Valley Golf & Country Club, Inc. vs. Vda. de Caram

A non-stock corporation may terminate membership and sell a fully-paid membership share under its by-laws pursuant to Section 91 of the Corporation Code, even without a corresponding provision in the articles of incorporation; however, where the termination entails deprivation of a proprietary interest, the process must conform to substantial justice, including actual notice and an opportunity to be heard, and the corporation must act in good faith pursuant to Articles 19, 20, and 21 of the Civil Code.

Congressman Fermin Z. Caram, Jr. subscribed to and fully paid for one Golf Share in Valley Golf & Country Club, a non-stock, non-profit corporation, in 1961. The share carried a par value of ₱9,000.00 and entitled the holder to membership privileges, including use of the golf course. Members were assessed monthly dues. Beginning in 1980, Caram allegedly stopped paying his monthly dues, accumulating an outstanding balance. Caram died on October 6, 1986, unbeknownst to his heirs with respect to the dispute over the share. Unknown to the Caram family, Valley Golf had initiated steps to sell the share, culminating in a public auction on June 11, 1987. The heirs learned of the sale only in May 1990 while settling Caram's estate, which had already included the Golf Share in a judicially approved partition.

• Nature of Membership: Valley Golf & Country Club, Inc. is a non-stock, non-profit corporation operating a golf course. Membership is tied to ownership of a share, denominated a "Golf Share." Members pay monthly dues and assessments in addition to the purchase price of the share.

• Acquisition of the Golf Share: In 1961, the late Congressman Fermin Z. Caram, Jr., husband of respondent Rosa O. Vda. de Caram, subscribed to and fully paid for one Golf Share at a par value of ₱9,000.00. Stock Certificate No. 389 dated January 26, 1961 was issued to him.

• Delinquency and Demand Letters: Valley Golf alleged that Caram stopped paying monthly dues beginning January 25, 1980. Five demand letters were sent to P.O. Box No. 1566, Makati Commercial Center Post Office, the mailing address Caram had furnished the club. The first letter, informing Caram of his delinquent account and suspension of club privileges, was sent January 27, 1986. The second letter, dated August 26, 1986, warned of posting on the club's delinquent list. The third, dated January 25, 1987, reiterated the delinquency and suspension. The fourth, dated March 7, 1987, demanded settlement within ten days and warned of the sale of the Golf Share. The fifth and final letter, dated May 3, 1987, set a final deadline of May 31, 1987 for payment or the share would be sold.

• Caram's Death and Notice to the Estate: Caram died on October 6, 1986. The first two demand letters were sent before his death and addressed to him personally. The third letter (January 25, 1987) and fourth letter (March 7, 1987) were addressed to "Est. of Fermin Z. Caram, Jr.," indicating Valley Golf's knowledge of his death. However, the fifth and final letter (May 3, 1987) reverted to addressing Caram personally, as though he were still alive.

• Auction Sale: The Board of Directors authorized the sale on April 11, 1987. A Notice of Auction Sale was published in the Philippine Daily Inquirer on June 6, 1987. The Golf Share was sold at public auction on June 11, 1987 for ₱25,000.00.

• Estate Proceedings and Discovery: Respondent initiated intestate proceedings to settle Caram's estate before the RTC of Iloilo City, Branch 35. The Golf Share was included in the estate inventory and subsequently adjudicated to respondent under a court-approved project of partition dated August 29, 1989. The heirs learned of the sale only through a letter dated May 15, 1990 following their inquiry with Valley Golf. Valley Golf later informed them, by letter dated October 15, 1990, that they were entitled to a refund of ₱11,066.52 from the sale proceeds.

• By-Law Provisions: Article VIII of Valley Golf's by-laws (originally adopted June 6, 1958) provided that the Club holds a first lien on a member's share for outstanding accounts (Section 1) and that upon a member being "posted as delinquent" for unpaid accounts exceeding 45 days, the Board may order the share sold to satisfy the Club's claims (Section 3).

