LOYOLA vs.

GRAND
FACTS: Loyola Grand Villas Homeowners Association (LGVHA) was organized on February 8, 1983
as the association of homeowners and residents of the Loyola Grand Villas. It was registered with
the Home Financing Corporation, the predecessor of herein respondent Home Insurance and
Guaranty Corporation (HIGC), as the sole homeowners' organization in the said subdivision. It was
organized by the developer of the subdivision and its first president was Victorio V. Soliven, himself
the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate bylaws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws but failed to do so. Then
the officers that there were two other organizations within the subdivision the Loyola Grand Villas
homeowners North Association Incorporated (North Association) and the Loyola Grand Villas
homeowners South Association Incorporated (South Association). According to private respondents,
a non-resident and Soliven himself, respectively headed these associations. They also discovered
that these associations had five (5) registered homeowners each who were also the incorporators,
directors and officers thereof. None of the members of the LGVHAI was listed as member of the
North Association while three (3) members of LGVHAI were listed as members of the South
Association. When Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head
of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved
because it did not submit its by-laws within the period required by the Corporation Code and there
was non-user of corporate charter because HIGC had not received any report on the association's
activities. Apparently, this information resulted in the registration of the North and South
Association.
ISSUE: Whether or not failure of LGVHAI to file its by-laws within one month from the date of its
incorporation result in its automatic dissolution.
RULING: NO. The Supreme Court ruled that the non-filing of the by-laws within the period of 1
month from the issuance by SEC of the Certificate of Incorporation will not result to the automatic
dissolution of the corporation because the word MUST in Sec 46 of the Corporation Code is merely
directory not mandatory in meaning. In fact the second paragraph allows the filing of by-laws even
prior to incorporation.
This provision of the Code rules out mandatory compliance with the requirement of filing the
by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file
the by-laws within that period does not imply the "demise" of the corporation. By-laws may be
necessary for the "government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes.
CHINA BANK vs. CA
Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc.
(VGCCI), pledged his Stock Certificate 1219 to China Banking Corporation (CBC). On 16 September
1974, CBC wrote VGCCI requesting that the pledge agreement be recorded in its books. In a letter
dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in CBC's
favor was duly noted in its corporate books. On 3 August 1983, Calapatia obtained a loan of
P20,000.00 from CBC, payment of which was secured by the pledge agreement still existing
between Calapatia and CBC. Due to Calapatia's failure to pay his obligation, CBC, on 12 April 1985,
filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila,
requesting the latter to conduct a public auction sale of the pledged stock. On 14 May 1985, CBC
informed VGCCI of the foreclosure proceedings and requested that the pledged stock be transferred
to its name and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI
wrote CBC expressing its inability to accede to CBC's request in view of Calapatia's unsettled
accounts with the club. Despite the foregoing, Notary Public de Vera held a public auction on 17

September 1985 and CBC emerged as the highest bidder at P20,000.00 for the pledged stock.
Consequently, CBC was issued the corresponding certificate of sale. On 21 November 1985, VGCCI
sent Calapatia a notice demanding full payment of his overdue account in the amount of
P18,783.24. Said notice was followed by a demand letter dated 12 December 1985 for the same
amount and another notice dated 22 November 1986 for P23,483.24. On 4 December 1986, VGCCI
caused to be published in the newspaper Daily Express a notice of auction sale of a number of its
stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's
own share of stock (Stock Certificate 1219). Through a letter dated 15 December 1986, VGCCI
informed Calapatia of the termination of his membership due to the sale of his share of stock in the
10 December 1986 auction. On 5 May 1989, CBC advised VGCCI that it is the new owner of
Calapatia's Stock Certificate 1219 by virtue of being the highest bidder in the 17 September 1985
auction and requested that a new certificate of stock be issued in its name. On 2 March 1990,
VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held
on 10 December 1986 for P25,000.00. On 9 March 1990, CBC protested the sale by VGCCI of the
subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the
nullification of the 10 December 1986 auction and for the issuance of a new stock certificate in its
name. On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of
jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and on
27 August 1990 denied CBC's motion for reconsideration. On 20 September 1990, CBC filed a
complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of
Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto;
for the issuance of a new certificate in petitioner's name; and for damages, attorney's fees and
costs of litigation. On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in
favor of VGCCI, stating in the main that considering that the said share is delinquent, VGCCI had
valid reason not to transfer the share in the name of CBC in the books of VGCCI until liquidation of
delinquency. Consequently, the case was dismissed. On 14 April 1992, Hearing Officer Perea denied
CBC's motion for reconsideration. CBC appealed to the SEC en banc and on 4 June 1993, the
Commission issued an order reversing the decision of its hearing officer; holding that CBC has a
prior right over the pledged share and because of pledgor's failure to pay the principal debt upon
maturity, CBC can proceed with the foreclosure of the pledged share; declaring that the auction sale
conducted by VGCCI on 10 December 1986 is declared NULL and VOID; and ordering VGCCI to issue
another membership certificate in the name of CBC. VGCCI sought reconsideration of the order.
However, the SEC denied the same in its resolution dated 7 December 1993. The sudden turn of
events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of
Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing
officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed CBC's
original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is
not intra-corporate; nullifying the SEC orders and dismissing CBCs complaint. CBC moved for
reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October
1994. CBC filed the petition for review on certiorari.
Issue: Whether CBC is bound by VGCCI's by-laws.
Held: In order to be bound, the third party must have acquired knowledge of the pertinent by-laws
at the time transaction or agreement between said third party and the shareholder was entered
into. Herein, at the time the pledge agreement was executed. VGCCI could have easily informed
CBC of its by-laws when it sent notice formally recognizing CBC as pledgee of one of its shares
registered in Calapatia's name. CBC's belated notice of said by-laws at the time of foreclosure will
not suffice. By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or members
and directors and officers with relation thereto and among themselves in their relation to it. In other
words, by-laws are the relatively permanent and continuing rules of action adopted by the
corporation for its own government and that of the individuals composing it and having the
direction, management and control of its affairs, in whole or in part, in the management and control

