the
extraordinary development of the association in recent years.

If the Melian contract had been clearly ultra vires which is not charged and is certainly untrue
its continued performance might conceivably be enjoined in such a proceeding as this; but if the
defect from which it suffers is mere matter for an action because Melian is not a party. It is
rudimentary in law that an action to annul a contract cannot be maintained without joining both the
contracting parties as defendants. Moreover, the proper party to bring such an action is either the
corporation itself, or some shareholder who has an interest to protect.

The mere fact that the compensation paid under this contract is in excess of what, in the full light of
history, may be considered appropriate is not a proper consideration for this court, and supplies no
ground for interfering with its performance. In the case of El Hogar Filipino vs. Rafferty (37 Phil.,
995), which was before this court nearly ten years ago, this court held that the El Hogar Filipino is
contract with Mr. Melian did not affect the association's legal character. The inference is that the
contract under consideration was then considered binding, and it occurred to no one that it was
invalid. It would be a radical step indeed for a court to attempt to substitute its judgment for the
judgment of the contracting parties and to hold, as we are invited to hold under this cause of
action, that the making of such a contract as this removes the respondent association from the pale
of the law. The majority of the court is of the opinion that our traditional respect for the sanctity of
the contract obligation should prevail over the radical and innovating tendencies which find
acceptance with some and which, if given full rein, would go far to sink legitimate enterprise in the
Islands into the pit of populism and bolshevism. The seventh count is not sustainable.

Eight cause of action. Under the fourth cause of action we had case where the alleged ground for
the revocation of the respondent's charter was based upon the presence in the by-laws of article 10
that was found to be inconsistent with the express provisions of law. Under the eight cause of action
the alleged ground for putting an end to the corporate life of the respondent is found in the
presence of other articles in the by-laws, namely, articles 70 and 76, which are alleged to be

Page 13 of 21
unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-laws in effect
requires that persons elected to the board of directors must be holders of shares of the paid up
value of P5,000 which shall be held as security may be put up in the behalf of any director by some
other holder of shares in the amount stated. Article 76 of the by-laws declares that the directors
waive their right as shareholders to receive loans from the association.

It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the
requirement for security, a poor member, or wage-earner, cannot serve as director, irrespective of
other qualifications and that as a matter of fact only men of means actually sit on the board. Article
76 is criticized on the ground that the provision requiring directors to renounce their right to loans
unreasonably limits their rights and privileges as members. There is nothing of value in either of
theses suggestions. Section 21 of the Corporation Law expressly gives the power to the corporation
to provide in its by-laws for the qualifications of directors; and the requirement of security from
them for the proper discharge of the duties of their office, in the manner prescribed in article 70, is
highly prudent and in conformity with good practice. Article 76, prohibiting directors from making
loans to themselves, is of course designed to prevent the possibility of the looting of the
corporation by unscrupulous directors. A more discreet provision to insert in the by-laws of a
building and loan association would be hard to imagine. Clearly, the eighth cause of action cannot
be sustained.

Ninth cause of action. The specification under this head is in effect that the respondent has
abused its franchise in issuing "special" shares. The issuance of these shares is allege to be illegal
and inconsistent with the plan and purposes of building and loan associations; and in particular, it is
alleged and inconsistent with the plan and purposes of building and loan associations; and in
particular, it is alleged that they are, in the main, held by well-to-wage-earners for accumulating
their modest savings for the building of homes.

In the articles of incorporation we find the special shares described as follows:

"Special" shares shall be issued upon the payment of 80 per cent of their par value in cash, or in
monthly dues of P10. The 20 per cent remaining of the par value of such shares shall be
completed by the accumulation thereto of their proportionate part of the profits of the
corporation. At the end of each quarter the holders of special shares shall be entitled to receive
in cash such part of the net profits of the corporation corresponding to the amount on such date
paid in by the holders of special shares, on account thereof, as shall be determined by the
directors, and at the end of each year the full amount of the net profits available for distribution
corresponding to the special shares. The directors shall apply such part as they deem advisable
to the amortization of the subscription to capital with respect to shares not fully paid up, and
the remainder of the profits, if any, corresponding to such shares, shall be delivered to the
holders thereof in accordance with the provision of the by-laws.

