Peña vs. Court of Appeals

A board resolution adopted at a special meeting without the quorum fixed in the by-laws is void; an assignment of a corporation’s redemption right that constitutes the entirety of its remaining assets requires approval by stockholders holding at least two-thirds of the voting power, and without such approval the resolution and the assignment are void. Additionally, a deed of assignment that recites no valuable consideration is a donation and, to be valid, must be executed in a public document with acceptance given in the same or in a separate public instrument; failure to observe these formalities renders the donation null and void ab initio.

PAMPANGA BUS CO., INC. (PAMBUSCO) mortgaged three parcels of land covered by TCT Nos. 4314, 4315, and 4316 to the Development Bank of the Philippines. After foreclosure, the properties were sold at public auction on October 25, 1974, and awarded to Rosita Peña as the highest bidder. A certificate of sale was issued and registered. Shortly thereafter, three individuals purporting to be PAMBUSCO’s directors resolved to assign the corporation’s right of redemption to any interested party. Marcelino Enriquez obtained a deed of assignment, redeemed the properties, and immediately sold them to the spouses Rising T. Yap and Catalina Lugue. Peña challenged the redemption as invalid, claiming the underlying resolution and assignment were void. The Yaps later secured registration of the properties in their names and filed an action to recover possession.

• The Foreclosure and Certificate of Sale: PAMBUSCO originally owned the lots covered by TCT Nos. 4314, 4315, and 4316. It mortgaged them to the Development Bank of the Philippines. The mortgage was foreclosed, and at the auction sale held on October 25, 1974 under Act No. 3135, Rosita Peña was the highest bidder. A certificate of sale was issued in her favor upon payment of P128,000.00 and was registered on October 29, 1974.
• The Board Resolution: On November 19, 1974, three of the five members of PAMBUSCO’s board of directors—Jesus Domingo, Joaquin Briones, and Salvador Bernardez—held a special meeting and passed a resolution assigning the corporation’s right of redemption over the foreclosed lots to any interested party. The resolution authorized Briones to execute the deed of assignment on behalf of PAMBUSCO.
• The Assignment and Redemption: Acting under that resolution, Briones executed a Deed of Assignment on March 18, 1975 in favor of Marcelino Enriquez. Using the assigned right, Enriquez redeemed the properties on August 15, 1975 by paying P140,474.00 to the Office of the Provincial Sheriff. A certificate of redemption was issued in his favor the same day.
• The Sale to the Yap Spouses: One day after the certificate of redemption was issued, on August 16, 1975, Enriquez executed a deed of absolute sale of the same properties in favor of the spouses Rising T. Yap and Catalina Lugue for P140,000.00.
• Annotation of Encumbrances and the Consulta: On August 18, 1975, various annotations were made on the original titles, including a levy on attachment in favor of Capitol Allied Trading, a notice of pending consulta in Civil Case No. 4310, the certificate of sale to Peña, the board resolution, the deed of assignment, the certificate of redemption, and the deed of sale to the Yaps. On the same date, the Sheriff informed Peña by registered mail that the properties had been redeemed by Enriquez and that she could collect her money.
• Peña’s Challenge: On September 8, 1975, Peña wrote the Sheriff contesting the validity of the redemption on the ground that the underlying deed of assignment was void. She requested the recall of the redemption and a restraint on any further registration. Shortly thereafter, the Court of First Instance, Branch III, Pampanga, in Civil Case No. 4310 ordered the Register of Deeds to desist from registering or noting the deed of assignment, the certificate of redemption, and the deed of sale to the Yaps.
• Registration in the Name of the Yap Spouses: Despite the court order, the lots were registered on June 16, 1978 in the names of the Yap spouses under TCT Nos. 148983-R, 148984-R, and 148985-R, with the attachment levy annotated. The Land Registration Commission had earlier opined that the levy could be carried over to the new titles.
• The Complaint for Recovery of Possession: Peña remained in possession of the properties. On December 15, 1978, the Yap spouses filed a complaint for recovery of possession and damages, alleging they were the registered owners and that Peña had been unlawfully occupying the lots. Peña and her co-defendant Washington Distillery denied the material allegations and asserted that the board resolution, the deed of assignment, and all subsequent transactions were void. The trial court dismissed the complaint and declared the entire series of transactions null and void.

