Philippine Supreme Court Jurisprudence > Year 1911 > December 1911 Decisions > G.R. No. 6217 December 26, 1911 - CHARLES W. MEAD v. E. C. McCULLOUGH, ET AL.

021 Phil 95:

This action was originally brought by Charles W. Mead against Edwin C. McCullough, Thomas L. Hartigan, Frank Green, and Frederick H. Hilbert. Mead has died since the commencement of the action and the case is now going forward in the name of his administrator as plaintiff.

The complaint contains three causes of action, which are substantially as follows: The first, for salary; the second, for profits; and the third, for the value of the personal effects alleged to have been left by Mead and sold by the defendants.

A joint and several judgment was rendered by default against each and all of the defendants for the sum of $3,450.61 gold. The defendant McCullough alone having made application to have this judgment set aside, the court granted his motion, vacating the judgment as to him only, the judgment as to the other three defendants remaining undisturbed.

At the new trial, which took place some two or three years later and after the death of Mead, judgment was rendered upon the merits, dismissing the case as to the first and second causes of action and for the sum of $1,200 gold in the plaintiff’s favor on the third cause of action. From this judgment both parties appealed and have presented separate bills of exceptions. No appeal was taken by the defendant McCullough from the ruling of the court denying a recovery on his cross complaint.

On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion unless it is otherwise stated) and the defendants organized the "Philippine Engineering and Construction Company," the incorporators being the only stockholders and also the directors of said company, with general ordinary powers. Each of the stock-holders paid into the company $2,000 Mexican currency in cash, with the exception of Mead, who turned over to the company personal property in lieu of cash.

Shortly after the organization, the directors held a meeting and elected the plaintiff as general manager. The plaintiff held this position with the company for nine months, when he resigned to accept the position of engineer of the Canton and Shanghai Railway Company. Under this organization the company began business about April 1, 1902.

The contracts and work undertaken by the company during the management of Mead were the wrecking contract with the Navy Department at Cavite for the raising of the Spanish ships sunk by Admiral Dewey; the contract for the construction of certain warehouses for the quartermaster department; the construction of a wharf at FortMcKinley for the Government; the supervision of the construction of the Pacific Oriental Trading Company’s warehouse; and some other odd jobs not specifically set out in the record.

Shortly after the plaintiff left the Philippine Islands for China, the other directors, the defendants in this case, held a meeting on December 24, 1903, for the purpose of discussing the condition of the company at that time and determining what course to pursue. They did on that date enter into the following contract with the defendant McCullough, to wit:jgc:chanrobles.com.ph

"For value received, this contract and all the rights and interests of the Philippine Engineering and Construction Company in the same are hereby assigned to E. C. McCullough of Manila, P. I.

(Sgd.) "E. C. MCCULLOUGH,

"President, Philippine Engineering and

Construction Company.

(Sgd.) "F. E. GREEN, Treasurer.

(Sgd.) "THOMAS L. HARTIGAN, Secretary."cralaw virtua1aw library

The contract referred to in the foregoing document was known as the wrecking contract with the naval authorities.

On the 28th of that same month, McCullough executed and signed the following instrument:jgc:chanrobles.com.ph

"For value received, and having the above assignment from my associates in the Philippine Engineering and Construction Company, I hereby transfer my right, title, and interest in the within contract, with the exception of one-sixth, which I hereby retain, to R. W. Brown, H. D. C. Jones, John T. Macleod, and T. H. Twentyman."cralaw virtua1aw library

The assignees of the wrecking contract, including McCullough, formed what was known as the "Manila Salvage Association." This association paid to McCullough $15,000 Mexican currency cash for the assignment of said contract. In addition to this cash payment, McCullough retained a one-sixth interest in the new company or association.

The plaintiff insists that he was to receive as general manager of the first company a salary which was not to be less than $3,500 gold (which amount he was receiving as city engineer at the time of the incorporation of the company), plus 20 per cent of the net profits which might be derived from the business; while McCullough contends that he plaintiff was to receive only his necessary expenses unless the company made a profit, when he would receive $3,500 per year and 20 per cent of the profits. The contract entered into between the board of directors and the plaintiff as to the latter’s salary was a verbal one. The plaintiff testified that this contract was unconditional and that his salary, which was fixed at $3,500 gold, was not dependent upon the success of the company, but that his share of the profits was to necessarily depend upon the net income. On the other hand, McCullough, Green and Hilbert testify that the salary of the plaintiff was to be determined according to whether or not the company was successful in its operations; that if the company made gains, he was to receive $3,500 gold, and a percentage, but that if the company did not make any profits, he was to receive only his necessary living expenses.

