Agdao Landless Residents Association, Inc. vs. Maramion

Corporate property transfers to directors and officers are void where made without legitimate corporate purpose, fair and reasonable consideration, and compliance with the safeguards of Section 32 of the Corporation Code against self-dealing, particularly where the directors personally benefit from the transaction and ratification is defective for want of the required two-thirds vote and full disclosure.

Agdao Landless Residents Association, Inc. (ALRAI) is a non-stock, non-profit corporation organized to provide housing assistance and promote the welfare of landless residents. In 1999, Dakudao & Sons, Inc. executed six Deeds of Donation donating 46 titled lots to ALRAI for the benefit of its members. One deed imposed a five-year prohibition against partitioning or distributing individual certificates of title to members without written authority from the donor, providing that violation would render the donation void and revert title to the donor. In January 2000, ALRAI's board of directors resolved to transfer ten of the donated lots to individual officers and members, including President Armando Javonillo, Secretary Ma. Acelita Armentano, Romeo Dela Cruz, Asuncion Alcantara (widow of ALRAI's former counsel), and subsequently to Lily Loy (who purchased from Alcantara). When respondents, comprising ousted ALRAI members, demanded accounting and justification for these transfers, petitioners expelled them from the corporation allegedly for non-payment of dues and absences from meetings.

• Nature of the Corporation: ALRAI is a non-stock, non-profit corporation organized under Philippine laws to assist landless residents by providing shelter and promoting their general welfare.
• The Donation: On September 2, 1999, Dakudao & Sons, Inc. executed six Deeds of Donation covering 46 lots in favor of ALRAI. One deed contained a five-year restriction prohibiting ALRAI from partitioning or distributing individual titles to members without written authority from Dakudao, violation of which would render the donation void and revert title to the donor; the other five deeds contained no such restriction.
• The Board Resolutions and Transfers: In board and stockholders meetings held on January 5 and 9, 2000, ALRAI resolved to transfer ten donated lots to individual petitioners: four lots to Romeo Dela Cruz; two lots to Armando Javonillo (President); two lots to Ma. Acelita Armentano (Secretary); two lots to Asuncion Alcantara (widow of former counsel); and one lot (subsequently sold to Lily Loy) transferred to Alcantara.
• The Expulsion: Respondents, who were members of ALRAI, questioned the transfers and demanded accounting from the board. On July 29, 2001, petitioners expelled respondents allegedly for non-payment of membership dues and consecutive absences from meetings. The notice for the expulsion meeting was signed by the President only on July 27, 2001, providing less than the three-day notice required under Section 2, Article III of the ALRAI Constitution. No hearing was conducted prior to the expulsion.
• The Complaint and Answer: Respondents filed a complaint for reinstatement, annulment of transfers, production of accounting books, and damages. Petitioners countered that the expulsion was valid under Section 5, Article II of the ALRAI Constitution and that the transfers were valid compensation for financial assistance (Dela Cruz), legal services (Alcantara), and sacrifices rendered by officers (Javonillo and Armentano).
• Lower Court Findings: The RTC found respondents to be bona fide members illegally expelled without due process, and annulled all land transfers for violating the five-year restriction and corporate purpose. The CA affirmed the illegal expulsion but modified the land transfer rulings, upholding the transfers to Dela Cruz and Loy as valid while voiding those to Javonillo, Armentano, and Alcantara for violating the prohibition on director compensation and the five-year restriction.

• Validity of Expulsion: Petitioners maintained that respondents were validly expelled for delinquency in paying monthly dues and failure to attend three consecutive meetings without justifiable cause, as authorized by Section 5, Article II of the ALRAI Constitution.
• Justification for Land Transfers: Petitioners argued that the transfers were valid: to Alcantara as attorney's fees for legal services rendered by her deceased husband; to Dela Cruz as compensation for financial assistance extended to ALRAI; and to Javonillo and Armentano in recognition of their sacrifices and efforts in securing the donated properties.
• Standing: Petitioners contended that respondents who were non-members lacked personality to sue, and that the suit should have been dismissed for failure to file a derivative suit.

• Due Process Violations: Respondents countered that their expulsion violated the ALRAI Constitution's three-day notice requirement and that they were denied opportunity to be heard prior to termination, constituting a deprivation of due process under Section 91 of the Corporation Code and Article 19 of the Civil Code.
• Breach of Fiduciary Duty: Respondents argued that the transfers constituted self-dealing contracts prohibited under Section 32 of the Corporation Code, violated Section 6, Article IV of the ALRAI Constitution prohibiting director compensation except for per diems, and were made without legitimate corporate purpose.
• Violation of Donation Conditions: Respondents maintained that the transfers violated the five-year restriction in the Deed of Donation and that Loy was a purchaser in bad faith who acquired the property at a grossly undervalued price while aware of the dispute.
• Inspection Rights: Respondents asserted their right as members to inspect corporate books and demand accounting under Sections 74 and 75 of the Corporation Code and the ALRAI Constitution.

• Validity of Expulsion: Whether respondents were illegally expelled from ALRAI without due process in violation of the corporation's by-laws and Section 91 of the Corporation Code.
• Nature of Action: Whether the action involving ALRAI's corporate properties should have been brought as a derivative suit, and whether the Court could liberally treat the individual suit as such.
• Validity of Land Transfers: Whether the transfers of donated lots to corporate officers, directors, and their transferees were valid and consistent with corporate powers and fiduciary duties.