• Jurisdiction: Petitioner maintained that the trial court had jurisdiction to annul the board resolution and subsequent transfers because the controversy did not involve an intra-corporate dispute within the exclusive jurisdiction of the Securities and Exchange Commission. Neither she nor the Yap spouses were stockholders or officers of PAMBUSCO, placing the case squarely within the competence of regular courts.
• Legal Standing: Petitioner argued that she possessed the requisite standing to challenge the validity of the resolution and transactions because, as the foreclosure purchaser, her right to consolidate title upon expiration of the redemption period was directly and adversely affected by the purported redemption.
• Validity of the Board Resolution: Petitioner contended that the board resolution was void for having been passed at a special meeting attended by only three of five directors, contrary to the by-law provision requiring at least four directors to constitute a quorum for a special meeting. Moreover, the resolution was not ratified by stockholders holding at least two-thirds of the voting power as required for the disposition of substantially all corporate assets.
• Validity of the Deed of Assignment: Petitioner asserted that the deed of assignment lacked any valuable consideration and therefore constituted a donation. As such, it was void ab initio for failing to comply with Article 749 of the Civil Code, which requires the donee’s acceptance to appear in the same public document or in a separate public instrument with due notification to the donor.
• Bad Faith of the Yap Spouses: Petitioner argued that the Yap spouses were purchasers in bad faith because they caused the registration of the properties in their names despite a subsisting court order to desist from registering the contested documents.

• Jurisdiction: Respondents countered that the annulment of the board resolution fell within the exclusive jurisdiction of the Securities and Exchange Commission, as it pertained to an intra-corporate matter properly cognizable by that agency.
• Legal Standing: Respondents argued that Peña, being a stranger to the board resolution and the chain of transactions among PAMBUSCO, Enriquez, and the Yaps, had no legal standing to question their validity.
• Validity of the Board Resolution: Respondents maintained that the by-law provision concerning the invalidity of proceedings applied only if there was a failure or irregularity of notice, which was neither alleged nor proved. The mere attendance of only three directors did not render the resolution void ab initio; the by-laws did not expressly state that non-compliance with the attendance requirement rendered all acts void. Moreover, the special meeting itself had not been declared void in a proper proceeding.
• Validity of the Deed of Assignment: Respondents asserted that the deed of assignment was supported by consideration—the liberality of PAMBUSCO towards its former corporate officer, Enriquez, for services rendered—and therefore was not a void donation.
• Good Faith of the Yap Spouses: Respondents contended that the Yap spouses were purchasers in good faith and that the issue of bad faith had not been timely raised at the trial level.

• Jurisdiction: Whether the trial court had jurisdiction to declare the nullity of the board resolution and the subsequent transfers, or whether jurisdiction lay exclusively with the Securities and Exchange Commission.
• Legal Standing: Whether Rosita Peña, as the foreclosure purchaser, possessed standing to assail the validity of the board resolution and the succeeding transactions.
• Validity of the Board Resolution: Whether the board resolution of November 19, 1974, passed at a special meeting attended by only three of five directors, was void for lack of quorum and for failure to secure the required stockholder approval.
• Validity of the Deed of Assignment as a Donation: Whether the deed of assignment in favor of Enriquez was void ab initio for failing to comply with the formalities of a donation under Article 749 of the Civil Code.
• Good Faith of the Yap Spouses: Whether the Yap spouses were purchasers in good faith and entitled to retain the properties.