It is strongly urged that the plaintiff would not have accepted the management of the company upon such conditions, as he was receiving from the city of Manila a salary of $3,500 gold. This argument is not only answered by the positive and direct testimony of three of the defendants, but also by the circumstances under which this company was organized and its principal object, which was the raising of the Spanish ships. The plaintiff put no money into the organization, the defendants put but little: just sufficient to get the work of raising the wrecks under way. This venture was a risky one. All the members of the company realized that they were undertaking a most difficult and expensive project. If they were successful, handsome profits would be realized; while if they were unsuccessful, all the expenses for the hiring of machinery, launches, and labor would be a total loss. The plaintiff was in complete charge and control of this work and was to receive, according to the great preponderance of the evidence, in case the company made no profits, sufficient amount to cover his expenses, which included his room, board, transportation, etc. The defendants were to furnish money out of their own private funds to meet these expenses, as the original $8,000 Mexican currency was soon exhausted in the work thus undertaken. So the contract entered into between the directors and the plaintiff as to the latter’s salary was a contingent one.

It is admitted that the plaintiff received $1,500 gold for his services, and whether he is entitled to receive an additional amount depends upon the result of the second cause of action.

The second cause of action is more difficult to determine. On this point counsel for the plaintiff has filed a very able and exhaustive brief, dealing principally with the facts.

It is urged that the net profits accruing to the company after the completion of all the contracts (except the salvage contract) made before the plaintiff resigned as manager and up to the time the salvage contract was transferred to McCullough and from him to the new company, amounted to $5,628.37 gold. This conclusion is reached, according to the memorandum of counsel for the plaintiff which appears on pages 38 and 39 of the record, in the following manner:chanrob1es virtual 1aw library

Profits from the construction of warehouses for the Government $6,962.54

Profits from the construction of the wall at Fort McKinley 500.00

Profits from the inspection of the construction of the P. O. T.

warehouse 1,000.00

Profits obtained from other projects (according to Mead’s

calculations) 1,000.00

______

Total 9,462.54

In this same memorandum, the expense for the operation of the company during Mead’s management, consisting of rents, the hire of one muchacho, the publication of various notices, the salary of an engineer for four months, and plaintiff’s salary for nine months, amounts to $3,834.17 gold. This amount, deducted from the sum total of profits, leaves $5,628.37 gold.

Counsel for the plaintiff, in order to show conclusively as they assert that the company, after paying all expenses and indebtedness, had a considerable balance to its credit, calls attention to Exhibit K. This exhibit reads as follows:jgc:chanrobles.com.ph

"Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering and Construction Company."cralaw virtua1aw library

Then follows the debits and credits, with a balance in favor of the company of $10,728.44 Mexican currency. This account purports to cover the period from July 1, 1902, to April 1, 1903. Ledger No. 3, above mentioned, is that of the defendant McCullough and not one of the books of the company.

It was upon this exhibit that the lower court based its conclusion when it found that on January 25, 1903, after making the transfer of the salvage contract to McCullough, the company was in debt $2,278.30 gold. The balance of $10,728.44 Mexican currency deducted from the $16,439.40 Mexican currency (McCullough’s losses in the Manila Salvage Association) leaves $2,278.30 United States currency at the then existing rate of exchange. In Exhibit K, McCullough charged himself with the $15,000 Mexican currency which he received from his associates in the new company, but did not credit himself with the $16,439.40 Mexican currency, losses in said company, for the reason that on April 1, 1903, said losses had not occurred. It must be borne in mind that Exhibit K is an abstract from a ledger.

