Two recent decisions of the Supreme Court underscore the need for country clubs to strictly follow notice requirements in connection with the sale of a delinquent member’s shares in a public auction.
In Valley Golf & Country Club, Inc. vs. Rosa O. Vda. Caram, G.R. No. 158805, April 16, 2009, the Supreme Court invalidated the sale based on the finding that Valley Golf sent the notice of sale to the member (instead of sending it to his estate), notwithstanding that Valley Golf knew that the member has died. In Calatagan Golf Club, Inc. vs. Sixto Clemente, Jr., G.R. No. 165443, April 16, 2009, the Supreme Court invalidated the sale based on the finding that Calatagan sent the notice of sale to the member’s P.O. box, notwithstanding that Calatagan knew that the P.O. box has been closed.
In Valley Golf, Valley Golf sold the golf membership share (the “Golf Share”) of Congressman Caram at a public auction sometime June 1987 after Caram allegedly stop paying his monthly dues beginning January 1980 and after Valley Golf allegedly sent 5 letters to Caram concerning his delinquent account during the period January 1986 to May 1987.
As it turned out, Caram died on 6 October 1986. His wife initiated intestate proceedings before the Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle her husband’s estate. Unaware of the pending controversy over the Golf Share, the Caram family and the RTC included the Golf Share as part of Caram’s estate. The RTC approved a project of partition of Caram’s estate on 29 August 1989. The Golf Share was adjudicated to the wife, who paid the corresponding estate tax due, including that on the golf Share.
It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the sale of the Golf Share following their inquiry with Valley Golf about the Golf Share. After a series of correspondence, the Caram heirs were subsequently informed, in a letter dated 15 October 1990, that they were entitled to the refund ofP11,066.52 out of the proceeds of the sale of the Golf Share, which amount had been in the custody of Valley Golf since 11 June 1987.
Caram’s wife filed an action for reconveyance of the Golf Share with damages before the Securities and Exchange Commission (SEC) against Valley Golf. On 15 November 1996, SEC Hearing Officer Elpidio S. Salgado rendered a decision in favor of the wife, ordering Valley Golf to convey ownership of the Golf Share, or in the alternative. to issue one fully paid share of stock of Valley Golf of the same class as the Golf Share to the wife. Damages totaling P90,000.00 were also awarded to the wife.
The SEC hearing officer ruled that under Section 67, paragraph 2 of the Corporation Code, a share stock could only be deemed delinquent and sold in an extrajudicial sale at public auction only upon the failure of the stockholder to pay the unpaid subscription or balance for the share. However, the section could not have applied in Caram’s case since he had fully paid for the Golf Share and he had been assessed not for the share itself but for his delinquent club dues. Proceeding from the foregoing premises, the SEC hearing officer concluded that the auction sale had no basis in law and was thus a nullity. The SEC en banc and the Court of Appeals affirmed the hearing officer’s decision.
On appeal to the Supreme Court, the central issue raised was: “May a country club seize and dispose of the membership share of a fully-paid member on account of its unpaid membership to the country club when it is authorized to do so under the corporate by-laws but not by the Articles of Incorporation?”
The Supreme Court ruled that there is a specific provision under Title XI on Non-Stock Corporations of the Corporation Code dealing with thetermination of membership in a non-stock corporation such Valley Golf. Section 91 of the Corporation Code provides:
SEC. 91. Termination of membership.—Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membe rship shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws. (Emphasis supplied)
On the basis of Section 91, the Supreme Court ruled that 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. However, the Supreme Court proceed to declare the sale as invalid. The Supreme Court found that Valley Golf acted in 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. The Court stated:
Whatever the reason Caram was unable to respond to the earlier notices, the fact remains that at the time of the final notice, Valley Golf knew that Caram, having died and gone, would not be able to settle the obligation himself, yet they persisted in sending him notice to provide a color of regularity to the resulting sale.
That reason alone, evocative as it is of the absence of substantial justice in the sale of the Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the Court of Appeals.
Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the final notice to Caram on the deliberate pretense that he was still alive could bring into operation Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code. These provisions enunciate a general obligation under law for every person to act fairly and in good faith towards one another. Non-stock corporations and its officers are not exempt from that obligation.
A similar fate fell on Calatagan Golf Club, which sold the golf share of Clemente sometime January 1993 after Clemente allegedly stop paying its membership dues. Clemente learned of the sale of his share only in November of 1997. He filed a claim with the SEC seeking the restoration of his shareholding in Calatagan with damages.
