ASG Law

Tag: By-laws

  • Condominium Foreclosure: Clarifying Authority Under the Condominium Act

    The Supreme Court ruled that a condominium corporation’s Master Deed and By-Laws can grant it the authority to extrajudicially foreclose on a unit owner’s property for unpaid assessments. This decision clarifies that such authority doesn’t solely rely on the Condominium Act itself, but can stem from the contractual agreements within the condominium’s governing documents. For condominium owners and corporations, this means understanding the full scope of the Master Deed and By-Laws is crucial, as they define the rights and obligations regarding assessment collections and foreclosure processes, thereby impacting property rights and financial responsibilities.

    Unpaid Dues and Foreclosure Battles: Who Holds the Power?

    This case revolves around the extrajudicial foreclosure of a condominium unit due to unpaid assessment dues. The heirs of Cresenciano C. De Castro challenged the foreclosure, arguing that Welbilt Construction Corp. and Wack Wack Condominium Corp. lacked the specific authority to initiate such proceedings. The central legal question is whether the Condominium Act, in conjunction with the condominium’s Master Deed and By-Laws, sufficiently empowers the condominium corporation to foreclose on units with delinquent accounts.

    The dispute began when De Castro, the owner of Unit 802 in Wack Wack Condominium, failed to pay assessment dues. This led to the annotation of a lien on his Condominium Certificate of Title (CCT) and subsequent extrajudicial foreclosure proceedings initiated by the petitioners. De Castro then filed a petition with the Securities and Exchange Commission (SEC) questioning the legality of the foreclosure, arguing that the assessments were excessive and the petitioners lacked the necessary authority. After De Castro’s death, his heirs continued the legal battle, ultimately leading to the present Supreme Court decision.

    The Regional Trial Court (RTC) initially sided with the condominium corporation, upholding the validity of the foreclosure. However, the Court of Appeals (CA) reversed this decision, citing the case of First Marbella Condominium Association, Inc. v. Gatmaytan, which emphasized the need for explicit authority to foreclose. The CA found that neither the Condominium Act nor the condominium’s governing documents explicitly granted such authority to the petitioners. This divergence in lower court rulings set the stage for the Supreme Court’s intervention to clarify the extent of a condominium corporation’s power to enforce assessment liens.

    The Supreme Court, in reversing the CA’s decision, clarified the interplay between the Condominium Act, Act No. 3135 (governing extrajudicial foreclosure), and the condominium’s internal governing documents. The Court emphasized that while the Condominium Act itself does not explicitly grant the authority to foreclose, it allows for the creation of liens to enforce assessment obligations. Section 20 of the Condominium Act states:

    Sec. 20. The assessment upon any condominium made in accordance with a duly registered declaration of restrictions shall be an obligation of the owner thereof at the time the assessment is made. The amount of any such assessment plus any other charges thereon, such as interest, costs (including attorney’s fees) and penalties, as such may be provided for in the declaration of restrictions, shall be and become a lien upon the condominium to be registered with the Register of Deeds of the city or province where such condominium project is located. Such notice shall be signed by an authorized representative of the management body or as otherwise provided in the declaration of restrictions. Upon payment of said assessment and charges or other satisfaction thereof, the management body shall cause to be registered a release of the lien.

    Such lien shall be superior to all other liens registered subsequent to the registration of said notice of assessment except real property tax liens and except that the declaration of restrictions may provide for the subordination thereof to any other liens and encumbrances, such liens may be enforced in the same manner provided for by law for the judicial or extra-judicial foreclosure of mortgage or real property. Unless otherwise provided for in the declaration of the restrictions, the management body shall have power to bid at foreclosure sale. The condominium owner shall have the right of redemption as in cases of judicial or extra-judicial foreclosure of mortgages.

