Cagayan Fishing Development Co., Inc. vs. Sandiko

A corporation that has not yet come into legal existence possesses no juridical capacity to enter into contracts or acquire property; promoters cannot bind a non-existent corporation. While a subsequently organized corporation may under some circumstances ratify pre-incorporation contracts, ratification will not be extended where it would result in injustice or fraud to an innocent third party.

Manuel Tabora was the registered owner of four parcels of land in Aparri, Cagayan, encumbered by three duly annotated mortgages: two in favor of the Philippine National Bank and one in favor of Severina Buzon. To develop the land into a fishery, Tabora arranged for the creation of a corporation—the Cagayan Fishing Development Co., Inc.—and on May 31, 1930, executed a document purporting to transfer the lands to that company while it was still “in the process of incorporation.” The transfer was for a nominal consideration of one peso, subject to the mortgages, and on condition that title would not be transferred to the company until it paid Tabora’s debt to the bank. The articles of incorporation were filed only on October 22, 1930. The corporation’s capital was overwhelmingly subscribed by Tabora and his wife, both of whom served as directors, with Mrs. Tabora as treasurer. Later, the corporation sold the same lands to Teodoro Sandiko, who assumed the mortgages and issued a promissory note for P25,300. When Sandiko defaulted, the corporation filed suit.

• The Tabora Lands: Manuel Tabora was the registered owner of four parcels in Linao, Aparri, Cagayan, under Transfer Certificate of Title No. 217. He mortgaged the lands three times: a first mortgage to the Philippine National Bank for P8,000 (August 14, 1929); a second mortgage to the same bank for P7,000 (April 1930); and a third mortgage to Severina Buzon for P2,900 (April 16, 1930). These mortgages were duly annotated on the title.
• The Pre-Incorporation Transfer: On May 31, 1930, Tabora executed a public document entitled “Escritura de Transpaso de Propiedad Inmueble” (Exhibit A) by which the four parcels were sold to “Cagayan Fishing Development Co., Inc.,” described as “una sociedad en vias de incorporacion.” The consideration was one peso. The transfer was expressly made subject to the existing mortgages and to the condition that the certificate of title would not be transferred to the company until it had fully paid Tabora’s indebtedness to the Philippine National Bank.
• Incorporation and Control: The plaintiff company filed its articles of incorporation with the Bureau of Commerce and Industry on October 22, 1930. Of the P48,700 subscribed capital stock, Tabora subscribed P45,000 and his wife Rufina P500; they were credited with payments of P42,100 and P200, respectively. Both served as directors, and Mrs. Tabora was treasurer. The lands continued to be registered in Tabora’s name, and the Philippine National Bank always treated Tabora—not the corporation—as the owner.
• Sale to Sandiko: On October 28, 1931, the board of directors authorized its president, Jose Ventura, to sell the lands to Teodoro Sandiko for P42,000. On February 15, 1932, three instruments were executed: Exhibit B—a notarized deed of sale under which the company transferred all its rights, titles, and interests in the lands to Sandiko, who assumed the three mortgages; Exhibit C—a promissory note for P25,300 drawn by Sandiko in favor of the company, payable after one year; and Exhibit D—a deed of mortgage over the same lands to secure the promissory note.
• Default and the Underlying Circumstances: Sandiko failed to pay the promissory note. Two civil suits had been brought against Tabora, and writs of attachment had been levied on the lands. The Philippine National Bank threatened foreclosure. Tabora had approached Sandiko and induced him to sign the documents, and the promissory note was made payable to the company to shield it from Tabora’s creditors. The company filed suit on January 25, 1934. The trial court absolved Sandiko, declaring Exhibit B invalid.

• Validity of the Pre-Incorporation Acquisition: Petitioner argued that the transfer from Tabora to the company (Exhibit A) was valid, because a corporation may ratify contracts entered into by its promoters and thereby acquire ownership of the land.
• Right to Sell to Sandiko: Petitioner maintained that, having acquired title, it possessed the right to sell the lands to Sandiko and to enforce the promissory note and mortgage given as consideration.
• Error in the Lower Court’s Ruling: Petitioner contended that the trial court erred in holding Exhibit B void for vice of consent and repugnancy to law, and that the evidence warranted a money judgment in its favor.

• Nullity of Petitioner’s Title: Respondent countered that when Exhibit A was executed, the Cagayan Fishing Development Co., Inc. did not yet exist; it therefore never acquired any interest in the land and had no right to transfer anything to Sandiko.
• Invalidity of the Deed of Sale: Respondent argued that Exhibit B was invalid for lack of genuine consent and consideration, and that the entire transaction was a device employed by Tabora to avoid his creditors.