The ground for supposing the issuance of the "special" shares to be unlawful is that special shares
are not mentioned in the Corporation Law as one of the forms of security which may be issued by
the association. In the agreed statement of facts it is said that special shares are issued upon two
plans. By the second, the shareholder, upon subscribing, pays in cash P10 for each share taken, and
undertakes to pay P10 a month, as dues, until the total so paid in amounts to P160 per share. On
December 31, 1925, there were outstanding 20,844 special shares of a total paid value (including
accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since 1915, has been to
accumulate to each special share, at the end of the year, one-tenth of the divident declared and to
pay the remainder of the divident in cash to the holders of shares. Since the same year dividend
have been declared on the special and common shares at the rate of 10 per centum per annum.
When the amount paid in upon any special share plus the accumulated dividends accruing to it,
amounts to the par value of the share (P200), such share matures and ceases to participate further
in the earning. The amount of the par value of the share (P200) is then returned to the shareholder
and the share cancelled. Holders of special and ordinary shares participate ratably in the dividends
declared and distributed, the part pertaining to each share being computed on the basis of the
capital paid in, plus the accumulated dividends pertaining to each share at the end of the year. The
total number of shares of El Hogar Filipino outstanding on December 31, 1925, was 125,750, owned
by 5,826 shareholders, and dividend into classes as follows:

Preferred shares .................................. 1,503

Special shares ..................................... 20,884
Ordinary shares .................................. 103,363

The matter of the propriety of the issuance of special shares by El Hogar Filipino has been before
this court in two earlier cases, in both of which the question has received the fullest consideration
from this court. In El Hogar Filipino vs. Rafferty (37 Phil., 995), it was insisted that the issuance of
such shares constituted a departure on the part of the association from the principle of mutuality;
and it was claimed by the Collector of Internal Revenue that this rendered the association liable for
the income tax to which other corporate entities are subject. It was held that this contention was

Page 14 of 21
untenable and that El Hogar Filipino was a legitimate building and loan association notwithstanding
the issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R. No. 24926),2 and the related
cases of Gervasio Miraflores and Gil Lopes against the same entity, it was asserted by the plaintiffs
that the emission of special shares deprived the herein responded of the privileges and immunities
of a building and loan association and that as a consequence the loans that had been made to the
plaintiffs in those cases were usurious. Upon an elaborate review of the authorities, the court,
though divided, adhered to the principle announced in the earlier case and held that the issuance of
the special shares did not affect the respondent's character as a building and loan association nor
make its loans usurious. In view of the lengthy discussion contained in the decisions above-
mentioned, it would appear to be an act of supererogation on our part to go over the same ground
again. The discussion will therefore not be repeated, and what is now to be said should be
considered supplemental thereto.

Upon examination of the nature of the special shares in the light of American usage, it will be found
that said shares are precisely the same kind of shares that, in some American jurisdictions, are
generally known as advance payment shares; in if close attention be paid to the language used in
the last sentence of section 178 of the Corporation Law, it will be found that special shares where
evidently created for the purpose of meeting the condition cause by the prepayment of dues that is
there permitted. The language of this provision is as follow "payment of dues or interest may be
made in advance, but the corporation shall not allow interest on such advance payment at a
greater rate than six per centum per annum nor for a longer period than one year." In one sort of
special shares the dues are prepaid to the extent of P160 per share; in the other sort prepayment is
made in the amount of P10 per share, and the subscribers assume the obligation to pay P10
monthly until P160 shall have been paid.

