Board of Liquidators vs. Heirs of Kalaw

A corporate general manager entrusted with general management has implied authority to execute contracts necessary to the ordinary business of the corporation without prior board approval when such authority has been established by course of business, usage, and acquiescence; directors who ratify unprofitable contracts in good faith, without dishonest purpose, self-interest, or moral obliquity, are not liable for business losses caused by force majeure.

The National Coconut Corporation (NACOCO) was created as a non-profit governmental organization to protect and develop the coconut industry. Following a charter amendment granting it power to trade in copra, NACOCO engaged in forward sales contracts for future delivery. After four devastating typhoons struck the Philippines in late 1947, causing copra prices to spiral and production to decrease, the corporation was unable to fulfill its contractual obligations, resulting in substantial settlement payments to buyers. The Board of Liquidators, as successor to NACOCO after its dissolution, sought to recover these amounts from the former General Manager and Board members, alleging negligence and breach of trust.

• NACOCO was chartered on May 7, 1940 as a non-profit governmental organization; its charter was amended on August 1, 1946 by Republic Act 5 to authorize copra trading.
• Maximo M. Kalaw served as General Manager and Board Chairman, while defendants Juan Bocar and Casimiro Garcia were board members; defendant Leonor Moll became director on December 22, 1947.
• Between July 30, 1947 and October 28, 1947, Kalaw executed nine forward sales contracts for copra delivery to various buyers (including Louis Dreyfus & Co., Pacific Vegetable Co., and Franklin Baker) without prior board approval, totaling approximately 16,500 tons.
• Four devastating typhoons struck the Philippines between October and December 1947, causing extensive damage to coconut trees, decreasing copra production, destroying warehouses, and causing prices to spiral.
• On December 22, 1947, Kalaw disclosed the contracts and impending losses to the board; no action was taken on that date or at the January 7, 1948 meeting.
• On January 30, 1948, the board unanimously approved the contracts previously executed by Kalaw.
• NACOCO partially performed the contracts, delivering 7,091.45 tons out of 16,500 tons required, and settled claims with various buyers for a total of P1,343,274.52, including a compromise payment of P567,024.52 to Louis Dreyfus & Co.
• NACOCO was abolished by Executive Order 372 on November 24, 1950, and the Board of Liquidators was created to settle its affairs.
• Kalaw died in March 1955 before trial, and Casimiro Garcia also died during the proceedings.

• Kalaw was negligent under Article 1902 of the Old Civil Code for entering into the disputed contracts without prior approval of the board of directors as required by the corporate by-laws.
• The defendant board members, including Kalaw, acted in bad faith and/or breach of trust by approving the contracts on January 30, 1948 despite knowing they would cause heavy losses to the corporation.
• The defendants should be held personally liable for the settlement amounts paid to buyers, which were excessive and unjustified compared to settlements in similar cases involving private traders.
• The board's ratification was invalid and did not cure the defect of lack of prior authority.

• The Board of Liquidators lost its legal personality to continue the suit because the three-year period for liquidation under Executive Order 372 had elapsed, and the corporation's existence had terminated.
• The action against the heirs of Kalaw and the estate of Garcia abated upon their deaths because the claim was for money arising from contract, which must be filed in estate proceedings under Section 5, Rule 87 of the Rules of Court.
• Kalaw had implied authority as General Manager to enter into the contracts without prior board approval, based on established corporate practice, course of business, and the nature of copra trading which required quick execution of forward sales.
• The directors acted in good faith in ratifying the contracts; there was no dishonest purpose, moral obliquity, or self-interest, and the losses were caused by force majeure (typhoons), not by any wrongful act of the defendants.
• The directors' decision to ratify was a valid exercise of business judgment to protect the corporation's prestige and treat the General Manager fairly.

• Procedural:
  • Whether the Board of Liquidators has legal personality to continue the suit after the expiration of the three-year period under Executive Order 372.
  • Whether the action against the heirs of Maximo M. Kalaw and the estate of Casimiro Garcia survived their deaths, or whether it abated as a claim for money arising from contract.
• Substantive Issues:
  • Whether General Manager Kalaw had authority to enter into the copra sales contracts without prior approval of the board of directors.
  • Whether the board of directors acted in bad faith or breach of trust in ratifying the contracts on January 30, 1948.
  • Whether the defendants are liable for the losses suffered by NACOCO in settling the claims of the buyers.

