Cebu Country Club, Inc. vs. Elizagaque

A corporation's board of directors may be held jointly and severally liable for damages under Articles 19 and 21 of the Civil Code when it exercises its lawful right to approve or disapprove membership applications in an arbitrary manner and with evident bad faith, such as by withholding from the applicant a material amendment to the by-laws requiring unanimous approval and ignoring his requests for reconsideration.

Cebu Country Club, Inc. (CCCI) is a domestic non-stock, non-profit private membership club based in Banilad, Cebu City. Its Articles of Incorporation limit membership to qualified persons who are duly accredited owners of Proprietary Ownership Certificates (POCs) issued in accordance with its By-Laws. The petitioners are members of CCCI's Board of Directors. Respondent Ricardo F. Elizagaque was designated by San Miguel Corporation — a special company proprietary member of CCCI — as a special non-proprietary member in 1987, in his capacity as San Miguel's Senior Vice President and Operations Manager for the Visayas and Mindanao. The CCCI Board approved that designation. In 1996, respondent sought to upgrade to proprietary membership, purchasing an existing share from a certain Dr. Butalid for ₱3 million and securing endorsements from two proprietary members.

Cebu Country Club, Inc. (CCCI) is a domestic non-stock, non-profit private membership club with its principal place of business in Banilad, Cebu City. Its Articles of Incorporation limit membership and participation in its assets to qualified persons who are duly accredited owners of Proprietary Ownership Certificates (POCs) issued by the corporation in accordance with its By-Laws. The petitioners are members of CCCI's Board of Directors.

Sometime in 1987, San Miguel Corporation, a special company proprietary member of CCCI, designated respondent Ricardo F. Elizagaque — its Senior Vice President and Operations Manager for the Visayas and Mindanao — as a special non-proprietary member. The CCCI Board of Directors approved the designation. In 1996, respondent filed with CCCI an application for proprietary membership, endorsed by two proprietary members, Edmundo T. Misa and Silvano Ludo. As the price of a proprietary share was around ₱5 million, Benito Unchuan, then president of CCCI, offered to sell respondent a share for ₱3.5 million. Respondent instead purchased the share of a certain Dr. Butalid for ₱3 million, and on September 6, 1996, CCCI issued Proprietary Ownership Certificate No. 1446 to respondent.

Under CCCI's Amended By-Laws, Section 3, Article 1 sets the procedure for admission of new members: a proprietary member, seconded by another voting proprietary member, submits a written proposal; the proposal is posted on the Club bulletin board for thirty days during which any member may object; after the thirty-day period, if no objections are filed or if the Board considers any objections unmeritorious, the candidate qualifies for inclusion in the "Eligible-for-Membership List." On March 1, 1978, Section 3(c) was amended to require that, after the thirty-day posting period, the Board may approve inclusion of the candidate by unanimous vote of all directors present at a regular or special meeting. The Board adopted a secret balloting system known as the "black ball system," wherein a white ball signifies conformity and a black ball signifies disapproval.

During Board meetings on April 4, 1997 and May 30, 1997, action on respondent's application was deferred. At the Board meeting on July 30, 1997, the application was voted upon; the ballot box contained one black ball. For lack of unanimity, the application was disapproved. On August 1, 1997, respondent received a letter from Julius Z. Neri, CCCI's corporate secretary, informing him of the disapproval. The amendment to Section 3(c) requiring unanimous vote had not been printed on the application form respondent filled out and submitted; what appeared thereon was the original provision, which was silent on the required number of votes. Petitioners explained that the amendment was not printed on the form due to economic reasons.

On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of reconsideration. Receiving no answer, respondent sent another letter of reconsideration on October 7, 1997. CCCI remained silent. On November 5, 1997, respondent again wrote inquiring whether any Board member had objected to his application. CCCI did not reply. On December 23, 1998, respondent filed a complaint for damages against petitioners with the RTC, Branch 71, Pasig City. Both the trial court and the Court of Appeals found that petitioners committed fraud and evident bad faith in disapproving respondent's application, holding them jointly and severally liable for damages.