It will escape notice that the provision quoted say that interest shall not be allowed on the advance
payments at a greater rate than six per centum per annum nor for a longer period than one year.
The word "interest " as there used must be taken in its true sense of compensation for the used of
money loaned, and it not must not be confused with the dues upon which it is contemplated that
the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no
interest is ever paid by the association in any amount for the advance payments made on these
shares; and the reason is to be found in the fact that the participation of the special shares in the
earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently
compensates the shareholder for the advance payments made by him; and no other incentive is
necessary to induce inventors to purchase the stock.

It will be observed that the final 20 per centum of the par value of each special share is not paid for
by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the
shareholder's participation in the annual earnings. But as the right of every shareholder to such
participation in the earnings is undeniable, the portion thus annually applied is as much the
property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission of
the special shares does not involve any violation of the principle that the shares must be sold at
par.

From what has been said it will be seen that there is express authority, even in the very letter of the
law, for the emission of advance-payment or "special" shares, and the argument that these shares
are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs.
El Hogar Filipino, supra, that even assuming that the statute has not expressly authorized such
shares, yet the association has implied authority to issue them. The complaint consequently fails
also as regards the stated in the ninth cause of action.

Tenth cause of action. Under this head of the complaint it is alleged that the defendant is
pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of the real
properties acquired by it at its sales; and it is alleged that this rate is excessive. From the agreed
statement it appears that since its organization in 1910 El Hogar Filipino, prior to the end of the
year 1925, had made 1,373 loans to its shareholders secured by first mortgages on real estate as
well as by the pledge of the shares of the borrowers. In the same period the association has
purchased at foreclosure sales the real estate constituting the security for 54 of the aforesaid loans.
In making these purchases the association has always bid the full amount due to it from the debtor,
after deducting the withdrawal value of the shares pledged as collateral, with the result that in no
case has the shareholder been called upon to pay a deficiency judgement on foreclosure.

El Hogar Filipino places real estate so purchased in its inventory at actual cost, as determined by
the amount bid on foreclosure sale; and thereafter until sold the book value of such real estate is
depreciated at the rate fixed by the directors in accordance with their judgment as to each parcel,
the annual average depreciation having varied from nothing to a maximum of 14.138 per cent. The
sales thereof, but sales are made for the best prices obtainable, whether greater or less than the
book value.

It is alleged in the complaint that depreciation is charged by the association at the rate of 10 per
centum per annum. The agreed statement of facts on this point shows that the annual average
varies from nothing to a maximum of something over 14 per centum. We are thus left in the dark as

Page 15 of 21
to the precise depreciation allowed from year to year. It is not claimed for the Government that the
association is without power to allow some depreciation; and it is quite clear that the board of
directors possesses a discretion in this matter. There is no positive provision of law prohibiting the
association from writing off a reasonable amount for depreciation on its assets for the purpose of
determining its real profits; and article 74 of its by-laws expressly authorizes the board of directors
to determine each year the amount to be written down upon the expenses of installation and the
property of the corporation. There can be no question that the power to adopt such a by-law is
embraced within the power to make by-laws for the administration of the corporate affairs of the
association and for the management of its business, as well as the care, control and disposition of
its property (Act No. 1459, sec. 13 [7]). But the Attorney-General questions the exercise of the
direction confided to the board; and it is insisted that the excessive depreciation of the property of
the association is objectionable in several respects, but mainly because it tends to increase unduly
the reserves of the association, thereby frustrating the right of the shareholders to participate
annually and equally in the earnings of the association.

This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court
may do in determining the internal policy of a business corporation. If the criticism contained in the
brief of the Attorney-General upon the practice of the respondent association with respect to
depreciation be well founded, the Legislature should supply the remedy by defining the extent to
which depreciation may be allowed by building and loan associations. Certainly this court cannot
undertake to control the discretion of the board of directors of the association about an
administrative matter as to which they have legitimate power of action. The tenth cause of action is
therefore not well founded.

