Agdao Residents Inc. vs. Maramion

In non-stock corporations, membership termination must strictly comply with the procedures prescribed in the articles of incorporation or by-laws, including due notice and opportunity to be heard; and transfers of corporate property to directors or officers are voidable under Section 32 of the Corporation Code unless they are fair, reasonable, approved without the participation of the interested directors, and serve a legitimate corporate purpose, otherwise constituting a breach of fiduciary duty.

Agdao Landless Residents Association, Inc. (ALRAI) is a non-stock, non-profit corporation organized to assist landless residents in Davao City. Dakudao & Sons, Inc. donated 46 titled lots to ALRAI, subject to a five-year restriction in one deed prohibiting partition or distribution to individual members without written authority from the donor. Disputes arose when ALRAI's board of directors transferred several lots to themselves and other individuals allegedly as compensation for services and financial assistance, and subsequently expelled members who questioned these transactions.

• ALRAI is a non-stock, non-profit corporation duly organized under Philippine laws, with petitioner Armando Javonillo as President and Ma. Acelita Armentano as Secretary, among other directors.
• Dakudao & Sons, Inc. executed six Deeds of Donation in favor of ALRAI covering 46 titled lots; one deed contained a five-year prohibition against partitioning or distributing individual titles to members without written authority from the donor, under pain of reversion.
• In January 2000, ALRAI's board of directors and general membership approved the transfer of 10 donated lots to individual petitioners: four lots to Romeo Dela Cruz, two lots to Javonillo, two lots to Armentano, and two lots to Asuncion Alcantara (widow of ALRAI's former counsel).
• Alcantara subsequently sold one lot to Lily Loy.
• Respondents, who were members of ALRAI, were expelled from the corporation during a general meeting held on July 29, 2001, allegedly for non-payment of dues and consecutive absences from meetings.
• The notice for the July 29, 2001 meeting was signed by the President only on July 27, 2001, giving less than the required three-day notice under ALRAI's by-laws.
• Respondents filed a complaint alleging illegal expulsion without due process, anomalous transfer of donated lands to officers and non-members in violation of the Deeds of Donation, exorbitant fee collections, and failure to produce accounting books.
• The RTC found that respondents were bona fide members who were illegally ousted without proper notice and that the land transfers violated the five-year restriction in the Deed of Donation.
• The CA found that respondents were not given the required three-day notice for the expulsion meeting and that the transfers to Javonillo and Armentano violated the by-law prohibition against compensation for directors, while the transfer to Alcantara violated the five-year restriction.

• Respondents were validly terminated from membership due to delinquency in paying monthly dues and failure to attend three consecutive meetings without justifiable cause, as authorized under Section 5, Article II of the ALRAI Constitution.
• The transfers of land were valid and reasonable: to Dela Cruz as compensation for financial assistance; to Alcantara as compensation for legal services rendered by her deceased husband; and to Javonillo and Armentano for their outstanding services and sacrifices in securing the donated lands.
• The Secretary's Certificate from Dakudao & Sons, Inc. removed the five-year restriction on the land transferred to Alcantara.
• Respondents who were expelled lacked personality to sue, and those who were non-members had no standing to file the complaint.

• They were illegally expelled without due process, as they were not given the required three-day written notice prior to the meeting where their expulsion was approved, and they were not afforded an opportunity to be heard.
• The transfers of donated lands to the directors and officers violated Section 32 of the Corporation Code on dealings of directors, lacked legitimate corporate purpose, and were unconscionable, particularly the transfer to Alcantara as attorney's fees.
• The transfers violated the five-year restriction in the Deed of Donation.
• Lily Loy was a buyer in bad faith, having purchased the land at a grossly undervalued price while knowing of the land dispute.
• They were entitled to inspect corporate books and demand accounting under the ALRAI Constitution and the Corporation Code.

• Procedural:
  • Whether the complaint, which sought to recover corporate property allegedly misappropriated by directors, should have been filed as a derivative suit rather than an individual suit.
• Substantive Issues:
  • Whether respondents' termination of membership from ALRAI was valid and complied with due process and the corporation's by-laws.
  • Whether the transfers of the donated lots to petitioners Javonillo, Armentano, Dela Cruz, Alcantara, and Loy were valid and in accordance with Section 32 of the Corporation Code.