• Excessive Damages: Petitioners contended that the Court of Appeals erred in awarding exorbitant damages to respondent despite the lack of evidence that they acted in bad faith in disapproving his application.
• Damnum Absque Injuria: Petitioners argued that the principle of damnum absque injuria — damage without injury — should apply, shielding them from liability since they merely exercised a lawful right to approve or disapprove membership.
• Joint and Several Liability: Petitioners maintained that they could not be held jointly and severally liable because only one director voted for the disapproval of respondent's application.

• Lack of Merit: Respondent maintained that the petition lacked merit and should be denied.

• Liability for Damages: Whether petitioners are liable to respondent for damages in disapproving his application for proprietary membership with CCCI.
• Joint and Several Liability: Whether petitioners' liability, if any, is joint and several.

• Liability for Damages: Yes. Petitioners are liable for damages under Articles 19 and 21 of the Civil Code, the Board having acted arbitrarily and in evident bad faith by withholding the unanimity requirement from the application form and ignoring respondent's letters of reconsideration.
• Joint and Several Liability: Yes. Under Section 31 of the Corporation Code, directors who are guilty of bad faith in directing the affairs of the corporation are liable jointly and severally for all damages resulting therefrom.

• Liability for Damages: The CCCI Board of Directors, under its Articles of Incorporation, possessed the right to approve or disapprove applications for proprietary membership. However, such right must not be exercised arbitrarily. Articles 19 and 21 of the Civil Code set standards of human relations — to act with justice, give everyone his due, and observe honesty and good faith — and provide that a person who willfully causes loss or injury in a manner contrary to morals, good customs, or public policy must compensate the injured party. Citing GF Equity, Inc. vs. Valenzona, the Court reiterated that a right, though legal by itself, may become a source of illegality when exercised in a manner that does not conform with the norms of Article 19 and results in damage to another. Here, the amendment to Section 3(c) of the By-Laws requiring unanimous Board approval — introduced in 1978, nearly twenty years before respondent's application — was never printed on the application form. Petitioners' excuse of economic reasons was found flimsy and unconvincing for a prestigious club whose members are affluent. Respondent was left without knowledge of the unanimity requirement and was ignored when he sought reconsideration and inquired about objections. The trial court and the Court of Appeals both found fraud and evident bad faith. The defense of damnum absque injuria was rejected, citing Amonoy vs. Gutierrez, which held that the principle does not apply when there is an abuse of a person's right. Moral damages were deemed proper under Article 2219 in connection with Article 21, but the amount of ₱2,000,000 was reduced to ₱50,000 as excessive; exemplary damages under Article 2229 were reduced from ₱1,000,000 to ₱25,000; and attorney's fees and litigation expenses under Article 2208 were reduced from ₱500,000 and ₱50,000 to ₱50,000 and ₱25,000, respectively.

• Joint and Several Liability: Section 31 of the Corporation Code provides that directors who are guilty of gross negligence or bad faith in directing the affairs of the corporation shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members, and other persons. Since the Board was found to have acted in bad faith, all directors who participated in the disapproval are jointly and severally liable, notwithstanding that only one black ball was cast. The argument that only one director voted for disapproval was without merit.

• Abuse of Rights (Article 19, Civil Code) — Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. A right, though legal by itself, may become the source of illegality when exercised in a manner that does not conform with the norms of Article 19 and results in damage to another. The Court applied this principle to hold that the CCCI Board's exercise of its right to disapprove a membership application, done arbitrarily and in bad faith, constituted a legal wrong warranting damages under Article 21.

• Damnum Absque Injuria — Damage without injury; the principle that there may be damage without a legal wrong, for which no action lies. The Court held that this principle does not apply when there is an abuse of a person's right, as in the present case where the Board acted in bad faith.