Eleventh and twelfth causes of action. The same comment is appropriate with respect to the
eleventh and twelfth causes of action, which are treated together in the briefs, and will be here
combined. The specification in the eleventh cause of action is that the respondent maintains
excessive reserve funds, and in the twelfth cause of action that the board of directors has settled
upon the unlawful policy of paying a straight annual dividend of 10 per centum, regardless of losses
suffered and profits made by the corporation and in contravention of the requirements of section
188 of the Corporation Law. The facts relating to these two counts in the complaint, as set forth in
the stipulation, are these:

In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the net profits
earned each year, as shown by the annual balance sheet shall be carried to a reserve fund. The
fund so created is called the General Reserve. Article 93 of the by-laws authorizes the directors to
carry funds to a special reserve, whenever in their judgment it is advisable to do so, provided that
the annual dividend in the year in which funds are carried to special reserve exceeds 8 per centum.
It appears to have been the policy of the board of directors for several years past to place in the
special reserve any balance in the profit and loss account after the satisfaction of preferential
charges and the payment of a dividend of 10 per centum to all special and ordinary shares (with
accumulated dividends). As things stood in 1926 the general reserve contained an amount
equivalent to about 5 per centum of the paid-in value of shared. This fund has never been drawn
upon for the purpose of maintaining the regular annual dividend; but recourse has been had to the
special reserve on three different occasions to make good the amount necessary to pay dividends.
It appears that in the last five years the reserves have declined from something over 9 per cent to
something over 7.

It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is
unnecessary in the case of building and loan associations, and at any rate the keeping of reserves
is inconsistent with section 188 of the Corporation Law. Moreover, it is said that the practice of the
association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association of
a fixed dividend which is contrary to the intention of the statute.

Upon careful consideration of the questions involved we find no reason to doubt the right of the
respondent to maintain these reserves. It is true that the corporation law does not expressly grant
this power, but we think it is to be implied. It is a fact of common observation that all commercial
enterprises encounter periods when earnings fall below the average, and the prudent manager
makes provision for such contingencies. To regard all surplus as profit is to neglect one of the
primary canons of good business practice. Building and loan associations, though among the most
solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend
rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends,
continued over long periods, supplies the surest foundations of public confidence.

The question now under consideration is not new in jurisprudence, for the American courts have
been called upon more than once to consider the legality of the maintenance of reserves by
institutions of this or similar character.

In Greeff vs. Equitable Life Assurance Society, the court had under consideration a charter provision
of a life insurance company, organized on the mutual plan, in its relation to the power of the
company to provide reserves. There the statute provided that "the officers of the company, within
sixty days from the expiration of the first five years, from December 31, 1859, and within the first

Page 16 of 21
sixty days of every subsequent period of five years, shall cause a balance to be struck of the affairs
of the company, which shall exhibit its assets and liabilities, both present and contingent, and also
the net surplus, after deducting a sufficient amount to cover all outstanding risks and other
obligations. Each policy holder shall be credited with an equitable share of the said surplus."

The court said:

No prudent person would be inclined to take a policy in a company which had so improvidently
conducted its affairs that it only retained a fund barely sufficient to pay its present liabilities,
and, therefore, was in a condition where any change by the reduction of interest upon, or
depreciation in, the value of its securities, or any increase of mortality, would render it insolvent
and subject to be placed in the hands of a receiver. The evident purpose of the provisions of the
defendant's charter and policy relating to this subject was to vest in the directors of the
corporation a discretion to determine the proportion of its surplus which should be dividend
each year.

In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman Bldg. and Loan
Association vs. Knolt, the court, in commenting on the nature of these reserves, said:

The apparent function of this fund is to insure the stockholders against losses. Its purpose is not
unlike that of the various forms of insurance now in such common use. This contribution is as
legitimate an item of expense as are the premiums paid on any insurance policy. (See Clarks
and Chase, Building and Loan Association, footnote, page 344.)

In commenting on the necessity of such funds, Sundheim says:

It is optional with the association whether to maintain such a fund or not, but justice and good
business policy seem to require it. The retiring stockholder must be paid the value of his stock in
cash and leave for those remaining a large number of securities and perhaps some real estate
purchased to protect the associations interest. How much will be realized on these securities, or
real estate, no human foresight can tell. Further, the realizing on these securities may entail
considerable litigation and expense. There are many other contingencies which might cause a
shrinkage in the association's assets, such as defective titles, undisclosed defalcations on the
part of an officer, a miscalculation of assets and liabilities, and many other errors and omissions
which must always be reckoned within the conduct of human affairs.