• Validity of Expulsion: The expulsion was invalid for failure to comply with due process. Section 5, Article II of the ALRAI Constitution requires specific grounds and procedures for termination, while Section 2, Article III mandates a three-day written notice prior to meetings. The notice for the July 29, 2001 expulsion meeting was signed only on July 27, 2001, providing insufficient notice, and no hearing was conducted to allow respondents to be heard. Under Section 91 of the Corporation Code, membership termination must conform strictly to the articles or by-laws and basic due process requirements. Respondents were therefore reinstated as members with rights to inspect books and demand accounting.
• Nature of Action: The action was treated as a derivative suit despite being filed as an individual complaint. Substantial compliance with the three requisites for derivative suits was established: (1) respondents were members at the time of the wrongful acts; (2) demand for relief was made upon the board but was unheeded, and further demand would have been futile given the threat of expulsion; and (3) the cause of action belonged to ALRAI, as the reliefs sought (annulment of transfers and preservation of assets) redounded to the corporation's benefit, not to respondents' personal gain. Liberal application was warranted by the interest of justice and the case's prolonged pendency.
• Validity of Land Transfers: All transfers of donated lots to Javonillo, Armentano, Dela Cruz, Alcantara, and Loy were void. Section 36 of the Corporation Code limits corporate power to convey property to transactions reasonably necessary for legitimate corporate purposes. The transfers lacked legitimate corporate purpose and were not shown to be fair and reasonable. The transfer to Alcantara as attorney's fees was unconscionable absent proof of special skills or the value of services rendered, and violated the five-year restriction in the Deed of Donation. The transfers to Javonillo and Armentano violated Section 6, Article IV of the ALRAI Constitution prohibiting director compensation and Section 32 of the Corporation Code governing self-dealing contracts, which require that the contract be fair and reasonable, and that ratification, if needed, be by two-thirds vote of members with full disclosure—requirements not met here. The transfer to Dela Cruz lacked evidence supporting the alleged financial assistance, and Loy's purchase from Alcantara was tainted by bad faith.

• Derivative Suit Requisites — A derivative suit requires: (a) the plaintiff was a shareholder/member at the time of the act complained of; (b) exhaustion of intra-corporate remedies or demonstration of futility; and (c) the cause of action belongs to the corporation, not the individual plaintiff. Courts may apply these requirements liberally where justice demands and the reliefs sought benefit the corporation rather than result in premature distribution of assets.
• Due Process in Corporate Expulsion — Termination of membership in non-stock corporations must comply strictly with the procedures and grounds specified in the articles of incorporation or by-laws, including notice and opportunity to be heard, pursuant to Section 91 of the Corporation Code.
• Self-Dealing Contracts (Section 32) — Contracts between a corporation and its directors or officers are voidable unless: (1) the director's presence was not necessary for quorum; (2) the director's vote was not necessary for approval; (3) the contract is fair and reasonable; and (4) for officers, prior board authorization was obtained. Ratification requires approval by two-thirds of the outstanding capital stock or members with full disclosure of the adverse interest.
• Fiduciary Duty of Directors — Directors occupy a fiduciary relationship toward the corporation and its members; they cannot vote themselves compensation for services rendered without clear justification and cannot enter into contracts with the corporation for their personal benefit without satisfying statutory safeguards against self-dealing.

• "The whole purpose of the law authorizing a derivative suit is to allow the stockholders/members to enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action."
• "Being the corporation's agents and therefore, entrusted with the management of its affairs, the directors or trustees and other officers of a corporation occupy a fiduciary relation towards it, and cannot be allowed to contract with the corporation, directly or indirectly, or to sell property to it, or purchase property from it, where they act both for the corporation and for themselves."
• "The Corporation Code therefore tells us that the power of a corporation to validly grant or convey any of its real or personal properties is circumscribed by its primary purpose. It is therefore important to determine whether the grant or conveyance is pursuant to a legitimate corporate purpose, or is at least reasonable and necessary to further its purpose."

• Evangelista v. Santos, 86 Phil. 387 (1950) — Distinguished; the Court noted that unlike in Evangelista, the reliefs sought here did not entail premature distribution of corporate assets but rather preservation for the corporate benefit.
• Commart (Phils.), Inc. v. Securities and Exchange Commission, G.R. No. 85318 (1991) — Followed; recovery of corporate funds for the benefit of the corporation characterizes the action as derivative.
• Rayos v. Hernandez, G.R. No. 169079 (2007) — Followed; contingent fee arrangements must be reasonable and subject to court supervision based on factors including the amount of property affected and the services rendered.
• Spouses Cadavedo v. Lacaya, G.R. No. 173188 (2014) — Followed; attorney's fees consisting of one-half of the subject property were held excessive and unconscionable where no special skills or additional work were shown.

• Section 32, Corporation Code of the Philippines — Governs voidable contracts between corporations and their directors/trustees or officers, requiring fairness and reasonableness and specific conditions for validity or ratification.
• Section 36(7) and (11), Corporation Code — Limits corporate powers to deal with property to transactions reasonably necessary for the lawful business of the corporation or essential to carry out its purposes.
• Section 91, Corporation Code — Mandates that membership termination occur only in the manner and for causes provided in the articles or by-laws.
• Sections 74 and 75, Corporation Code — Grant stockholders and members the right to inspect corporate records and books of accounts and to receive financial statements.
• Article 19, Civil Code of the Philippines — Prohibits the exercise of rights in abuse thereof, applied to the arbitrary expulsion of members.

Presbitero J. Velasco, Jr. (Chairperson), Diosdado M. Peralta, Jose Catral Mendoza (not listed in the text but the text shows Velasco, Jr., Peralta, Perez, Reyes), Lucas P. Bersamin (not listed), Mariano del Castillo (not listed).

Note: The decision lists concurring Justices as Velasco, Jr. (Chairperson), Peralta, Perez, and Reyes.