    Building on this, the Court referenced Act No. 3135, which dictates the procedure for extrajudicial foreclosure, and related circulars requiring proof of special authority to foreclose. However, the critical distinction in this case was the presence of provisions in the condominium’s Master Deed and By-Laws that explicitly authorized the corporation to enforce collection of unpaid assessments through foreclosure. The Court highlighted the RTC’s findings:

    Thus, Section 1 of the Article V of the By-laws of the Condominium Corporation authorizes the board to assess the unit owner penalties and expenses for maintenance and repairs necessary to protect the common areas or any portion of the building or safeguard the value and attractiveness of the condominium. Under Section 5 of Article [V] of the By-Laws, in the event a member defaults in the payment of any assessment duly levied in accordance with the Master Deed and the By-Laws, the Board of Directors may enforce collection thereof by any of the remedies provided by the Condominium Act and other pertinent laws, such as foreclosure. x x x.

    x x x x

    The Master Deed with Declaration of Restrictions of the Condominium Project is annotated on the Condominium Certificate of title 2826. The Master Deed and By-Laws constitute as the contract between the unit owner and the condominium corporation. As a unit owner, [De Castro] is bound by the rules and restrictions embodied in the said Master Deed and By-Laws pursuant to the provisions of the Condominium Act. Under the Condominium Act (Section 20 of RA 4726) and the by-laws (Section 5 of Article [V]) of the Wack Wack, the assessments  upon a condominium constitute a lien on such condominium and may be enforced by judicial or extra-judicial foreclosure.

    This contrasts with the First Marbella case, where the condominium corporation’s authority to foreclose was based solely on a notice of assessment. In this case, the authority stemmed from the contractual agreement between the unit owner and the condominium corporation, as embodied in the Master Deed and By-Laws. Furthermore, the Court pointed to a 1984 Board Resolution, signed by De Castro himself, authorizing the condominium president and legal counsel to effect foreclosure on units with delinquent accounts. This evidence solidified the Court’s conclusion that the petitioners had the necessary authority to initiate the foreclosure proceedings.

    The practical implication of this decision is significant for both condominium corporations and unit owners. Condominium corporations are empowered to enforce assessment liens through foreclosure, provided that such authority is clearly outlined in their Master Deed and By-Laws. Unit owners, on the other hand, are bound by these documents and must be aware of their obligations regarding assessment payments and the potential consequences of default. Therefore, a clear understanding of the condominium’s governing documents is essential for all parties involved.

    Moreover, this case underscores the importance of proper documentation and adherence to procedural requirements in foreclosure proceedings. Condominium corporations must ensure that all notices and communications are properly served on delinquent unit owners and that all legal requirements are met. Failure to do so could result in the invalidation of the foreclosure and potential legal liability. For unit owners, it is crucial to understand their rights and obligations under the Condominium Act and the condominium’s governing documents, and to seek legal advice if they are facing foreclosure proceedings.

    FAQs

    What was the key issue in this case? The central issue was whether the condominium corporation had sufficient authority to extrajudicially foreclose on a unit owner’s property for unpaid assessments, based on the Condominium Act, Master Deed, and By-Laws. The court clarified that authority could be derived from the condominium’s governing documents.
    What is a Master Deed and By-Laws in relation to condominiums? The Master Deed is a document that establishes the condominium project, while the By-Laws are the rules and regulations governing the administration and management of the condominium corporation and the use of units and common areas. They essentially form the contract between the unit owner and the condominium corporation.
    What did the Court of Appeals decide? The Court of Appeals reversed the RTC’s decision, ruling that the condominium corporation lacked explicit authority to foreclose, based on the precedent set in the First Marbella case. This decision was later overturned by the Supreme Court.
    How did the Supreme Court rule in this case? The Supreme Court reversed the Court of Appeals’ decision, ruling that the condominium corporation did have the authority to foreclose because the Master Deed and By-Laws granted them that power. The court emphasized the contractual obligations of the unit owner.
    What is the significance of Section 20 of the Condominium Act? Section 20 of the Condominium Act establishes that assessments become a lien on the condominium unit and can be enforced through judicial or extra-judicial foreclosure, following the same procedures as mortgage foreclosures. It empowers condominium corporations to secure unpaid dues.
    What was the First Marbella case, and how did it relate to this case? First Marbella Condominium Association, Inc. v. Gatmaytan established that a condominium corporation needs specific authority to foreclose. This case was initially used by the Court of Appeals to rule against the condominium corporation, but the Supreme Court distinguished it based on the presence of explicit foreclosure provisions in the Master Deed and By-Laws in the present case.
    What should condominium corporations do to ensure they have the authority to foreclose? Condominium corporations should ensure that their Master Deed and By-Laws clearly and explicitly grant them the authority to enforce collection of unpaid assessments through foreclosure. They should also follow all legal and procedural requirements for foreclosure proceedings.
    What should condominium unit owners do if they are facing foreclosure? Condominium unit owners facing foreclosure should carefully review their Master Deed and By-Laws to understand their rights and obligations, and seek legal advice from a qualified attorney to explore their options and protect their interests.
    What is the effect of a Board Resolution in this case? The 1984 board resolution that authorized the president to lead the foreclosure of delinquent units was an important additional factor in this case that further strenghtened the petitioner’s claim that they have the authority to foreclose the unit.