The contingent fund is merely insurance against possible loss. That losses may occur from time
to time seems almost inevitable and it is, therefore, inequitable that the remaining stockholders
should be compelled to accept all securities at par, so, to say the least, the maintenance of this
fund is justified. The association teaches the duty of providing for the proverbial rainy day. Why
should it not provide for the hour of adversity? The reserve fund has protected the maturing or
withdrawing member during the period of his membership. In case of loss it has or would have
reimbursed him and, at all times, it has protected him and given strength and standing to the
association. Losses may occur, after his membership ceases, that arose from some mistake or
mismanagement committed during the period of his membership, and in fairness and equity the
remaining members should have some protection against this. (Sundheim, Law of Building and
Loan Association, sec. 53.)

The government insists, we thing, upon an interpretation of section 188 of the Corporation Law that
is altogether too strict and literal. From the fact that the statute provides that profits and losses
shall be annually apportioned among the shareholders it is argued that all earnings should be
distributed without carrying anything to the reserve. But it will be noted that it is provided in the
same section that the profits and losses shall be determined by the board of directors: and this
means that they shall exercise the usual discretion of good businessmen in allocating a portion of
the annual profits to purposes needful to the welfare of the association. The law contemplates the
distribution of earnings and losses after other legitimate obligations have been met.

Our conclusion is that the respondent has the power to maintain the reserves criticized in the
eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves
referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper
function of the court to arrogate to itself the control of administrative matters which have been
confided to the discretion of the board of directors. The causes of action under discussion must be
pronounced to be without merit.

Thirteenth cause of action. The specification under this head is, in effect, that the respondent
association has made loans which, to the knowledge of the associations officers were intended to
be used by the borrowers for other purposes than the building of homes. In this connection it
appears that, though loans have been made by the association exclusively to its shareholders, no
attempt has been made by it to control the borrowers with respect to the use made of the borrowed
funds, the association being content to see that the security given for the loan in each case is
sufficient. On December 31, 1925, the respondent had five hundred forty-four loans outstanding
secured by mortgages upon real estate and by the pledge of the borrowers' shares in an amount
Page 17 of 21
sufficient at maturity to amortize the loans. With respect to the nature of the real estate upon which
these loans were made it appears that three hundred fifty-one loans were secured by mortgages
upon city residences, seven by mortgages upon commercial building in cities, and three mortgages
upon unimproved city lots. At the same time one hundred eighty-three of the loans were secured by
mortgages upon groves, sugar land, and rice land, with a total area of about 7,558 hectares. From
information gathered by the association from voluntary statements of borrowers given at the time
of application with respect to the use intended to be made of the borrowed funds, it appears that
the amount of P693,200 was borrowed to redeem real property from existing mortgages or pactos
de retro, P280,800 to buy real estate, P449,100 to erect buildings, P24,000 to improve and repair
buildings, P1,480,900 for agricultural purposes, while the amount of P5,763,700 was borrowed for
purposes not disclosed.

Upon these facts an elaborate argument has been constructed in behalf of the plaintiff to the effect
that in making loans for other purposes than the building of residential houses the association has
illegally departed from its character and made itself amenable to the penalty of dissolution. Aside
from being directly opposed to the decision of this court in Lopez and Javelona vs. El Hogar Filipino
and Registrar of Deeds of Occidental Negros (47 Phil., 249), this contention finds no substantial
support in the prevailing decisions made in American courts; and our attention has not been
directed to a single case wherein the dissolution of a building and loan association has been
decreed in a quo warranto proceeding because the association allowed its borrowers to use the
loans for other purposes than the acquisition of homes.