• Validity of By-Law Provisions: Valley Golf argued that its by-laws, specifically Article VIII, authorized the constitution of a lien on the Golf Share and its subsequent sale to satisfy delinquent dues. The by-laws constitute a valid contractual agreement binding on all members, and Caram consented to them upon becoming a member.

• Section 6 of the Corporation Code Inapplicable: Valley Golf maintained that Section 6 refers only to "restrictions" on shares that must be stated in the articles of incorporation, not to "liens." Even assuming liens and restrictions are synonymous, the word "may" in Section 6 renders the requirement merely permissive, not mandatory.

• SEC Approval of By-Laws: The by-laws had been duly scrutinized and approved by the SEC, lending them validity and legal force.

• Error in Factual Findings: Valley Golf contended that the Court of Appeals erred in relying on the SEC hearing officer's factual findings, which were allegedly replete with errors and contradictions. Valley Golf claimed it learned of Caram's death only in March 1990.

• Damages Unwarranted: The award of moral and exemplary damages was assailed as lacking basis.

• Section 67 of the Corporation Code Inapplicable: Respondent argued that Section 67, governing delinquency sales for unpaid subscriptions, could not apply because Caram had fully paid for the Golf Share. The debt consisted of monthly dues, not an unpaid subscription balance.

• Absence of Lien in Articles of Incorporation: Pursuant to Section 6 of the Corporation Code, any lien or restriction on shares must be stated in the articles of incorporation, not merely in the by-laws. Valley Golf's Articles of Incorporation contained no such provision.

• Lack of Due Process: Respondent maintained that Caram was not properly notified of the delinquencies. The notices were sent to an outdated address despite Caram having informed the club of his new mailing address as early as 1978. Further, the notices were sent predominantly after Caram's death, depriving his estate of an opportunity to settle the account.

• Unjust Deprivation of Property: The sale constituted a deprivation of property without due process of law. The proper recourse was to file a money claim in the estate proceedings, not to summarily sell the fully-paid share.

• Validity of By-Laws on Termination: Whether the provisions in Valley Golf's by-laws authorizing a lien on a member's share and its sale for delinquent dues are valid, given the absence of a corresponding provision in the Articles of Incorporation.

• Applicability of Section 91 of the Corporation Code: Whether Section 6 of the Corporation Code requires that the power to terminate membership and enforce a lien on shares be stated in the articles of incorporation, or whether Section 91 permits such provisions solely in the by-laws of a non-stock corporation.

• Substantial Justice and Notice: Whether the sale of Caram's Golf Share was effected in accordance with the requirements of substantial justice, including adequate notice, given that membership termination entailed deprivation of a proprietary interest.

• Good Faith of the Corporation: Whether Valley Golf acted in good faith in selling the Golf Share, particularly in light of its knowledge of Caram's death and the manner in which the final notice was addressed.

• Applicability of Civil Code Provisions on Human Relations: Whether Valley Golf's actions violated Articles 19, 20, and 21 of the Civil Code, warranting the award of damages.

• Award of Damages: Whether the awards of moral and exemplary damages were proper.

• Validity of By-Laws on Termination: The by-law provisions on termination of membership were not invalid per se. Section 91 of the Corporation Code expressly states that membership "shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws." The SEC and Court of Appeals therefore erred in holding that the lien and forfeiture provisions had to be stated in the articles of incorporation under Section 6. The specific provision of Section 91, governing non-stock corporations, prevails over the general provision of Section 6, which pertains to stock corporations and the classification of shares.

• Applicability of Section 91 of the Corporation Code: Section 91 permits termination of membership in a non-stock corporation to be governed by the by-laws alone; no corresponding provision in the articles of incorporation is necessary. The Supreme Court disagreed with the lower tribunals' reliance on Section 6, noting that Section 6 deals with "rights, privileges or restrictions" attached to shares of stock corporations, while Section 91 specifically addresses termination of membership in non-stock corporations. The by-laws validly created a lien and prescribed the procedure for sale.