• Corporate Capacity: Whether a corporation that was not yet in existence at the time of a purported sale of real property could acquire title to the property and thereafter validly convey it to a third person.

• Corporate Capacity: The transfer to the plaintiff was void ab initio. At the time Exhibit A was executed on May 31, 1930, the Cagayan Fishing Development Co., Inc. had not yet been incorporated; it was not even a de facto corporation. A corporation is a creature of law that comes into existence only upon compliance with statutory prerequisites, principally the filing of articles of incorporation. Before that moment it possesses no juridical personality and no faculties; it is “a child in ventre sa mere.” The promoters could not act as its agents because a non-existent principal cannot appoint an agent. While a subsequently organized corporation may, in some circumstances, ratify pre-incorporation contracts, the doctrine of ratification was not extended here because the peculiar facts of the case—Tabora’s overwhelming control of the corporation, the continued registration of the land in his name, the bank’s persistent recognition of Tabora as owner, and Sandiko’s direct dealings with Tabora—demonstrated that ratification would perpetrate injustice or fraud upon the unwary defendant. Because the company never acquired ownership, it had no right to sell the lands to Sandiko, and the promissory note could not be enforced. The dismissal of the complaint was therefore affirmed, even though the Supreme Court did not adopt the trial court’s reasoning on vice of consent and illegality.

• Non-Existent Corporation’s Incapacity to Contract — A corporation must have full and complete organization and legal existence before it can enter into any contract or transact business. Until organized, it has “no being, franchises or faculties,” and those bringing it into existence have no power to bind it by contract unless authorized by the charter. Promoters cannot act as agents for a projected corporation because a principal that does not yet exist cannot grant authority. (Citing Gent vs. Manufacturers and Merchant’s Mutual Insurance Co., 107 Ill., 652; Fletcher Cyc. of Corps.)
• Ratification of Pre-Incorporation Contracts (Massachusetts Rule) — While a corporation may, after incorporation, ratify contracts made on its behalf by promoters, ratification is an equitable doctrine that will not be applied where it would result in injustice or fraud. The court will examine the peculiar facts and circumstances of the case to decide whether ratification should be permitted. Here, because the incorporator-promoter dominated the entity, the property remained in his name, and the defendant dealt directly with him, ratification was withheld to avoid fraud. (Citing Abbott vs. Hapgood, 150 Mass. 248; Koppel vs. Massachusetts Brick Co., 192 Mass. 223; Holyoke Envelope Co. vs. U.S. Envelope Co., 182 Mass. 171.)

• “Corporations are creatures of the law, and can only come into existence in the manner prescribed by law. … [I]f conditions precedent are prescribed in the statute, or certain acts are required to be done, they are terms of the offer, and must be complied with substantially before legal corporate existence can be acquired.”
• “That a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business, would seem to be self evident. … A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter.”
• “A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere.”
• On the refusal to ratify: “… under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary. (Massachusetts rule …).”

• Gent vs. Manufacturers and Merchant’s Mutual Insurance Company, 107 Ill., 652, 658 — Cited for the rule that a corporation, until organized, has no being and cannot be bound by promoters’ contracts.
• Abbott vs. Hapgood, 150 Mass., 248; 22 N.E. 907 — Authority for the Massachusetts rule that ratification of pre-incorporation contracts will not be allowed where it would cause injustice or fraud.
• Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N.E. 128 — Followed as supporting the same limitation on ratification.
• Holyoke Envelope Co. vs. U.S. Envelope Co., 182 Mass., 171; 65 N.E. 54 — Same.
• Fletcher Cyclopedia of Corporations, Vol. I, secs. 207 et seq. — Recognized for the general proposition that exceptions exist where ratification of promoters’ acts may be permitted.

• Act No. 1459 (The Corporation Law), Sections 6 et seq., 13 (pars. 5 and 9), 14 — Prescribe the procedure for incorporation and grant a duly organized corporation the power to purchase real property and enter into contracts. These provisions were invoked to underscore that a corporation must first be lawfully organized before it can exercise such powers.
• Section 334(31), Code of Civil Procedure — Creates a disputable presumption that all legal requirements have been complied with. The Court held the presumption was rebutted by the uncontroverted proof that the plaintiff was not yet incorporated on May 31, 1930.
• Article 1114, Civil Code (suspensive condition) — The Court noted but did not rule on the argument that the transfer was subject to a condition precedent (payment of Tabora’s bank debt), deeming it unnecessary in light of the nullity finding.

Villa-Real, Abad Santos, Imperial, Diaz, and Concepcion, JJ., concurred.