The case principally relied upon for the Government appears to be Pfeister vs. Wheeling Building
Association (19 W. Va., 676, 716),which involved the question whether a building and loan
association could recover the full amount of a note given to it by a member and secured by a
mortgage from a stranger. At the time the case arose there was a statute in force in the State of
West Virginia expressly forbidding building and loan associations to use or direct their funds for or
to any other object or purpose than the buying of lots or houses or in building and repairing houses,
and it was declared that in case the funds should be improperly directed to other objects, the
offending association should forfeit all rights and privileges as a corporation. Under the statute so
worded the court held that the plaintiff could only recover the amount actually advanced by it with
lawful interest and fines, without premium; and judgment was given accordingly. The suggestion in
that case that the result would have been the same even in the absence of statute was mere
dictum and is not supported by respectable authority.

Reliance is also placed in the plaintiff's brief upon McCauley vs. Building & Saving Association. The
statute in force in the State of Tennessee at the time this action arose provided that all loans should
be made to the members of the association at open stated meetings and that the money should be
lent to the highest bidder. Inconsistently with this provision, there was inserted in the by-laws of the
association a provision to the effect that no loan should be made at a greater premium than 30 per
cent, nor at a less premium than 29 7/8 per cent. It was held that this by-law made free and open
competition impossible and that it in effect established a fixed premium. It was accordingly held, in
the case cited, that an association could not recover such part of the loan as had been applied by it
to the satisfaction of a premium of 30 per centum.

We have no criticism to make upon the result reached in either of the two decisions cited, but it is
apparent that much of the discussion contained in the opinions in those cases does not reflect the
doctrine now prevailing in the United States; and much less are those decisions applicable in this
jurisdiction. There is no statute here expressly declaring that loans may be made by these
associations solely for the purpose of building homes. On the contrary, the building of homes is
mentioned in section 171 of the Corporation Law as only one among several ends which building
and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law
expressly authorities the Board of directors of the association from time to time to fix the premium
to be charged.

In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in
which the idea is developed that the primary design of building and loan associations should be to
help poor people to procure homes of their own. This beneficent end is undoubtedly served by
these associations, and it is not to be denied that they have been generally fostered with this end in
view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of
building and loan associations in an exclusive manner, and the exercise of the broader powers must
in the end approve itself to the business community. Judging from the past history of these
institutions it can be truly said that they have done more to encourage thrift, economy and saving
among the people at large than any other institution of modern times, not excepting even the
saving banks. In this connection Mr. Sundheim, in a late treatise upon the subject of the law of
building and loan associations, makes the following comment:

They have grown to such an extent in recent years that they no longer restrict their money to
the home buyer, but loan their money to the mere investor or dealer in real estate. They are the
holder of large mortgages secured upon farms, factories and other business properties and rows
of stores and dwellings. This is not an abuse of their powers or departure from their main

Page 18 of 21
 purposes, but only a natural and proper expansion along healthy and legitimate lines.
(Sundheim, Building and Loan Associations, sec. 7.)

Speaking of the purpose for which loans may be made, the same author adds:

Loans are made for the purpose of purchasing a homestead, or other real estate, or for any
lawful purpose or business, but there is no duty or obligation of the association to inquire for
what purpose the loan is obtained, or to require any stipulation from the borrower as to what
use he will make of the money, or in any manner to supervise or control its disbursement.
(Sundheim, Building and Loan Association, sec. 111.)

In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros, this court
had before it the question whether a loan made by the respondent association upon the security of
a mortgage upon agricultural land, where the loan was doubtless used for agricultural purposes,
was usurious or not; and the case turned upon the point whether, in making such loans, the
association had violated the law and departed from its fundamental purposes. The conclusion of the
court was that the loan was valid and could be lawfully enforced by a nonjudicial foreclosure in
conformity with the terms of the contract between the association and the borrowing member. We
now find no reason to depart from the conclusion reached in that case, and it is unnecessary to
repeat what was then said. The thirteenth cause of action must therefore be pronounced
unfounded.