    This case serves as a reminder of the importance of understanding the legal framework governing condominium ownership and management. The Supreme Court’s decision clarifies the extent to which condominium corporations can enforce assessment liens through foreclosure, while also emphasizing the contractual obligations of unit owners. It is essential for all parties involved to be aware of their rights and responsibilities under the Condominium Act, the Master Deed, and the By-Laws.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: WELBILT CONSTRUCTION CORP. VS. HEIRS OF CRESENCIANO C. DE CASTRO, G.R. No. 210286, July 23, 2018

  • Condominium Disputes: Demolition Rights and the Limits of Good Faith Construction

    The Supreme Court has ruled that the general provisions of the Civil Code regarding builders in good faith do not apply to condominium disputes governed by the Condominium Act. This means that a condominium corporation can demand the removal of unauthorized constructions by a unit owner, even if the unit owner acted in good faith, without needing to offer compensation or purchase the improvement. This decision clarifies the rights and obligations of unit owners and condominium corporations, reinforcing the primacy of the Condominium Act and the corporation’s governing documents in resolving disputes over common areas.

    Whose Airspace Is It Anyway? Illegal Condo Construction Sparks Legal Showdown

    This case revolves around Legaspi Towers 200, Inc. (Legaspi Towers), a condominium building, and Leviste Management System, Inc. (LEMANS), a unit owner who constructed an additional unit, named Concession 4, on top of their existing unit. Legaspi Towers argued that LEMANS’ construction was illegal because it violated the Condominium Act and the building’s Master Deed and By-Laws. LEMANS contended they acted in good faith, relying on an agreement with the then-president of Legaspi Towers and sought protection as a builder in good faith under Article 448 of the Civil Code. The central legal question before the Supreme Court was whether the provisions of the Civil Code on builders in good faith applied to this condominium dispute.

    The heart of the legal debate centered on Article 448 of the Civil Code, which addresses the rights of a landowner when someone builds in good faith on their property. This article allows the landowner to either appropriate the construction by paying indemnity or require the builder to purchase the land. However, the Supreme Court clarified that Article 448 typically applies when the landowner and builder are distinct parties without pre-existing contractual or legal obligations governing their relationship. In this case, the parties’ relationship was governed by the Condominium Act, the Master Deed, and the By-Laws of the condominium corporation, establishing a distinct legal framework.

    Building on this principle, the Court emphasized the unique nature of condominium ownership. Unit owners are automatically members of the condominium corporation, making them co-owners of the common areas. The Condominium Act, as a special law, takes precedence over the general provisions of the Civil Code. To reiterate, it is a long-standing principle that Generalia specialibus non derogant, meaning a general law does not nullify a specific law. This principle ensures that the specific regulations governing condominiums prevail over the more general rules of property law outlined in the Civil Code. The Court noted that allowing Article 448 to override the Condominium Act would undermine the integrity of condominium governance and potentially lead to structural issues and disputes.

    Articles 448 and 546 of the Civil Code on builders in good faith are therefore inapplicable in cases covered by the Condominium Act where the owner of the land and the builder are already bound by specific legislation on the subject property (the Condominium Act), and by contract (the Master Deed and the By-Laws of the condominium corporation).

