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Grace Christian Highschool vs Court of

Appeals (1997)
February 14, 2013 markerwins Corporation Law, Mercantile Lawcorpo, merc

Facts: Petitioner Grace Christian High School is an educational


institution offering preparatory, kindergarten and secondary courses
at the Grace Village in Quezon City. Private respondent Grace Village
Association, Inc., is an organization of lot and/or building owners,
lessees and residents at Grace Village, while private respondents
Alejandro G. Beltran and Ernesto L. Go were its president and
chairman of the committee on election. It appears that a committee of
the board of directors prepared a draft of an amendment to the by-
laws which says that Grace Christian High school will have a
permanent director of the association. This draft was never presented
to the general membership for approval. Nevertheless, the petitioner
was given a permanent seat in the board of directors of the
association. The association committee on election informed that the
petitoner’s permanent seat in board is invalid because it was never
approved by the majority of its members. Hence they will have an
election. The petitioner school requested the cancellation of the
election, the association denied. So the petitioner school instituted an
action to the Home Insurance Guaranty Corporation but their action
was denied. The board adopted a resolution declaring the 1975
provision null and void for lack of approval by members of the
association and the 1968 by-laws to be effective. The petitioner school
appealed to the CA but CA ruled that the amended by laws in 1975 is
null and void.
Issue: WON Grace Christian High school can have permanent seat in
board as director?
Held: No. The former and present corporation law leave no room for
doubt as to their meaning: the board of directors of corporations must
be elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it
is clear that in the examples cited by petitioner the unelected members
sit as ex officio members, i.e., by virtue of and for as long as they hold
a particular office. Nor can petitioner claim a vested right to sit in the
board on the basis of “practice.” Practice, no matter how long
continued, cannot give rise to any vested right if it is contrary to law.
Even less tenable is petitioner’s claim that its right is “coterminus with
the existence of the association.”

Lee vs. CA Case Digest


Lee vs. Court of Appeals
[GR 93695, 4 February 1992]

Facts: On 15 November 1985, a complainant for sum of money was filed by the International
Corporate Bank, Inc. against Sacoba Manufacturing Corp., Pablo Gonzales Jr., and Tomas Gonzales
who, in turn, filed a third party complaint against Alfa Integrated Textile Mills (ALFA), Ramon C. Lee
(ALFA's president) and Antonio DM. Lacdao (ALFA's vice president) on 17 March 1986. On 17
September 1987, Lee and Lacdao filed a motion to dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in an Order dated 27 June 1988. On 18 July 1988,
Lee and Lacdao filed their answer to the third party complaint. Meanwhile, on 12 July 1988, the trial
issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a
consequence of Lee and Lacdao's letter informing the court that the summons for ALFA was
erroneously served upon them considering that the management of ALFA had been transferred to the
DBP. In a manifestation dated 22 July 1988, the DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company which has a separate
and distinct corporate personality and existence. On 4 August 1988, the trial court issued an order
advising Sacoba Manufacturing, et. al. to take the appropriate steps to serve the summons to ALFA.
On 16 August 1988, Sacoba Manufacturing, et. al. filed a Manifestation and Motion for the Declaration
of Proper Service of Summons which the trial court granted on 17 August 1988.

On 12 September 1988, Lee and Lacdao filed a motion for reconsideration submitting that the Rule
14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of
ALFA and Sacoba Manufacturing, et. al. should have availed of another mode of service under Rule
14, Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA. On 2
January 1989, the trial court upheld the validity of the service of summons on ALFA through Lee and
Lacdao, thus, denying the latter's motion for reconsideration and requiring ALFA to file its answer
through Lee and Lacdao as its corporate officers. On 19 January 1989, a second motion for
reconsideration was filed by Lee and Lacdao reiterating their stand that by virtue of the voting trust
agreement they ceased to be officers and directors of ALFA, hence, they could no longer receive
summons or any court processes for or on behalf of ALFA. In support of their second motion for
reconsideration, Lee and Lacdao attached thereto a copy of the voting trust agreement between all
the stockholders of ALFA (Lee and Lacdao included), on the one hand, and the DBP, on the other
hand, whereby the management and control of ALFA became vested upon the DBP. On 25 April 1989,
the trial court reversed itself by setting aside its previous Order dated 2 January 1989 and declared
that service upon Lee and Lacdao who were no longer corporate officers of ALFA cannot be
considered as proper service of summons on ALFA. On 15 May 1989, Sacoba Manufacturing, et. al.
moved for a reconsideration of the Order which was affirmed by the court in is Order dated 14 August
1989 denying Sacoba Manufacturing, et. al.'s motion for reconsideration.