Fourteenth cause of action. The specification under this head is that the loans made by the
defendant for purposes other than building or acquiring homes have been extended in extremely
large amounts and to wealthy persons and large companies. In this connection attention is directed
to eight loans made at different times in the last several years to different persons or entities,
ranging in amounts from P120,000 to P390,000 and to two large loans made to the Roxas Estate
and to the Pacific Warehouse Company in the amounts of P1,122,000 and P2,320,000, respectively.
In connection with the larger of the two after this loan was made the available funds of El Hogar
Filipino were reduced to the point that the association was compelled to take advantage of certain
provisions of its by-laws authorizing the postponement of the payment of claims resulting from
withdrawals, whereas previously the association had always settled these claims promptly from
current funds. At no time was there apparently any delay in the payment of matured shares; but in
four or five cases there was as much as ten months delay in the payment of withdrawal
applications.

There is little that can be said upon the legal aspects of this cause of action. In so far, as it relates
to the purposes for which these loans were made, the matter is covered by what was said above
with reference to the thirteenth cause of action; and in so far as it relates to the personality of the
borrowers, the question belongs more directly to the discussion under the sixteenth cause of action,
which will be found below. The point, then, which remains for consideration here is whether it is a
suicidal act on the part of a building and loan association to make loans in large amount. If the
loans which are here the subject of criticism had been made upon inadequate security, especially in
case of the largest two, the consequences certainly would have been disastrous to the association
in the extreme; but no such fact is alleged; and it is to be assumed that none of the ten borrowers
have defaulted in their contracts.

Now, it must be admitted that two of these loans at least are of a very large size, considering the
average range of financial transaction in this country; and the making of the largest loan was
followed, as we have already see, with unpleasant consequences to the association in dealing with
current claims. Nevertheless the agreed statement of facts shoes that all of the loan referred to are
only ten out of a total of five hundred forty-four outstanding on December 31, 1925; and the
average of all the loans taken together is modest enough. It appears that the chief examiner of
banks and corporations of the Philippine Treasury, after his examination of El Hogar Filipino at the
end of the year 1925, made a report concerning this association as of January 31, 1926, in which he
criticized the Pacific Warehouse Company loan as being so large that it temporarily crippled the
lending power of the association for some time. This criticism was apparently justified as proper
comment on the activities of the association; but the question for use here to decide is whether the
making of this and the other large loans constitutes such a misuser of the franchise as would justify
us in depriving the association of its corporate life. This question appears to us to be so simple as
almost to answer itself. The law states no limit with respect to the size of the loans to be made by
the association. That matter is confided to the discretion of the board of directors; and this court
cannot arrogate to itself a control over the discretion of the chosen officials of the company. If it
should be thought wise in the future to put a limit upon the amount of loans to be made to a single
person or entity, resort should be had to the Legislature; it is not a matter amenable to judicial
control. The fourteenth cause of action is therefore obviously without merit.

Fifteenth cause of action. The criticism here comes back to the supposed misdemeanor of the
respondent in maintaining its reserve funds, a matter already discussed under the eleventh and
twelfth causes of action. Under the fifteenth cause of action it is claimed that upon the expiration of
the franchise of the association through the effluxion of time, or earlier liquidation of its business,
the accumulated reserves and other properties will accrue to the founder, or his heirs, and the then

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directors of the corporation and to those persons who may at that time to be holders of the ordinary
and special shares of the corporation. In this connection we note that article 95 of the by-laws reads
as follows:

ART. 95. The funds obtained by the liquidation of the association shall be applied in the first
place to the repayment of shares and the balance, if any, shall be distribute in accordance with
the system established for the distribution of annual profits.