The defendant McCullough, in order to show in detail his transactions with the old company, presented Exhibits 1 and 2. These accounts read as follows:jgc:chanrobles.com.ph

"Detailed account of the receipts and disbursements of E. C. McCullough and the Philippine Engineering and Construction Company."cralaw virtua1aw library

Then follow the debits and credits. These two accounts cover the period from March 5, 1902, to June 9, 1905. According to Exhibit No. 1, the old company was indebted to McCullough in the sum of $14,918.75 Mexican currency, and according to Exhibit No. 2 the indebtedness amounted to $6,358.15 Mexican currency. The debits and credits in these two exhibits are exactly the same with the following exceptions: In Exhibit No. 1, McCullough credits himself with the $10,000 Mexican currency (the amount borrowed from the bank and deposited with the admiral as a guarantee for the faithful performance of the salvage contract); while in Exhibit No. 2 he credits himself with this $10,000, and at the same time charges himself with this amount. In the same exhibit (No. 2) he credits himself with $16,439.40 Mexican currency, his losses in the new company, and charges himself with the $15,000 Mexican currency, received from said company. Eliminating entirely from these two exhibits the $10,000 Mexican currency, the $15,000 Mexican currency, and the $16,439.40 Mexican currency, the balance shown in McCullough’s favor is exactly the same in both exhibits. This balance amounts to $4,918.75 Mexican currency.

According to McCullough’s accounts in Exhibits 1 and 2, the profits derived from the construction of the Government warehouses amounted to $4,005.02 gold, while the plaintiff contends that these profits amounted to $6,962.54 gold. The plaintiff, during his management of the old company, made a contract with the Government for the construction of these warehouses and commenced work. After he resigned and left for China, McCullough took charge of and completed the said warehouses. McCullough gives a complete, detailed statement of expenses for the completion of this work, showing the dates, to whom paid, and for what purpose. He also gives the various amounts he received from the Government with the dates of the receipt of the same. On the first examination, McCullough testified that the total amount received from the Government for the construction of these warehouses was $11,128 gold. The case was suspended for the purpose of examining the records of the Auditor and the quartermaster, to determine the exact amount paid for this work. As a result of this examination, the vouchers show an additional amount of about $5,000 gold, paid in checks. These checks show that the same were endorsed by the plaintiff and collected by him from the Hongkong and Shanghai Banking Corporation. This money was not handled by McCullough and as it was collected by the plaintiff, it must be presumed, in the absence of proof, that it was disbursed by him. McCullough did not charge himself with the $2,500 gold, alleged to have been profits from the construction of the wall at Fort McKinley, the inspection of the construction of the P. O. T. warehouse, and other projects. This work was done under the management of the plaintiff and it is not shown that the profits from these contracts ever reached the hands of McCullough. McCullough was not the treasurer of the company at that time. The other items which the plaintiff insists that McCullough had no right to credit himself with are the following:chanrob1es virtual 1aw library

Date. To whom paid. account (Mex. currency)

Jan. 30, 1903 Green $2,000.00

Feb. 2, 1903 McCullough 1,300.00

Feb. 2, 1903 Green 1,027.92

Feb. 19, 1903 P.O.T. Co. note 2,236.80

May 23, 1905 Hilbert 1,856.02

June 9, 1905 Hartigan 1,225.00

McCullough says that these amounts represent cash borrowed from the respective parties to carry on the operations of the old company while it was trying to raise the sunken vessels. There is no proof to the contrary, and McCullough’s testimony on this point is strongly corroborated by the fact that the work done by the company in attempting to raise these vessels was its first undertaking. The company had made no profits while that work was going on under the management of the plaintiff, but its expenses greatly exceeded that of the original $8,000 Mexican currency. It was necessary to borrow money to continue that work. These amounts, having been borrowed, were outstanding debts when McCullough took charge for the purpose of completing the warehouses and winding up the business of the old company. These amounts do not represent payments or refunds of the original capital McCullough did not credit himself with any amount for his services for supervising the completion of the warehouses, nor for liquidating or winding up the company’s affairs. We think that the amount of $4,918.75 Mexican currency, balance in McCullough’s favor up to this point, represents a fair, equitable, and just settlement.

So far we have referred to the Philippine Engineering and Construction Company as the "company," without any attempt to define its legal status.

The plaintiff and defendants organized this company with a capital stock of $100,000 Mexican currency, each paying in on the organization $2,000 Mexican currency. The remainder, $90,000, according to the articles of agreement, were to be offered to the public in shares of $100 Mexican currency, each. The names of all the organizers appear in the articles of agreement, which articles were duly inscribed in the commercial register. The purposes for which this organization was effected were to engage in general engineering and construction work, operating under the name of the "Philippine Engineering and Construction Company." During its active existence, it engaged in the business of attempting to raise the sunken Spanish fleet, constructing under contract warehouses and a wharf for the United States Government, supervising the construction of a warehouse for a private firm, and some assay work. It was, therefore, an industrial civil partnership, as distinguished from a commercial one; a civil partnership in the mercantile form, an anonymous partnership legally constituted in the city of Manila.