On 18 September 1989, a petition for certiorari was belatedly submitted by Sacoba Manufacturing, et.
al. before the Court of Appeals which, nonetheless, resolved to give due course thereto on 21
September 1989. On 17 October 1989, the trial court, not having been notified of the pending petition
for certiorari with the appellate court issued an Order declaring as final the Order dated 25 April 1989.
Sacoba Manufacturing, et. al. in the said Order were required to take positive steps in prosecuting the
third party complaint in order that the court would not be constrained to dismiss the same for failure to
prosecute. Subsequently, on 25 October 1989 Sacoba Manufacturing, et. al. filed a motion for
reconsideration on which the trial court took no further action. On 19 March 1990, after Lee and Lacdao
filed their answer to Sacoba Manufacturing, et. al.'s petition for certiorari, the appellate court rendered
its decision, setting aside the orders of trial court judge dated 25 April 1989 and 14 August 1989. On
11 April 1990, Lee and Lacdao moved for a reconsideration of the decision of the appellate court which
resolved to deny the same on 10 May 1990. Lee and Lacdao filed the petition for certiorari. In the
meantime, the appellate court inadvertently made an entry of judgment on 16 July 1990 erroneously
applying the rule that the period during which a motion for reconsideration has been pending must be
deducted from the 15-day period to appeal. However, in its Resolution dated 3 January 1991, the
appellate court set aside the aforestated entry of judgment after further considering that the rule it
relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to
appeals from its decision to the Supreme Court pursuant to the Supreme Court's ruling in the case of
Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].

Issue:
1. Whether the execution of the voting trust agreement by Lee and Lacdao whereby all
their shares to the corporation have been transferred to the trustee deprives the stockholder
of their positions as directors of the corporation.
2. Whether the five-year period of the voting trust agreement in question had lapsed in
1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto
reverted to Lee and Lacdao as beneficial owners pursuant to the 6th paragraph of section 59
of the new Corporation Code.
3. Whether there was proper service of summons on ALFA through Lee and Lacdao, to
bind ALFA.
Held:

1. Lee and Lacdao, by virtue of the voting trust agreement executed in 1981 disposed of all their shares
through assignment and delivery in favor of the DBP, as trustee. Consequently, Lee and Lacdao
ceased to own at least one share standing in their names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also ceased to have anything to do with the
management of the enterprise. Lee and Lacdao ceased to be directors. Hence, the transfer of their
shares to the DBP created vacancies in their respective positions as directors of ALFA. The transfer
of shares from the stockholders of ALFA to the DBP is the essence of the subject voting trust
agreement. Considering that the voting trust agreement between ALFA and the DBP transferred legal
ownership of the stocks covered by the agreement to the DBP as trustee, the latter because the
stockholder of record with respect to the said shares of stocks. In the absence of a showing that the
DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as
directors of ALFA, Lee and Lacdao can no longer be deemed to have retained their status as officers
of ALFA which was the case before the execution of the subject voting trust agreement. There is no
dispute from the records that DBP has taken over full control and management of the firm.

2. The 6th paragraph of section 59 of the new Corporation Code reads that "Unless expressly renewed,
all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period,
and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the
transferors." However, it is manifestly clear from the terms of the voting trust agreement between ALFA
and the DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations
of ALFA with the DBP. Had the five-year period of the voting trust agreement expired in 1986, the DBP
would not have transferred an its rights, titles and interests in ALFA "effective June 30, 1986" to the
national government through the Asset Privatization Trust (APT) as attested to in a Certification dated
24 January 1989 of the Vice President of the DBP's Special Accounts Department II. In the same
certification, it is stated that the DBP, from 1987 until 1989, had handled s account which included
ALFA's assets pursuant to a management agreement by and between the DBP and APT. Hence, there
is evidence on record that at the time of the service of summons on ALFA through Lee and Lacdao on
21 August 1987, the voting trust agreement in question was not yet terminated so that the legal title to
the stocks of ALFA, then, still belonged to the DBP.

3. It is a basic principle in Corporation Law that a corporation has a personality separate and distinct
from the officers or members who compose it. Thus, the role on service of processes on a corporation
enumerates the representatives of a corporation who can validly receive court processes on its behalf.
Not every stockholder or officer can bind the corporation considering the existence of a corporate
entity separate from those who compose it. The rationale of the rule is that service must be made on
a representative so integrated with the corporation sued as to make it a priori supposable that he will
realize his responsibilities and know what he should do with any legal papers served on him. Herein,
Lee and Lacdao do not fall under any of the enumerated officers. The service of summons upon ALFA,
through Lee and Lacdao, therefore, is not valid. To rule otherwise will contravene the general principle
that a corporation can only be bound by such acts which are within the scope of the officer's or agent's
authority.

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