It will be noted that the cause of action with which we are now concerned is not directed to any
positive misdemeanor supposed to have been committed by the association. It has exclusive
relation to what may happen some thirty-five years hence when the franchise expires, supposing of
course that the corporation should not be reorganized and continued after that date. There is
nothing in article 95 of the by-laws which is, in our opinion, subject to criticism. The real point of
criticism is that upon the final liquidation of the corporation years hence there may be in existence
a reserve fund out of all proportion to the requirements that may then fall upon it in the liquidation
of the company. It seems to us that this is matter that may be left to the prevision of the directors
or to legislative action if it should be deemed expedient to require the gradual suppression of the
reserve funds as the time for dissolution approaches. It is no matter for judicial interference, and
much less could the resumption of the franchise on this ground be justified. There is no merit in the
fifteenth cause of action.

Sixteenth cause of action. This part of the complaint assigns as cause of action that various loans
now outstanding have been made by the respondent to corporations and partnerships, and that
these entities have in some instances subscribed to shares in the respondent for the sole purpose
of obtaining such loans. In this connection it appears from the stipulation of facts that of the 5,826
shareholders of El Hogar Filipino, which composed its membership on December 31, 1925, twenty-
eight are juridical entities, comprising sixteen corporations and fourteen partnerships; while of the
five hundred forty-four loans of the association outstanding on the same date, nine had been made
to corporations an five to partnerships. It is also admitted that some of these juridical entities
became shareholders merely for the purpose of qualifying themselves to take loans from the
association, and the same is said with respect to many natural persons who have taken shares in
the association. Nothing is said in the agreed statement of facts on the point whether the
corporations and partnerships that have taken loans from the respondent are qualified by law
governing their own organization to enter into these contracts with the respondent.

In section 173 of the Corporation Law it is declared that "any person" may become a stockholder in
building and loan associations. The word "person" appears to be here used in its general sense, and
there is nothing in the context to indicate that the expression is used in the restricted sense of both
natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say
that the word "person" or persons," is to be taken in this broad sense in every part of the
Corporation Law. For instance, it would seem reasonable to say that the incorporators of a
corporation ought to be natural persons, although in section 6 it is said that five or more "persons",
although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a
private corporation. But the context there, as well as the common sense of the situation, suggests
that natural persons are meant. When it is said, however, in section 173, that "any person" may
become a stockholder in a building and loan association, no reason is seen why the phrase may not
be taken in its proper broad sense of either a natural or artificial person. At any rate the question
whether these loans and the attendant subscriptions were properly made involves a consideration
of the power of the subscribing corporations and partnerships to own the stock and take the loans;
and it is not alleged in the complaint that they were without power in the premises. Of course the
mere motive with which subscriptions are made, whether to qualify the stockholders to take a loan
or for some other reason, is of no moment in determining whether the subscribers were competent
to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of
action, or in the facts developed in connection therewith, that would justify us in granting the relief.

Seventeenth cause of action. Under the seventeenth cause of action, it is charged that in
disposing of real estates purchased by it in the collection of its loans, the defendant has no various
occasions sold some of the said real estate on credit, transferring the title thereto to the purchaser;
that the properties sold are then mortgaged to the defendant to secure the payment of the
purchase price, said amount being considered as a loan, and carried as such in the books of the
defendant, and that several such obligations are still outstanding. It is further charged that the
persons and entities to which said properties are sold under the condition charged are not members
or shareholders nor are they made members or shareholders of the defendant.

This part of the complaint is based upon a mere technicality of bookkeeping. The central idea
involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders
only and on the security of real estate and shares in the corporation, or of shares alone. It seems to
be supposed that, when the respondent sells property acquired at its own foreclosure sales and
takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan,
and hence prohibited. But in requiring the respondent to sell real estate which it acquires in
connection with the collection of its loans within five years after receiving title to the same, the law
does not prescribe that the property must be sold for cash or that the purchaser shall be a

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shareholder in the corporation. Such sales can of course be made upon terms and conditions
approved by the parties; and when the association takes a mortgage to secure the deferred
payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor
does the fact that it is carried as a loan on the books of the respondent make it a loan on the books
of the respondent make it a loan in law. The contention of the Government under this head is
untenable.

In conclusion, the respondent 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, without costs. So ordered.

Avancea, C. J., Johnson, Villamor and Vila-Real, JJ., concur.

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