    Furthermore, the Court pointed out that the Master Deed of Legaspi Towers explicitly stated the building’s structure, including the number of stories. LEMANS’ construction of Concession 4 violated this Master Deed. Also, the Condominium Act requires that any amendments to the Master Deed, such as adding another level to the building, must be consented to by all registered owners. LEMANS failed to secure this consent, rendering the construction illegal.

    In addition to violating the Master Deed and the Condominium Act, LEMANS’ construction also ran afoul of the By-Laws of Legaspi Towers. These By-Laws specifically require that any extraordinary improvements or additions to the common areas, particularly those involving structural modifications, must be approved by the members in a regular or special meeting. LEMANS did not obtain this approval. The Court emphasized that a corporation, like Legaspi Towers, can only be bound by the actions of its Board of Directors, not by individual agreements with its officers. This underscores the importance of adhering to the formal processes outlined in the corporation’s governing documents.

    The Supreme Court ultimately sided with Legaspi Towers, holding that they had the right to demand the removal of Concession 4 at LEMANS’ expense. The Court reasoned that applying Article 448 in this situation would be unjust, as it would force Legaspi Towers to either appropriate the illegal structure (and bear the cost of its demolition) or allow it to continue in violation of the law and the Master Deed. The Court rejected the argument that LEMANS’ good faith justified the application of Article 448, emphasizing that the Condominium Act and the condominium corporation’s governing documents took precedence.

    This decision reinforces the principle that condominium ownership is subject to specific regulations designed to ensure the structural integrity and harmonious living environment within the condominium. Unit owners cannot unilaterally alter common areas or violate the Master Deed and By-Laws. Condominium corporations have the right to enforce these regulations and protect the interests of all unit owners. This ruling provides clarity and guidance for resolving disputes over unauthorized constructions in condominiums, emphasizing adherence to the Condominium Act and the corporation’s governing documents.

    FAQs

    What was the key issue in this case? The key issue was whether the provisions of the Civil Code on builders in good faith (Article 448) applied to a condominium dispute where a unit owner constructed an unauthorized addition to the building.
    What did the Supreme Court rule? The Supreme Court ruled that Article 448 of the Civil Code does not apply to condominium disputes governed by the Condominium Act, Master Deed, and By-Laws.
    Why did the Court say Article 448 didn’t apply? The Court reasoned that the relationship between a condominium corporation and its unit owners is governed by specific laws (the Condominium Act) and contracts (Master Deed and By-Laws), which take precedence over the general provisions of the Civil Code.
    What is the significance of the Condominium Act? The Condominium Act is a special law designed to address the unique aspects of condominium ownership, including the co-ownership of common areas and the need to maintain structural integrity.
    What did the Master Deed and By-Laws say? The Master Deed explicitly stated the building’s structure, while the By-Laws required approval for any extraordinary improvements or additions to common areas, which LEMANS did not obtain.
    What was the consequence for LEMANS? LEMANS was ordered to remove the unauthorized construction (Concession 4) at its own expense.
    Can a condominium corporation force the demolition of illegal structures? Yes, the Supreme Court affirmed the right of the condominium corporation to demand the removal of unauthorized structures that violate the Condominium Act, Master Deed, and By-Laws.
    What does good faith mean in this context? Even if a unit owner acted in good faith by relying on an agreement with a condominium officer, this does not override the requirements of the Condominium Act, Master Deed, and By-Laws.
    Does this case change the process of amending Master Deeds? This case stresses the importance of following protocol when amending Master Deeds; it underscores that the consent of all the registered owners should be obtained.

    This Supreme Court decision provides critical clarification on the rights and responsibilities within condominium settings. It reinforces that while unit owners possess rights, those rights are subordinate to the governing documents of the condominium and the overall framework established by the Condominium Act. Adherence to these regulations is essential for maintaining order, structural integrity, and harmonious community living.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: Leviste Management System, Inc. v. Legaspi Towers 200, Inc., G.R. Nos. 199353 & 199389, April 04, 2018

  • Corporate Governance: Upholding By-Laws in Director Removal Disputes

    The Supreme Court ruled that a special stockholders’ meeting called by an unauthorized body is invalid, and actions taken during that meeting, such as the removal of directors, are void. Subsequent ratification attempts during annual meetings cannot validate the initial, improperly called meeting. This decision reinforces the importance of adhering to corporate by-laws and statutory requirements in the removal and election of directors, ensuring that corporate governance remains transparent and legally sound.