• Procedural:
  • The Board of Liquidators has legal personality to continue the suit. Executive Order 372, which abolished NACOCO, created the Board of Liquidators without any time limit for its existence. The Board acts as a trustee for the government (the sole stockholder) and assumes the powers and functions of the abolished boards of directors. Prior jurisprudence in National Abaca and Other Fibers Corporation v. Pore supports the view that the Board of Liquidators escapes the three-year limitation because the President created it specifically to continue the management of pending matters after the corporation's existence ended.
  • The action against the heirs of Kalaw and the estate of Garcia survives. The suit is not merely a claim for money arising from contract under Section 5, Rule 87, but an action for damages based on alleged tortious acts (negligence and breach of trust). Under Section 1, Rule 88 (now Rule 87) of the Rules of Court, actions to recover damages for injury to property survive the death of the defendant and may be prosecuted against the executor, administrator, or heirs.
• Substantive:
  • Kalaw had implied authority to execute the contracts without prior board approval. As General Manager entrusted with general management, he had authority to bind the corporation in matters arising in the usual course of business. The by-law requiring prior approval was effectively waived by the board's course of business and acquiescence, as evidenced by: (1) Kalaw's execution of approximately 60 similar contracts in the previous fiscal year without prior approval, which resulted in substantial profits and earned him a bonus; (2) the board's knowledge of this practice and its ratification of other contracts executed without prior approval; and (3) the necessity of quick execution in forward sales of copra. Ratification by the board on January 30, 1948 cleansed any defect and related back to the time of contract execution.
  • The directors did not act in bad faith or breach of trust. Bad faith imports a dishonest purpose, moral obliquity, conscious doing of wrong, or breach of a known duty through motive of self-interest or ill will. Mere bad judgment or business losses do not constitute bad faith. The record shows no evidence that the directors acted for personal reasons, self-interest, or to defraud the corporation. The ratification was an act of fairness to the General Manager and in the best interest of the corporation's prestige, made in the honest belief that the contracts were valid and binding.
  • The defendants are not liable for the losses. The damage was caused by force majeure (the four typhoons), not by any negligence or wrongful act of the defendants. NACOCO itself pleaded force majeure in its defense against the buyers' suits. The losses resulted from damnum absque injuria—damage without legal wrong. The directors' decision to ratify was a valid exercise of business judgment not reviewable by courts where they acted in good faith.

• Implied Authority of Corporate Officers — A general manager or officer entrusted with general management and control of corporate business has implied authority to make any contract or do any act necessary or appropriate to the conduct of the ordinary business of the corporation without special authority from the board, provided such authority is established by the course of business, usage, practices of the company, and the knowledge or acquiescence of the board.
• Ratification by the Board — Ratification by a corporation of an unauthorized act or contract by its officers relates back to the time of the act or contract ratified and is equivalent to original authority; it cleanses the contract from all its defects from the moment it was constituted.
• Bad Faith of Directors — Bad faith does not connote bad judgment or negligence but imports a dishonest purpose, moral obliquity, conscious doing of wrong, or breach of a known duty through some motive of self-interest or ill will; it partakes of the nature of fraud. Directors are not liable for business losses where they act in good faith and without personal interest or fraud.
• Survival of Actions — Actions to recover damages for injury to property (including tortious acts causing financial loss) survive the death of the defendant and may be prosecuted against the executor, administrator, or heirs, unlike claims for money arising from contract which must be filed in estate settlement proceedings.
• Damnum Absque Injuria — Damage without injury; there is no actionable wrong when damage occurs without a legal wrong, or where the damage is caused by force majeure or circumstances beyond the control of the defendants.

• "bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud."
• "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority."
• "damnum absque injuria. Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if either one or the other is wanting."
• "Whether the business of a corporation should be operated at a loss during a business depression, or closed down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation, and not by the court."

• National Abaca and Other Fibers Corporation v. Pore, G.R. No. L-16779 — Cited to support the ruling that the Board of Liquidators has legal personality to continue suits after the three-year liquidation period because it was created by Executive Order 372 specifically to manage pending affairs of abolished corporations.
• Aguas v. Llemos, G.R. No. L-18107 — Controlling precedent establishing that actions for damages caused by tortious conduct survive the death of the defendant and are not claims for money arising from contract that must be filed in estate proceedings.
• Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No. L-15092 — Cited for the principle that questions of business policy and management are left solely to the honest decision of officers and directors, and courts cannot substitute their judgment for that of the board acting in good faith.
• Briggs v. Spaulding — American jurisprudence cited to establish that directors are not liable unless personally guilty of fraud, connivance at fraud, or failure to give ordinary attention to their duties.
• Air France v. Carrascoso, G.R. No. L-21438 — Cited for the definition of bad faith as a state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will.

• Article IV (b), Chapter III, NACOCO By-Laws — Corporate provision requiring the General Manager to obtain prior board approval for all contracts, which the Court held was waived by course of business and acquiescence.
• Section 1, Rule 88, Rules of Court (now Section 1, Rule 87, Revised Rules of Court) — Provision enumerating actions that survive against a decedent's estate, including actions to recover damages for injury to property.
• Section 5, Rule 87, Rules of Court (now Section 5, Rule 86, Revised Rules of Court) — Provision requiring claims for money arising from contract to be filed in estate settlement proceedings, which the Court held inapplicable to tort actions.
• Article 1902, Old Civil Code (now Article 2176, New Civil Code) — Basis for the negligence claim against Kalaw for entering into contracts without prior board approval.
• Article 1313, Old Civil Code (now Article 1396, New Civil Code) — Provision stating that ratification cleanses the contract from all its defects from the moment it was constituted.
• Executive Order 372 (November 24, 1950) — Presidential issuance abolishing NACOCO and creating the Board of Liquidators to settle the affairs of the corporation without time limit.