• Joint and Several Liability of Directors (Section 31, Corporation Code) — Directors who are guilty of gross negligence or bad faith in directing the affairs of the corporation are liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members, and other persons. The Court applied this provision to hold all petitioners jointly and severally liable despite only one black ball being cast.

• "A right, though by itself legal because recognized or granted by law as such, may nevertheless become the source of some illegality. When a right is exercised in a manner which does not conform with the norms enshrined in Article 19 and results in damage to another, a legal wrong is thereby committed for which the wrongdoer must be held responsible." — This passage, quoted from GF Equity, Inc. vs. Valenzona, articulates the core ratio decidendi: the abuse of rights principle under Article 19, correlating it with Article 21 as the basis for damages.

• "The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper norm. When the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is committed for which the wrongdoer must be held responsible." — This formulation synthesizes the Court's application of the abuse of rights doctrine to the specific facts of arbitrary membership disapproval.

• "It bears stressing that the amendment to Section 3(c) of CCCI's Amended By-Laws requiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form respondent filled and submitted to CCCI." — This factual finding anchors the Court's conclusion that respondent was deprived of material information, constituting bad faith on the part of the Board.

• GF Equity, Inc. vs. Valenzona, G.R. No. 156841, June 30, 2005, 462 SCRA 466 — Controlling authority cited for the explication of Article 19 (abuse of rights principle) and its correlation with Article 21 of the Civil Code. The Court relied on this case to establish that a legal right exercised in violation of Article 19 norms constitutes a legal wrong.

• Amonoy vs. Gutierrez, G.R. No. 140420, February 15, 2001, 351 SCRA 731 — Followed for the proposition that damnum absque injuria does not apply when there is an abuse of a person's right, thereby rejecting petitioners' defense.

• Solidbank Corporation vs. Mindanao Ferroalloy Corporation, G.R. No. 153535, July 28, 2005, 464 SCRA 409 — Cited for the principle that the exercise of a right, though legal by itself, must conform with proper norms; arbitrary, unjust, or excessive exercise resulting in damage constitutes a legal wrong.

• Lamis vs. Ong, G.R. No. 148923, August 11, 2005, 466 SCRA 510 — Cited for the principle that moral damages should not be palpably and scandalously excessive and are not intended to penalize the wrongdoer or enrich the claimant.

• Country Bankers Insurance Corporation vs. Lianga Bay and Community Multi-Purpose Cooperative, Inc., G.R. No. 136914, January 25, 2002, 374 SCRA 653 — Cited for the principle that exemplary damages serve as a deterrent against socially deleterious actions, not to enrich one party or impoverish another.

• Article 19, Civil Code — Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. Applied as the standard governing the Board's exercise of its right to approve or disapprove membership; the Board's failure to conform with these norms constituted abuse of rights.

• Article 21, Civil Code — Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. Applied as the basis for awarding damages to respondent, the Board's bad-faith disapproval being contrary to morals and good customs.

• Article 2219, Civil Code — Moral damages may be recovered in acts and actions referred to in Article 21. Applied to sustain the award of moral damages to respondent for mental anguish, social humiliation, and wounded feelings.

• Article 2229, Civil Code — Exemplary damages may be imposed by way of example or correction for the public good. Applied to sustain, but reduce, the award of exemplary damages as a deterrent against arbitrary membership disapprovals.

• Article 2208, Civil Code — Attorney's fees and expenses of litigation may be recovered when exemplary damages are awarded and where the court deems it just and equitable. Applied to sustain, but reduce, the award of attorney's fees and litigation expenses.

• Section 31, Corporation Code — Directors who are guilty of gross negligence or bad faith in directing the affairs of the corporation shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members, and other persons. Applied to hold all petitioners jointly and severally liable despite only one director casting the disapproving black ball.

Chief Justice Puno (Chairperson), Justice Corona, Justice Azcuna, and Justice Leonardo-de Castro concurred.