    Makati Sports Club: When Club Oversight Exceeds Legal Authority

    This case revolves around a power struggle within the Makati Sports Club (MSC), a domestic corporation, concerning the removal of its directors. Alarmed by rumored financial anomalies, the MSC Oversight Committee (MSCOC), composed of past presidents, demanded the resignation of the incumbent directors, the Bernas Group. When the Bernas Group refused, the MSCOC called a special stockholders’ meeting resulting in the removal of the Bernas Group and the election of the Cinco Group. The core legal question is whether the MSCOC had the authority to call such a meeting and whether the subsequent actions were valid.

    The Bernas Group challenged the validity of the special stockholders’ meeting, arguing that only the corporate secretary, the president, or the board of directors could call such a meeting according to the Corporation Code and MSC’s by-laws. The Cinco Group argued that the MSCOC’s actions were justified due to the corporate secretary’s refusal to call the meeting. Subsequently, at the annual stockholders’ meeting, the actions of the special meeting were ratified, further complicating the dispute.

    The Supreme Court grounded its decision in Section 28 of the Corporation Code, which stipulates the process for removing directors or trustees:

    Sec. 28. Removal of directors or trustees. – Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock… A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock…

    The Court emphasized that the power to manage a corporation rests with the board of directors. It highlighted that the by-laws explicitly authorize only the President and the Board of Directors to call a special meeting. The MSCOC, while tasked with overseeing the affairs of the corporation, lacks the explicit authority to call special meetings or exercise other corporate powers. This underscored the principle that a corporation acts through its board of directors or duly authorized officers, ensuring accountability to shareholders.

    The Court further explained the fiduciary duty of directors, stating:

    The board of directors, in drawing to itself the power of the corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that the board should exercise not only care and diligence, but utmost good faith in the management of the corporate affairs.

    The Court also noted that illegal acts of a corporation, which contravene law, morals, or public order, are void and cannot be validated through ratification or estoppel. The Court distinguished between illegal corporate acts and ultra vires acts (those beyond the scope of the corporation’s articles of incorporation). The former are void ab initio and cannot be ratified, while the latter are merely voidable and can be ratified by the stockholders.

    The Cinco Group’s reliance on the de facto officership doctrine was also dismissed by the Court. This doctrine typically applies to third parties dealing with a corporation, protecting their interests when officers, who appear to be duly authorized, act on behalf of the corporation. The Cinco Group could not claim this status, as they were not validly elected in the first place.

    The Court acknowledged that, had the stockholders petitioned the Securities and Exchange Commission (SEC) directly to call a special meeting, the outcome might have been different. Section 50 of the Corporation Code grants the SEC the authority to order a meeting if there is no authorized person to call one, or if such a person refuses to do so.

    Despite finding the special meeting invalid, the Court upheld the validity of subsequent annual stockholders’ meetings, as they were conducted according to the by-laws and, in one instance, under SEC supervision. Therefore, the Bernas Group could not rely on the holdover principle to remain in office, as new directors had been duly elected in the valid annual meetings.