The articles of agreement appeared in a public document and were duly inscribed in the commercial register. To the extent of this inscription the corporation partook of the form of a mercantile one and as such must be as these provisions are not in conflict with the Civil Code (art. 1670, Civil Code); but the direct and principal law applicable is the Civil Code. Those provisions of the Code of Commerce are applicable subsidiarily.

This partnership or stock company (sociedad anonima) upon the execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, became a juridical person — n artificial being, invisible, intangible, and existing only in contemplation of law — with the power to hold, buy, and sell property, and to sue and be sued — a corporation — not a general copartnership nor a limited copartnership. (Arts. 37, 38, 1665, and 1666 of the Civil Code; Compañia Agricola de Ultramar v. Reyes Et. Al., 4 Phil. Rep., 2; and Chief Justice Marshall’s definition of a corporation, 17 U. S., 518.)

The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person — a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation. (Compañia Agricola de Ultramar v. Reyes Et. Al., supra.)

Did a majority of the stockholders, who were at the same time a majority of the directors of this corporation, have the power under the law and its articles of agreement, to sell or transfer to one of its members the assets of said corporation?

In the first article of the statutes of incorporation it is stated that by virtue of a public document the organizers, whose names are given in full, agreed to form a sociedad anonima. Article II provides that the organizers should be the directors and administrators until the second general meeting, and until their successors were duly elected and installed. The third article provides that the sociedad should run for ninety-nine years from the date of the execution of its articles of agreement. Article IV sets forth the object or purpose of the organization. Article V makes the capital $100,000 Mexican currency, divided into one thousand shares at $100 Mexican currency each. Article VI provides that each shareholder should be considered as a coowner in the assets of the company and entitled to participate in the profits in proportion to the amount of his stock. Article VII fixed the time of holding general meetings and the manner of calling special meetings of the stockholders. Article VIII provides that the board of directors shall be elected annually. Article IX provides for the filling of vacancies in the board of directors. Article X provides that "the board of directors shall elect the officers of the sociedad and have under its charge the administration of the said sociedad." Article XI: "In all the questions with reference to the administration of the affairs of the sociedad, it shall be necessary to secure the unanimous vote of the board of directors, and at least three of said board must be present in order to constitute a legal meeting." Article XII provides that all of the stock, except that which was divided among the organizers, should remain in the treasury subject to the disposition of the board of directors. Article XIII reads: "In all the meetings of the stockholders, a majority vote of the stockholders present shall be necessary to determine any question discussed." The fourteenth article authorizes the board of directors to adopt such rules and regulations for the government of the sociedad as it should deem proper, which were not in conflict with its statutes.

When the sale or transfer heretofore mentioned took place, there were present four directors, all of whom gave their consent to that sale or transfer. The plaintiff was then absent and his express consent to make this transfer or sale was not obtained. He was, before leaving, one of the directors in this corporation, and although he had resigned as manager, he had not resigned as a director. He accepted the position of engineer of the Canton and Shanghai Railway Company, knowing that his duties as such engineer would require his whole time and attention and prevent his returning to the Philippine Islands for at least a year or more. The new position which he accepted in China was incompatible with his position as director in the Philippine Engineering and Construction Company, a corporation whose sphere of operations was limited to the Philippine Islands. These facts are sufficient to constitute an abandoning or vacating of his position as director in said corporation. (10 Cyc., 741.) Consequently, the transfer or sale of the corporation’s assets to one of its members was made by the unanimous consent of all the directors in the corporation at that time.

There were only five stockholders in this corporation at any time, four of whom were the directors who made the sale, and the other the plaintiff, who was absent in China when the said sale took place. The sale was, therefore, made by the unanimous consent of four-fifths of all the stockholders. Under the articles of incorporation, the stockholders and directors had general ordinary powers. There is nothing in said articles which expressly prohibits the sale or transfer of the corporate property to one of the stockholders of said corporation.

Is there anything in the law which prohibits such a sale or transfer? To determine this question, it is necessary to examine, first, the provisions o

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