On 15 November 2000, the SEC rendered a decision dismissing Clemente’s complaint. Citing Section 69 of the Corporation Code which provides that the sale of shares at an auction sale can only be questioned within six (6) months from the date of sale, the SEC concluded that Clemente’s claim, filed four (4) years after the sale, had already prescribed. The SEC further held that Calatagan had complied with all the requirements for a valid sale of the subject share, Clemente having failed to inform Calatagan that the address he had earlier supplied was no longer his address. Clemente, the SEC ruled, had acted in bad faith in assuming as he claimed that his non-payment of monthly dues would merely render his share “inactive.”
The Supreme Court ruled that Clemente’s action for recovery of share has not prescribed, citing Article 1140 of the Civil Code which provides that an action to recover movables shall prescribe in eight (8) years. The Supreme Court also found the sale of the golf share was void:
Ultimately, the petition must fail because Calatagan had failed to duly observe both the spirit and letter of its own by-laws. The by-law provisions was clearly conceived to afford due notice to the delinquent member of the impending sale, and not just to provide an intricate façade that would facilitate Calatagan’s sale of the share. But then, the bad faith on Calatagan’s part is palpable. As found by the Court of Appeals, Calatagan very well knew that Clemente’s postal box to which it sent its previous letters had already been closed, yet it persisted in sending that final letter to the same postal box. What for? Just for the exercise, it appears, as it had known very well that the letter would never actually reach Clemente.
It is noteworthy that Clemente in his membership application had provided his residential address along with his residence and office telephone numbers. Nothing in Section 32 of Calatagan’s By-Laws requires that the final notice prior to the sale be made solely through the member’s mailing address. Clemente cites our aphorism-like pronouncement in Rizal Commercial Banking Corporation v. Court of Appeals that “[a] simple telephone call and an ounce of good faith x x x could have prevented this present controversy.” That memorable observation is quite apt in this case.
Calatagan’s bad faith and failure to observe its own By-Laws had resulted not merely in the loss of Clemente’s privilege to play golf at its golf course and avail of its amenities, but also in significant pecuniary damage to him. For that loss, the only blame that could be thrown Clemente’s way was his failure to notify Calatagan of the closure of the P.O. Box. That lapse, if we uphold Calatagan would cost Clemente a lot. But, in the first place, does he deserve answerability for failing to notify the club of the closure of the postal box? Indeed, knowing as he did that Calatagan was in possession of his home address as well as residence and office telephone numbers, he had every reason to assume that the club would not be at a loss should it need to contact him. In addition, according to Clemente, he was not even aware of the closure of the postal box, the maintenance of which was not his responsibility but his employer Phimco’s.
The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21 of the Civil Code under the Chapter on Human Relations. These provisions, which the Court of Appeals did apply, enunciate a general obligation under law for every person to act fairly and in good faith towards one another. A non-stock corporation like Calatagan is not exempt from that obligation in its treatment of its members. The obligation of a corporation to treat every person honestly and in good faith extends even to its shareholders or members, even if the latter find themselves contractually bound to perform certain obligations to the corporation. A certificate of stock cannot be a charter of dehumanization.
Two things to note:
1. Unlike the by-laws of Valley Golf, the by-laws of Calatagan contained what the Supreme Court described as “a clear and comprehensive procedure to govern the payment of monthly dues, the declaration of a member as delinquent, and the constitution of a lien on the shares and its eventual public sale to answer for the member’s debts.”
2. In Calatagan, the Supreme Court did not appear to have seen any issue with the by-laws provision that states that “The club shall have a first lien on every share of stock to secure debts of the members to the Club.” On the other hand, in Valley Golf, the Supreme Court appears to say (in an obiter) that a lien can be created only if there was a pledge or chattel mortgage executed by the owner of the golf share. The Supreme Court stated: “Caram had not signed any document that manifests his agreement to constitute his Golf Share as security in favor of Valley Golf to answer for his obligations to the club. There is no document we can assess that it is substantially compliant with the form of chattel mortgages under Section 5 of Act No. 1508. The by-laws could not suffice for that purpose since it is not designed as a bilateral contract between Caram and Valley Golf, or a vehicle by which Caram expressed his consent to constitute his Golf Share as security for his account with Valley Golf.”