of its affairs and activities. The purpose of a by-law is to regulate the conduct and define the duties
of the members towards the corporation and among themselves. They are self-imposed and,
although adopted pursuant to statutory authority, have no status as public law. Therefore, it is the
generally accepted rule that third persons are not bound by by-laws, except when they have
knowledge of the provisions either actually or constructively. For the exception to the general
accepted rule that third persons are not bound by by-laws to be applicable and binding upon the
pledgee, knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time
of foreclosure will not affect pledgee's right over the pledged share. Article 2087 of the Civil Code
provides that it is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists maybe alienated for the payment to the
creditor. Further, VGCCI's contention that CBC is duty-bound to know its by-laws because of Article
2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with
the diligence of a good father of a family, fails to convince. CBC was never informed of Calapatia's
unpaid accounts and the restrictive provisions in VGCCI's by-laws. Furthermore, Section 63 of the
Corporation Code which provides that "no shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The
term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from any other
transaction." Herein, the subscription for the share in question has been fully paid as evidenced by
the issuance of Membership Certificate 1219. What Calapatia owed the corporation were merely the
monthly dues. Hence, Section 63 does not apply.

GRACE vs. CA
FACTS: Grace Christian High School (GCHS) is an educational institution in Grace Village (QC?).
Grace Village Association, Inc. (GVAI)is the homeowners association in Grace Village. GVAI has an
existing by-laws which was already in effect since 1968. But in 1975, the board of directors made a
draft amending the by-laws whereby the representative of GCHS shall have a permanent seat in the
15-seat board. The draft however was never presented to the general membership for approval. But
nevertheless, the representative of GCHS held a seat in the board for 15 years until in 1990 when a
proposal was made to the board to reconsider the practice of allowing the GCHS representative in
taking a permanent seat. Thereafter, an election was scheduled for the 15 seat in the board. GCHS
opposed the election as it insists that the election should only be for 14 directors because it has a
permanent seat. GVAI argued that GCHS claim has no basis because the 1975 proposed
amendment was never ratified. GCHS averred that it was ratified when it was allowed to take the
seat for 15 years and as such its right has already vested.
ISSUE: Whether or not the representative from Grace Christian High School should be allowed to
have a permanent seat in the board of directors.
HELD: No. The Corporation Code is clear when it provides that members of the board of a
corporation must be elected by the stockholders (stock corporation) or the members (non-stock
corporation). Admittedly, there are corporations who allow some of their directors to sit in the board
without being elected but such practice cannot prevail over provisions of law. Practice, no matter
how long continued, cannot give rise to any vested right if it is contrary to law. Further, there is no
reason as to why a representative from GCHS should be given an automatic seat. It should therefore
go through the process of election. It cannot also be argued that the draft of the by-laws in 1975
was ratified when GCHS was allowed to take its seat for 15 years without an election. In the first
place, the proposal was merely a draft and even if passed and approved by the general
membership, it cannot be given effect because it is void and contrary to the law. GCHS seat in the
corporate board is at best merely tolerated by GVAI.