• Jurisdiction: Jurisdiction was properly vested in the regular courts, not the Securities and Exchange Commission. An intra-corporate dispute under Presidential Decree No. 902-A is confined to controversies involving the corporation and its stockholders, officers, or the state in relation to its franchise. Neither Peña nor the Yap spouses were stockholders or officers of PAMBUSCO; thus, the dispute lay outside the SEC’s exclusive competence, as defined in Philex Mining Corp. v. Reyes and Union Glass & Container Corp. v. SEC.
• Legal Standing: Peña possessed the requisite legal standing to impugn the validity of the board resolution and the transfers. A person who is not a party to a contract may sue for its nullity if she is prejudiced in her rights with respect to one of the contracting parties and can show the resulting detriment. The resolution and the series of transactions directly affected Peña’s right, as the highest bidder, to consolidate ownership upon the expiration of the redemption period, applying the principle recognized in Teves v. People’s Homesite and Housing Corporation.
• Validity of the Board Resolution: The board resolution was void. The by-laws of PAMBUSCO, which are the private laws of the corporation and bind its directors and officers, required at least four directors to constitute a quorum for a special meeting. With only three directors present, no quorum existed. Under Section 25 of the Corporation Code, any number less than the quorum fixed in the by-laws cannot transact business. Additionally, the three individuals were not listed as directors in the latest general information sheet filed with the SEC in 1951, and PAMBUSCO had been dormant since 1949. The resolution, which disposed of the corporation’s sole remaining asset—the right of redemption—was not confirmed by the affirmative vote of stockholders holding at least two-thirds of the voting power, as required by Section 28 1/2 of the then-applicable Corporation Law. The absence of both a proper quorum and the statutorily mandated stockholder approval rendered the resolution and the subsequent assignment null and void.
• Validity of the Deed of Assignment as a Donation: The deed of assignment was void ab initio as a donation. The instrument recited no valuable consideration; even assuming it was motivated by liberality for past services, it amounted to a donation. Article 749 of the Civil Code requires that a donation be made in a public document and that the donee’s acceptance be given in the same instrument or in a separate public instrument, with the donor notified of the acceptance in an authentic form. The deed of assignment executed on March 18, 1975 contained no acceptance by Enriquez, nor was any separate instrument of acceptance presented. Non-compliance with these mandatory formalities rendered the donation void under the settled rule in Uzon v. Del Rosario and Aldaba v. Court of Appeals. Consequently, the certificate of redemption and the sale to the Yaps derived from a void act and were equally without legal effect.
• Good Faith of the Yap Spouses: Given the absolute nullity of the board resolution, the deed of assignment, and the redemption, the Yap spouses could acquire no title to the properties. The question of their good faith was therefore legally immaterial to the disposition of the case; the titles issued in their names were properly ordered cancelled.

• Intra-corporate dispute jurisdiction under P.D. 902-A — The exclusive jurisdiction of the Securities and Exchange Commission over intra-corporate disputes is confined to controversies arising from the relationships (a) between the corporation and the public, (b) between the corporation and its stockholders, partners, members, or officers, (c) between the corporation and the state regarding its franchise, permit, or license, and (d) among the stockholders, partners, or associates themselves. Where none of the parties is a stockholder or officer of the corporation, the dispute is not an intra-corporate controversy and falls within the jurisdiction of regular courts. This principle, drawn from Philex Mining Corp. v. Reyes and Union Glass & Container Corp. v. SEC, determined that the trial court had jurisdiction because neither the foreclosure purchaser nor the transferees were stockholders or officers of PAMBUSCO.

• Standing of a non-party to impugn a void contract — A person who is not a party to a contract may exercise an action for its nullity if she is prejudiced in her rights with respect to one of the contracting parties and can demonstrate the detriment she would suffer from the contract. The Court applied this rule, as enunciated in Teves v. People’s Homesite and Housing Corporation, to hold that Peña could challenge the board resolution and the deed of assignment because the purported redemption directly impaired her interest as the foreclosure sale purchaser.

• By-laws as the private law of the corporation — By-laws constitute the private laws of a corporation and are binding upon the corporation, its directors, and its officers. A quorum requirement fixed in the by-laws for a special meeting of the board of directors must be strictly observed; any meeting and any act undertaken without the prescribed quorum are void and do not bind the corporation. Section 25 of the Corporation Code allows the articles or by-laws to fix a higher quorum; any number less than that fixed cannot transact business. In this case, the by-law requiring four directors for a special meeting was not met.