• Substantial Justice and Notice: Although the by-law provisions were facially valid, the sale was nevertheless nullified because the process betrayed the dictates of substantial justice. Where membership in a non-stock corporation entails the purchase of an expensive proprietary share, termination does not merely extinguish membership privileges but deprives the member of a property right. In the absence of a satisfactory notice and hearing procedure in the by-laws, the protections of substantive law—specifically the Civil Code—apply. The by-laws failed to provide for actual notice to the member before the share could be seized and sold, and the ambiguous "posting" requirement did not guarantee real notification. The Supreme Court emphasized that when loss of membership entails loss of property rights, "the manner of deprivation of such property right should also be in accordance with the provisions of the Civil Code."

• Good Faith of the Corporation: Valley Golf acted in clear bad faith. The demand letters demonstrated that Valley Golf knew of Caram's death by January 1987, as the third and fourth letters were addressed to "Est. of Fermin Z. Caram, Jr." Yet the fifth and final letter, the one carrying the threat of sale, was deliberately addressed to Caram personally, as if he were alive. This duplicity revealed Valley Golf's intention to proceed with the sale unhampered by the need to pursue the claim in estate proceedings. That act alone was sufficient to nullify the sale and sustain the rulings below.

• Applicability of Civil Code Provisions on Human Relations: The deliberate bad faith exhibited by Valley Golf in pretending Caram was alive to facilitate the sale brought into operation Articles 19, 20, and 21 of the Civil Code. These provisions impose a general obligation to act fairly and in good faith toward others. Non-stock corporations and their officers are not exempt from this obligation.

• Award of Damages: The awards of ₱50,000.00 in moral damages and ₱10,000.00 in exemplary damages were sustained. The moral damages were grounded on a finding that Valley Golf had besmirched the reputation and credit standing of respondent and her family, consistent with Article 2217 of the Civil Code. The exemplary damages were proper under Article 2229, serving to deter Valley Golf from repeating similar acts and to set an example for the public good.

• Section 91 of the Corporation Code — Termination of Membership in Non-Stock Corporations — Membership in a non-stock corporation may be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. It is not necessary that the grounds for termination and the procedure for enforcing a lien on a membership share be stated in the articles of incorporation; the by-laws alone suffice. Section 91, being a specific provision on non-stock corporations, prevails over the general provisions of Section 6 of the Corporation Code concerning the classification of shares in stock corporations.

• Substantial Justice in Termination of Membership with Property Rights — Where membership in a non-stock corporation is tied to the ownership of a fully-paid proprietary share, termination of membership operates as a deprivation of property. In such cases, the termination process must comply with the standard of substantial justice. At minimum, there must be actual notice to the member of the charges and a fair opportunity to be heard before the membership share is seized and sold. The absence of a satisfactory procedure in the by-laws or articles of incorporation necessitates reference to the protections afforded by the Civil Code. The rule is stricter than for religious corporations under Long v. Basa, where waiver of notice was inferred from voluntary adherence to by-laws because membership in a religious corporation does not ordinarily involve the purchase of ownership shares.

• Bad Faith in Corporate Actions — Application of Articles 19, 20, and 21 of the Civil Code — Non-stock corporations and their officers are bound by the general obligation under Articles 19, 20, and 21 of the Civil Code to act with justice, honesty, and good faith. Deliberate bad faith—such as sending a final demand notice to a deceased member personally despite knowledge of his death, to feign regularity in the sale of his membership share—nullifies the resulting sale and exposes the corporation to liability for moral and exemplary damages.

• Distinction Between Unpaid Subscriptions and Delinquent Dues — Section 67 of the Corporation Code, authorizing the extrajudicial sale of delinquent shares, applies exclusively to unpaid subscriptions or balances on the purchase price of shares. It does not apply to a fully-paid membership share where the indebtedness consists of unpaid monthly dues, assessments, or other charges. Such debts are ordinary money claims enforceable through judicial action, not through the delinquency sale mechanism of Section 67.

