Barretto v LA PREVISORA FILIPINA| L-34719 | December 8, 1932| Ostrand., J.

Plaintiff: ALBERTO BARRETTO, Jose de Amusategui, and Jose Barretto,

Defendant: LA PREVISORA FILIPINA
SUMMARY. The resigned directors of the corp are trying to get 1% of a year’s profits based on a by-law provision which stipulates that they are
entitled to a lifetime annuity from the profits of the corporation. LC found them entitled but was reversed by SC when the SC held that the amended
by-laws does create any obligation to pay to the persons name such a life gratuity or pension out of the profits. A by-law of this nature must be
clearly regarded as beyond the lawful powers of a mutual building and loan ssociation and is thus ultra vires. As it were, the by-law cannot be held to
establish a contractual relation between the parties. The authority conferred upon corporations in the code refers to providing compensation for
future services of directors, officers, and employees after the adoption of the by-law and cannot in any sense be held to authorize the giving of
continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by the them to the
corporation. To permit the transaction would be to create an obligation unknown to the law, and to countenance a misapplication of funds of the
building and loan association to the prejudice of SHs. Contracts between a corporation and third persons must be made by or under authority of its
board and not by the SHs. The action of the SHs is only advisory and is not binding on the corporation.

FACTS:

 La Previsora Filipina is a building & loan association

 The 2 Barrettos & Jose de Amusategui were directors of the La Previsora from incorporation to March, 1929
 They’re suing to recover from La Previsora Filipina
 1% to each of the them of the net profits for 1929 (net profit is P50,727.53)
o They base their claim in accordance with an amendment to the by-laws which was made at a general meeting of the stockholders
on Feb, 1929.
 “In consideration of the valuable services for several years which have been provided free of charge in favor of the
Society, Messrs. Alberto Barretto, Ariston de Guzman, Miguel Romualdez, Pedro Mata, Vicente L. Legarda, Alexander
Bachrach, Jose M. de Amusategui and Jose A. Barreto y Moratinos, hereby agrees and grants each and every one of said
directors an amount equal to one percent (1%) of all the net profits of the Company, year and years. in which he ceases
to be director of it.
 It being understood, however, that this special remuneration will subsist while the director lives, and will cease during
the time in which said director returns to be director of the Company.
 It is hereby stated that this article of these Bylaws constitutes a formal contract between the Company and each one of
the aforementioned directors, and this contract may not be modified or amended except by agreement between the
parties.
 Defendant corp filed a Motion to dismiss for lack of a cause of action;
o Defendants desired to present evidence for their motion to dismiss
 LC found that plaintiffs had a legal right to their claim
o And that defendants, by filing a motion to dismiss had impliedly waived its right to present its evidence
 Defendant corp’s MR denied. Appeal to SC

W/N the By-law is valid? NO, it is contrary to the nature of building & loan associations

 Nature of that BL provision is inconsistent with Corp Law by-law provision on compensation
o SC agrees with Corp
o Article 68-A of the amended by-law does not under the law as applied to the express provisions create any legal obligation on its
part to pay to the persons named such a life gratuity or pension out of its net profits.
o A by-law provision of this nature must be regarded as clearly beyond the lawful powers of a mutual building and loan association,
such as the defendant corporation.
o The law expressly authorizes corps to adopt by-laws but section 20 the Corp Law, as construed by this court in the case of Fleischer
vs. Botica Nolasco expressly limits such authority to the adoption of by-laws which are not inconsistent with the provisions of the
law.
 Plaintiff argument
o The article is merely a provision for the compensation of directors, which is expressly authorized by Sec 21 of the Corporation Law.
 SC disagrees
o The authority conferred upon corporations in that section refers only to providing compensation for the future services of directors,
officers, and employees thereof after the adoption of the by-law or other provisions in relation.
o It cannot in any sense be held to authorize the giving of continuous compensation to particular directors after their employment
has terminated for past services rendered gratuitously by them to the corporation.
o To permit the transaction involved in this case would be to create an obligation unknown to the law, and to countenance a
misapplication of the funds of the defendant building and loan association to the prejudice of the substantial right of its
shareholders.
 On Buildings & loan Associations
o Building and loan associations are peculiar and special corporations.
  Nature of corp is that of strict mutuality and equality of benefits and obligations
 Any contract made or by-law provision adopted by such an association in contravention of the statute is ultra vires and
void.
o It stands in a trust relation to the contributors in respect to the funds contributed
o There is an implied contract with its members that it shall not divert its funds or powers to purposes other than those for which it
was created.
o Fundamental Law is that all members must participate equally in the profits and bear the losses, if any, in the same proportion,
and any diversion of their funds to purposes not authorized by the law of their creation is violative of the principles of mutuality
between the members.
 As applied in this case
o the provisions are entirely foreign to the government of defendant corporation, inconsistent with and subversive of the legislative
scheme governing such associations, and contrary to the spirit of the law, and cannot therefore be the basis of a cause of action
against the defendant corporation.

W/N IT ESTABLISHES A CONTRACTUAL RELATION? NO, IT DOES NOT ESTABLISH CONTRACTUAL RELATION

 Regardless of its ultra vires nature, that by-law lacks the essential elements of a contract.
 It is merely a by-law provision adopted by the SHs of the corporation,
o without any action having been taken in relation thereto by its board of directors.
 Contracts between a corporation and 3rd persons must be made by or under the authority of its board of directors and not by its stockholders.
 Hence, the action of the SHs in such matters is only advisory and not in any wise binding on the corporation.
o There could not be a contract without mutual consent, and it appears that the SHs did not consent to the provisions of the by-law
in question, but, on the contrary, they objected to and voted against it in the stockholders' meeting in which it was adopted.

 The said by-laws shown on its face that there was no valid consideration for the supposed obligation mentioned.
 It is clearly an attempt to give in the future to certain directors compensation for past services gratuitously rendered by them to
the corporation.
o Such a provision is without consideration, and imposes no obligation on the corporation which can be enforced by action at law.
 Plaintiff’s argument
o Invoking El Hogar Filipino vs. Rafferty, and Government of the Philippine Islands vs. El Hogar Filipino
o They contend that those decisions are authority for sustaining the validity of the by-law in this case.
 SC replies with cited cases are entirely different from the case at bar
o Causes of action & facts are different

The judgment of the court below is reversed, and the complaint is dismissed with the costs of this instance against the appellees. So ordered.