• Procedural:
  • While strictly speaking the cause of action pertaining to corporate property required a derivative suit, the Supreme Court liberally treated the case as one pursued by the corporation to protect its rights, given that: (1) the RTC had jurisdiction over intra-corporate disputes under RA 8799 and PD 902-A; (2) petitioners never objected to the suit's institution on this ground in prior proceedings; (3) the reliefs sought (annulment of transfers) ultimately redounded to the benefit of ALRAI and did not involve premature distribution of assets to members; and (4) there was substantial compliance with the requisites of a derivative suit (membership at time of wrong, demand for relief, and injury to the corporation).
• Substantive:
  • The termination of respondents' membership was illegal. Section 91 of the Corporation Code mandates that termination must follow the manner and causes provided in the articles of incorporation or by-laws. The ALRAI Constitution required at least three days' written notice before any meeting, but the notice for the July 29, 2001 expulsion meeting was given only two days prior. Furthermore, the grounds cited (non-payment of dues and absences) only warranted suspension or fines under the by-laws, not automatic termination. The expulsion violated respondents' right to due process.
  • All transfers of donated lots to Javonillo, Armentano, Dela Cruz, Alcantara, and Loy were declared void. 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 and excessive, violating the Canons of Professional Ethics and the Rules of Court regarding contingent fees. The transfers to Javonillo and Armentano violated Section 32 of the Corporation Code because the interested directors participated in the approval, there was no full disclosure, and the contract was not fair and reasonable. Directors presumptively serve without compensation, and they cannot vote for their own compensation. The transfer to Dela Cruz lacked evidence to prove the alleged financial assistance or its commensurate value. Alcantara could not validly transfer to Loy as she had no title, and Loy was a buyer in bad faith.

• Termination of Membership in Non-Stock Corporations — Under Section 91 of the Corporation Code, membership in a non-stock, non-profit corporation shall be terminated only in the manner and for the causes provided in its articles of incorporation or by-laws, and must comply with due process requirements including proper notice and opportunity to be heard.
• Dealings of Directors with the Corporation (Section 32) — A contract between a corporation and one or more of its directors is voidable unless: (a) the director's presence is not necessary for a quorum; (b) the director's vote is not necessary for approval; (c) the contract is fair and reasonable under the circumstances; and (d) for officers, previously authorized by the board. Ratification requires a two-thirds vote of members with full disclosure and proof of fairness.
• Fiduciary Duty of Directors — Directors occupy a fiduciary relation toward the corporation and its stockholders; they cannot contract with the corporation where they act for both themselves and the corporation, and they presumptively serve without compensation.
• Derivative Suit vs. Individual Suit — A derivative suit is instituted by a shareholder or member for and in behalf of the corporation to enforce a corporate cause of action against wrongdoing directors or officers, whereas an individual suit seeks redress for personal injury.
• Reasonableness of Attorney's Fees — Contingent fee agreements must be reasonable under all circumstances, subject to court supervision, and must not be unconscionable or excessive.

• "Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws."
• "The requirement of due notice becomes more essential especially so since the ALRAI Constitution provides for the penalties to be imposed in cases where any member is found to be in arrears in payment of contributions, or is found to be absent from any meeting without any justifiable cause."
• "The lack of legitimate corporate purpose is even more emphasized when Javonillo and Armentano, as a director and an officer of ALRAI, respectively, violated the fiduciary nature of their positions in the corporation."
• "The amount of fee contracted for, standing alone and unexplained, would be sufficient to show that an unfair advantage had been taken of the client, or that a legal fraud had been perpetrated on him."
• "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."

• Evangelista v. Santos — Cited to distinguish derivative suits from individual suits and to explain that stockholders may not directly claim damages for loss of corporate assets for themselves.
• Commart (Phils.), Inc. v. Securities and Exchange Commission — Cited to illustrate that a suit for the recovery of corporate income diverted to private accounts is a derivative suit for the benefit of the corporation.
• Rayos v. Hernandez — Cited for the guidelines in determining the reasonableness of attorney's fees in contingent fee arrangements.
• Spouses Cadavedo v. Lacaya — Cited to illustrate that contingent attorney's fees consisting of a large portion of the subject property may be deemed excessive and unconscionable.
• Central Cooperative Exchange, Inc. v. Enciso — Cited for the principle that directors of corporations presumptively serve without compensation.
• Filipinas Port Services, Inc. v. Go — Cited for the requisites of a derivative suit.
• Villamor, Jr. v. Umale — Cited to distinguish individual suits from derivative suits.

• Section 91 of the Corporation Code (Batas Pambansa Blg. 68) — Governs the termination of membership in non-stock corporations, requiring compliance with the articles or by-laws.
• Section 32 of the Corporation Code — Regulates dealings of directors, trustees, or officers with the corporation, rendering such contracts voidable unless specific conditions of fairness, disclosure, and proper approval are met.
• Section 36(7) and (11) of the Corporation Code — Defines the power of corporations to deal with property as reasonably necessary to carry out their purposes.
• Sections 74 and 75 of the Corporation Code — Grants stockholders or members the right to inspect corporate books and demand financial statements.
• Section 5 of Presidential Decree No. 902-A — Vests jurisdiction in courts of general jurisdiction over intra-corporate disputes involving fraud or misrepresentation by directors detrimental to the corporation or members.
• Republic Act No. 8799 (The Securities Regulation Code) — Transferred jurisdiction over intra-corporate disputes from the SEC to the Regional Trial Courts.
• Rule 138, Section 24 of the Rules of Court — Provides that attorney's fees must be reasonable and that written contracts for services control unless found unconscionable.
• Article 19 of the Civil Code — Cited by the CA regarding the principle of good faith and due process in the expulsion of members.