• Requisites for the disposal of all or substantially all corporate assets — The sale or disposition of all or substantially all properties of a corporation requires a board resolution and the affirmative vote of stockholders holding at least two-thirds of the voting power at a meeting duly called for that purpose. The old Corporation Law (Section 28 1/2) and its present counterpart (Section 40 of the Corporation Code) embody this requirement. The board resolution authorizing the assignment of PAMBUSCO’s sole remaining asset was void because no stockholder ratification was obtained.

• Formal requirements for a valid donation — Under Article 749 of the Civil Code, a donation of an immovable must be made in a public document, and the acceptance must be given either in the same instrument or in a separate public instrument. If acceptance is made in a separate instrument, the donor must be notified thereof in an authentic form, and that step must be noted in both instruments. Failure to observe these formalities renders the donation null and void, as established in Uzon v. Del Rosario and Aldaba v. Court of Appeals. The deed of assignment, being a donation without acceptance, was struck down as void ab initio.

• “The by-laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. They are in effect, written, into the charter. In this sense they become part of the fundamental law of the corporation with which the corporation and its directors and officers must comply.” — This passage undergirds the ruling that the quorum requirement in the by-laws was mandatory and that non-compliance rendered the board resolution void.

• “Any number less than the number provided in the articles or by-laws therein cannot constitute a quorum and any act therein would not bind the corporation; all that the attending directors could do is to adjourn.” — The Court’s formulation of the effect of an insufficient quorum under Section 25 of the Corporation Code.

• “[A] person who is not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show the detriment which would positively result to him from the contract in which he had no intervention.” — The restatement of the standing rule from Teves v. People’s Homesite and Housing Corporation, on which Peña’s legal standing was founded.

• Philex Mining Corp. vs. Reyes, 118 SCRA 602 (1982) — Cited to delineate intra-corporate disputes: the exclusive SEC jurisdiction hinges on the relationship between the corporation and its stockholders/officers, or among stockholders themselves. Applied to hold that the trial court had jurisdiction because the parties were not within those relations.

• Union Glass & Container Corp. vs. Securities and Exchange Commission, 126 SCRA 31, 38 (1983) — Followed to enumerate the four categories of intra-corporate relationships under P.D. No. 902-A. Reinforced the conclusion that the dispute was not intra-corporate.

• Teves vs. People’s Homesite and Housing Corporation, 23 SCRA 1141, 1147 (1968) — Relied upon for the principle that a non-party to a contract may sue for nullity if prejudiced in her rights. Applied to uphold Peña’s standing.

• Uzon vs. Del Rosario, et al., L-4963, January 28, 1953, 92 Phil. 530 — Controlling precedent on the formal validity of donations. Cited to hold that the absence of acceptance in the deed of assignment rendered the donation void.

• Aldaba vs. Court of Appeals, 27 SCRA 263 (1969) — Cited alongside Uzon to reaffirm that non-compliance with the acceptance requirement under Article 749 of the Civil Code results in a void donation.

• Article 749, Civil Code — Requires that a donation of an immovable be made in a public document and that the donee’s acceptance be expressed in the same or a separate public instrument. Applied to invalidate the deed of assignment, which contained no acceptance and was thus void as a donation.

• Section 25, Corporation Code (Batas Pambansa Blg. 68) — Allows the articles of incorporation or by-laws to fix a greater number than the majority of directors to constitute a quorum. Any number less than that fixed cannot transact business. Applied in conjunction with the by-law requiring four directors for a special meeting; since only three attended, the resolution was void.

• Section 28 1/2, old Corporation Law (Act No. 1459, as amended) — Required the affirmative vote of stockholders holding at least two-thirds of the voting power for the sale of all or substantially all corporate assets. Cited as an additional ground for nullity because the resolution was never confirmed by the stockholders. (Present counterpart: Section 40, Corporation Code.)

• Section 30, old Corporation Law — Required every director to own at least one share in his own right. Mentioned to highlight the irregularity that the three individuals convening were not listed as directors or stockholders of PAMBUSCO in the latest SEC filings.

• Section 4, Article III, Amended By-Laws of PAMBUSCO — Provided that a special meeting of the board required at least four directors to be present. Non-compliance with this quorum provision invalidated the board proceedings and the resolution.

Narvasa, Cruz, Griño-Aquino, and Medialdea, JJ., concurred.