    FAQs

    What was the key issue in this case? The central issue was whether the MSCOC had the authority to call a special stockholders’ meeting to remove and replace the incumbent board of directors of Makati Sports Club. The court found that only certain parties may call a meeting and that the MSCOC had no such right.
    Why was the special stockholders’ meeting declared invalid? The special meeting was deemed invalid because it was called by the MSCOC, which lacked the authority to do so under the Corporation Code and MSC’s by-laws. Only the president, board of directors, or, under certain conditions, the corporate secretary or a petition to the SEC could call such a meeting.
    What is the de facto officership doctrine, and why didn’t it apply in this case? The de facto officership doctrine protects third parties who deal with a corporation in good faith, relying on the apparent authority of its officers. It did not apply here because the Cinco Group’s initial election was invalid, and they could not claim to be legitimate officers of the corporation.
    Can an invalid corporate act be ratified? The Court distinguished between illegal corporate acts, which are void from the beginning and cannot be ratified, and ultra vires acts, which are merely voidable and can be ratified by stockholders. Since the act of improperly calling the meeting was in violation of corporation code it was deemed an illegal act.
    What is the significance of the annual stockholders’ meetings in this case? While the special meeting was invalid, the Court upheld the annual stockholders’ meetings because they were conducted according to the MSC’s by-laws and, in one instance, under SEC supervision. This meant that valid elections could take place and the holdover principle was not applicable
    What recourse did the stockholders have if the corporate secretary refused to call a meeting? According to the Corporation Code, the stockholders could have petitioned the SEC to order the corporate secretary to call a meeting. The SEC has regulatory powers to intervene in such situations and ensure compliance with corporate governance rules.
    What does this case teach us about corporate by-laws? This case underscores the importance of adhering to corporate by-laws. The by-laws outline the rules for internal governance, and strict compliance is necessary for the validity of corporate actions. They are treated as private laws of the corporation that members must respect.
    What was the final ruling on the removal of Jose A. Bernas and the sale of his shares? The Court ruled that the expulsion of Jose A. Bernas and the public auction of his shares were void and without legal effect. This was because these actions were taken by the Cinco Group, who had no legal authority to act as directors due to the invalid special meeting.

    This case serves as a reminder to corporations to adhere strictly to their by-laws and the Corporation Code when making decisions regarding the removal and election of directors. Deviating from these established procedures can render corporate actions invalid and lead to protracted legal battles. Strict adherence to the rule of law ensures corporate stability and protects the rights and interests of all stakeholders.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: Jose A. Bernas vs. Jovencio F. Cinco, G.R. Nos. 163368-69, July 01, 2015

  • Corporate Governance: Ensuring Elected Boards in Associations

    The Supreme Court affirmed that a representative from Grace Christian High School could not permanently sit on the Grace Village Association’s board of directors without being elected. This decision reinforces the principle that all members of a corporate board must be duly elected by the members of the association, ensuring democratic governance and compliance with corporation law. The ruling clarifies that historical practices cannot override legal requirements for board membership.

    Can a School Claim a Permanent Seat? The Battle for Board Representation

    Grace Christian High School sought to maintain a permanent seat on the board of directors of Grace Village Association, Inc., a homeowner’s association. For fifteen years, from 1975 to 1989, the school’s representative had been recognized as a permanent, unelected member. However, in 1990, the association began to reconsider this arrangement, leading to a legal dispute. The central question before the Supreme Court was whether the school had a vested right to a permanent seat, despite not being elected by the association’s members. This case highlights the tension between historical practices and the legal requirements for corporate governance, specifically regarding the election of board members.

    The association’s original by-laws, adopted in 1968, stipulated that the board of directors would be elected annually by the members. In 1975, a committee drafted an amendment to the by-laws that would have granted Grace Christian High School a permanent seat on the board. However, this amendment was never formally approved by the general membership. Despite the lack of formal approval, the association allowed the school to have a permanent seat for fifteen years. The association’s committee on election then decided to reexamine this practice, asserting that all directors should be elected to ensure democratic representation. This decision prompted the school to file a suit for mandamus, seeking to compel the association to recognize its right to a permanent seat.

    The Home Insurance and Guaranty Corporation (HIGC) dismissed the school’s action, a decision that was subsequently affirmed by the appeals board. The HIGC based its decision on the opinion of the Securities and Exchange Commission (SEC), which stated that allowing unelected members on the board was contrary to both the association’s existing by-laws and Section 92 of the Corporation Code. This section outlines the election and term of trustees for non-stock corporations. The HIGC appeals board emphasized that the school was not being deprived of its right to nominate representatives to the board but that the directors were correcting a long-standing practice lacking legal basis. The Court of Appeals upheld the HIGC’s decision, affirming that there was no valid amendment to the association’s by-laws due to the failure to comply with the requirement of affirmative vote by the majority of the members. The appellate court cited Article XIX of the by-laws, which implements Section 22 of the Corporation Law, requiring majority approval for any amendments.