• "Clearly, the right of a non-stock corporation such as Valley Golf to expel a member through the forfeiture of the Golf Share may be established in the by-laws alone, as is the situation in this case. Thus, both the SEC and the appellate court are wrong in holding that the establishment of a lien and the loss of the Golf Share consequent to the enforcement of the lien should have been provided for in the articles of incorporation."

• "There is a distinction between membership in a religious corporation, which ordinarily does not involve the purchase of ownership shares, and membership in a non-stock corporation such as Valley Golf, where the purchase of an ownership share is a condition sine qua non. Membership in Valley Golf entails the acquisition of a property right. In turn, the loss of such property right could also involve the application of aspects of civil law, in addition to the provisions of the Corporation Code. To put it simply, when the loss of membership in a non-stock corporation also entails the loss of property rights, the manner of deprivation of such property right should also be in accordance with the provisions of the Civil Code."

• "Valley Golf acted in clear bad faith when it sent the final notice to Caram under the pretense they believed him to be still alive, when in fact they had very well known that he had already died. That it was in the final notice that Valley Golf had perpetrated the duplicity is especially blameworthy, since it was that notice that carried the final threat that his Golf Share would be sold at public auction should he fail to settle his account on or before 31 May 1987."

• "It is unmistakably wise public policy to require that the termination of membership in a non-stock corporation be done in accordance with substantial justice. No matter how one may precisely define such term, it is evident in this case that the termination of Caram's membership betrayed the dictates of substantial justice."

• Long v. Basa, G.R. Nos. 134693-94, September 27, 2001, 366 SCRA 113 — Distinguished. The Court had upheld the expulsion of church members without prior notice on the theory that members waived notice by adhering to the by-laws. However, this ruling was limited to religious corporations where membership does not involve the purchase of an ownership share. Where membership carries a proprietary interest, as in Valley Golf, a different standard applies.

• Schutch v. Farmers Union Milling and Grain Co., 116 Neb. 14 — Cited by the SEC en banc for the American rule that a corporation has no right to dispose of shares for delinquent assessments, dues, or unliquidated charges absent an express statutory or charter grant.

• Section 91, Corporation Code — Provides that membership in a non-stock corporation shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. The Court relied on this provision to hold that Valley Golf's by-laws alone could validly establish the grounds and procedure for termination of membership, without need for a corresponding provision in the articles of incorporation.

• Section 6, Corporation Code — Prescribes that shares of a stock corporation may have such rights, privileges, or restrictions as stated in the articles of incorporation. The lower tribunals had relied on this provision to invalidate the by-law lien, but the Supreme Court held it inapplicable to the termination of membership in a non-stock corporation, which is specifically governed by Section 91.

• Section 67, Corporation Code — Governs the procedure for the sale of delinquent shares in a stock corporation for unpaid subscriptions. The Court affirmed that this provision does not apply to fully-paid shares where the debt arises from membership dues, not the subscription price.

• Articles 19, 20, and 21, Civil Code — Enshrine the principles of human relations, requiring every person to act with justice, honesty, and good faith, and imposing liability for willful or negligent damage to another. Valley Golf's bad faith in sending the final notice to a decedent as though alive triggered the application of these articles, supporting the award of damages.

• Articles 2217 and 2229, Civil Code — Article 2217 provides the basis for moral damages for besmirched reputation; Article 2229 authorizes exemplary damages by way of example or correction for the public good.

• Article 2124, Civil Code, and Act No. 1508 (The Chattel Mortgage Law) — Discussed as possible contractual modes by which personal property (such as a membership share) may be constituted as security for an obligation. The Court noted that Caram had not executed any document manifesting consent to constitute his share as security, and the by-laws alone could not substitute for a bilateral contract of pledge or chattel mortgage.

Justice Leonardo A. Quisumbing (Chairperson), Justice Conchita Carpio Morales, Justice Presbitero J. Velasco, Jr., and Justice Arturo D. Brion concurred without separate opinions.

N/A — The decision was unanimous.