Case Summary (G.R. No. 165443)
Background of the Case
Sixto Clemente, Jr. applied for membership and purchased one share of stock in Calatagan Golf Club, Inc. on May 2, 1990, paying the full price of ₱120,000.00 for his share. His membership required payment of monthly dues as stipulated in the Articles of Incorporation and By-Laws of the club, which were also printed on the back of the stock certificate. At the time of Clemente’s membership, monthly dues were ₱400.00. Clemente made partial payments but ceased paying dues, accruing a balance of ₱400.00 by December 1991.
Dues and Delinquency Procedures
The Articles of Incorporation and By-Laws explicitly provided that monthly dues were mandatory and constituted a first lien on shares, allowing the club to foreclose and sell shares of delinquent members to satisfy unpaid obligations. The relevant By-Laws mandated that delinquent members for more than 60 days would be reported to the Board of Directors, who could then order the sale of the members’ shares at a public auction. Specific procedural safeguards included mailing notices to the delinquent member, posting notices on the club’s bulletin board, and allowing the member to pay overdue accounts before sale to prevent foreclosure.
Notice Attempts and Foreclosure
Calatagan sent three demand letters to Clemente’s mailing address as provided in his application, all of which were returned marked “address closed.” Despite this, Calatagan proceeded with the foreclosure process. On December 1, 1992, the Board of Directors authorized the auction of shares of delinquent members, including Clemente’s. The final demand letter was sent on December 7, 1992, warning of impending sale, again to the closed address. The auction was held on January 15, 1993, where Clemente’s share was sold for ₱64,000.
Clemente’s Claim and Initial SEC Decision
Clemente discovered the sale only in November 1997 and filed a complaint with the Securities and Exchange Commission (SEC) seeking restoration of his share and damages. The SEC dismissed the complaint on November 15, 2000, ruling that the six-month prescriptive period under Section 69 of the Corporation Code, governing actions to recover delinquent shares sold, barred Clemente’s claim. The SEC also held that Calatagan complied with notice requirements and that Clemente acted in bad faith by assuming his share would become inactive, not forfeited.
Court of Appeals Ruling
On June 1, 2004, the Court of Appeals reversed the SEC decision. It held that Section 69 of the Corporation Code, which applies to unpaid capital stock subscriptions, did not govern unpaid monthly dues in a non-stock corporation setting, where the share was fully paid. It determined that the appropriate prescriptive period was eight years under Article 1140 of the Civil Code, as the action involved recovery of a movable (the stock certificate). Therefore, the claim was not time-barred.
The appellate court further found that Calatagan failed to comply with its own By-Laws’ notice requirement. Despite knowing that the address used for prior demand letters was closed, Calatagan’s Corporate Secretary sent the final demand letter to the same invalid address without using Clemente’s residential address or telephone numbers, which were available in club records. The court emphasized the importance of due notice given the imminent loss of property rights through auction sale. As such, Calatagan acted in bad faith by knowingly sending a crucial demand letter to an unreachable address.
Legal Analysis on the Applicability of Section 69 and Civil Code Provisions
The Court distinguished between sales under Section 68-69 of the Corporation Code, which deal with unpaid subscriptions for stock, and the case at bar where the stock was fully paid and the sale was due to unpaid membership dues constituting a lien. Since Clemente had fully paid the stock subscription, these provisions were not applicable. The Court referred to several Civil Code provisions:
- Article 1140, prescribing an eight-year period for recovery of movables;
- Article 1146 and 1149, argued by Calatagan, were found inapplicable;
- Articles 19, 20, and 21, imposing obligations to act in good faith and pay damages for injury arising from bad faith acts.
These supported the conclusion that Calatagan’s action was unjustified and harmful.
By-Laws Compliance and Due Process Requirements
Calatagan’s Articles of Incorporation and By-Laws explicitly required:
- The Club must notify members within ten days after authorization of sale;
- Notices to be posted and communicated properly to ensure opportunity to prevent sale;
- Pending sale, members may settle accounts to stop foreclosure;
- Proceeds after sale must cover unpaid dues, with any excess returned to former member; and
- Cancellation of unreturned stock certificates must be recorded and publicly announced.
The Court of Appeals found Calatagan failed to properly notify Clemente as mandated, especially given the availability of alternative contact information. This lack of proper notice deprived Clemente of due process, invalidating the foreclosure sale despite having observed formal steps.
Bad Faith and Consequences
Calatagan’s persistence in sending the final warning letter to a closed address, despite knowledge thereof, de
Case Syllabus (G.R. No. 165443)
Facts of the Case
- Sixto Clemente, Jr. applied for membership and purchased one share of stock in Calatagan Golf Club, Inc. (Calatagan) on May 2, 1990, paying the full price of P120,000.00.
- Clemente provided a mailing address as "Phimco Industries, Inc. - P.O. Box 240, MCC," along with his residential address and office and residence telephone numbers.
- The Articles of Incorporation and By-Laws of Calatagan require members to pay monthly dues, evidenced on the back of each stock certificate. At the time of Clemente’s membership, monthly dues were set at P400.00.
- Clemente paid monthly dues on March 21, 1991 (P3,000.00) and December 9, 1991 (P5,400.00) before ceasing payments, leaving an outstanding balance of P400.00.
- Ten months later, Calatagan sent two demand letters (September 21 and October 22, 1992) to Clemente’s mailing address, both returned due to closure of the P.O. box.
- On October 31, 1992, Calatagan declared Clemente delinquent with unpaid monthly dues totaling P5,600.00 and posted his name on the delinquent members’ list.
- The Board of Directors authorized foreclosure and public auction sale of shares of delinquent members, including Clemente’s, with sale scheduled on January 15, 1993.
- A third and final demand letter was sent on December 7, 1992, signed by the Corporate Secretary, to the same closed mailing address, again returned.
- Notice of auction was posted visibly at the club premises and bulletin board on January 5, 1993.
- Clemente’s share was sold at auction for P64,000.00 to Nestor A. Virata.
- At sale, Clemente owed P5,200.00 in accrued dues.
- Notice of foreclosure was published in the Business World on May 26, 1993.
- Clemente learned of the sale only in November 1997 and filed a complaint before the Securities and Exchange Commission (SEC) for restoration of his share with damages.
Issues Presented
- Whether Clemente’s action to question the foreclosure sale of his share is barred by prescription under Section 69 of the Corporation Code.
- Whether Calatagan complied with the notice requirements under its Articles, By-Laws, and pertinent law regarding the foreclosure and sale of shares.
- Whether the sale of Clemente’s share was valid considering the payment of stock subscription and applicable lien for unpaid dues.
- Whether Calatagan acted in good faith and observed due diligence in its collection efforts and the foreclosure process.
- Whether damages, including actual, moral, exemplary damages, and attorney’s fees, are properly awarded to Clemente for wrongful foreclosure.
Ruling of the Securities and Exchange Commission (SEC)
- Dismissed Clemente’s complaint on November 15, 2000, on grounds of prescription citing Section 69 of the Corporation Code, which requires filing actions within six months from the sale date.
- Held that Calatagan complied with notice requirements.
- Declared Clemente acted in bad faith assuming non-payment only inactive his share.
Ruling of the Court of Appeals
- Rev