    The Supreme Court considered whether the proposed amendment had been effectively ratified through long-standing implementation. The Court referred to Sections 28 and 29 of the Corporation Law, and subsequently Section 23 of the Corporation Code, which require that members of the board of directors be elected from among the stockholders or members. According to the Court:

    §28. Unless otherwise provided in this Act, the corporate powers of all corporations formed under this Act shall be exercised, all business conducted and all property of such corporations controlled and held by a board of not less than five nor more than eleven directors to be elected from among the holders of stock or, where there is no stock, from the members of the corporation: Provided, however, That in corporations, other than banks, in which the United States has or may have a vested interest, pursuant to the powers granted or delegated by the Trading with the Enemy Act, as amended, and similar Acts of Congress of the United States relating to the same subject, or by Executive Order No. 9095 of the President of the United States, as heretofore or hereafter amended, or both, the directors need not be elected from among the holders of the stock, or, where there is no stock from the members of the corporation. (emphasis added)

    The Court clarified that while some corporations might have unelected members, these individuals typically serve as ex officio members by virtue of holding a particular office. In this case, the school did not claim a right to a seat based on any office held. Therefore, the provision granting the school a permanent seat was deemed contrary to law, and the Court stated that neither long-term implementation nor acquiescence could validate an illegal provision.

    The Court addressed the argument that the SEC lacked the authority to render an opinion on the validity of the provision. The Court noted that the HIGC, not the SEC, decided the case, and the HIGC merely cited the SEC’s opinion as an authority. The Supreme Court ultimately affirmed the decision of the Court of Appeals, emphasizing the necessity of adhering to legal requirements for the election of board members. This ruling underscores the importance of complying with corporate governance principles to ensure fair and democratic representation within associations.

    FAQs

    What was the key issue in this case? The central issue was whether Grace Christian High School had a vested right to a permanent seat on the Grace Village Association’s board of directors without being elected by the members. The Supreme Court ruled against the school, upholding the principle that all board members must be elected.
    Why did Grace Christian High School believe it had a right to a permanent seat? The school based its claim on a proposed amendment to the association’s by-laws from 1975, which granted them a permanent seat. Although the amendment was never formally approved, the school had been allowed to have a representative on the board for fifteen years.
    What was the association’s argument against the school’s claim? The association argued that the proposed amendment was never properly ratified and that allowing an unelected member on the board violated both the association’s by-laws and the Corporation Code. They emphasized the importance of democratic elections.
    What did the Securities and Exchange Commission (SEC) say about the matter? The SEC opined that the practice of allowing unelected members on the board was contrary to the existing by-laws of the association and Section 92 of the Corporation Code. This opinion supported the association’s position.
    What provisions of the Corporation Law were relevant to the decision? Sections 28 and 29 of the Corporation Law, as well as Section 23 of the present Corporation Code, were cited. These provisions require that the board of directors of corporations be elected from among the stockholders or members.
    Can a corporation have unelected members on its board of directors? The Court clarified that while some corporations might have unelected members, these individuals typically serve as ex officio members by virtue of holding a particular office. This was not the case with Grace Christian High School.
    What does “ex officio” mean in the context of board membership? “Ex officio” refers to someone who is a member of a board by virtue of their position or office, rather than through election. For example, the president of a company might automatically be a member of the board.
    Why couldn’t the long-standing practice of allowing a permanent seat validate the school’s claim? The Court stated that neither long-term implementation nor acquiescence could validate a provision that is contrary to law. If a provision violates the law, it cannot be made valid simply through repeated practice.
    What was the final outcome of the case? The Supreme Court affirmed the decision of the Court of Appeals, ruling that Grace Christian High School did not have a right to a permanent seat on the board of Grace Village Association without being elected. This decision upheld the importance of adhering to legal requirements for board membership.

    This case serves as a reminder of the importance of adhering to corporate governance principles and ensuring that all board members are duly elected. It reinforces the idea that historical practices cannot override legal requirements, and that democratic representation within associations is essential for maintaining fairness and transparency.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: Grace Christian High School vs. Court of Appeals, G.R. No. 108905, October 23, 1997