Membership Termination in Non-Stock Corporations: Safeguarding Property Rights

The Supreme Court's 2009 decision in Calatagan Golf Club, Inc. v. Clemente serves as an important reminder for non-stock corporations: the right to terminate a member's interest in the corporation is not absolute. Even when the corporation's governing documents permit the sale of shares for unpaid dues, the corporation must strictly comply with its own procedures and act in good faith. The case protects the property rights of members against arbitrary or careless corporate action.

The Facts of the Case

Sixto Clemente, Jr. purchased one share of stock in Calatagan Golf Club, Inc. in 1990 for P120,000.00. As a member, he was required to pay monthly dues under the club's Articles of Incorporation and By-Laws. Clemente paid his dues for a time, but stopped paying in late 1991.

Calatagan sent demand letters to the mailing address Clemente had provided in his membership application. However, the postal box had been closed, and the letters were returned to sender. Despite knowing this, Calatagan sent a final demand letter to the same closed address. The club then posted a notice of auction on its bulletin board and sold Clemente's share at public auction for P64,000.00. Clemente did not learn of the sale until 1997, four years later.

The Issue

The central issue was whether Calatagan validly terminated Clemente's membership and sold his share, and whether Clemente's claim for restoration was timely filed. Calatagan argued that Clemente's action had prescribed under Section 69 of the Corporation Code, which sets a six-month period to question a sale of delinquent stock.

The Ruling

The Supreme Court denied Calatagan's petition and affirmed the Court of Appeals' decision restoring Clemente's share and awarding damages. The Court made several key rulings.

First, Section 69 of the Corporation Code did not apply. That provision concerns the sale of shares for unpaid subscriptions—the purchase price of the stock itself. Clemente had fully paid for his share. His debt was for monthly dues, a separate obligation. The Court found no basis to apply the six-month prescriptive period to this different type of sale.

Second, the applicable prescriptive period was eight years under Article 1140 of the Civil Code, which governs actions to recover movables. Since Clemente's action was to recover his share of stock, his claim filed within eight years was timely.

Third, and most significantly, Calatagan failed to comply with its own By-Laws. The By-Laws required the Corporate Secretary to notify the member within ten days after the Board ordered the sale of the share. The Court found that Calatagan knew its previous letters had been returned because the postal box was closed, yet it sent the final notice to the same address. The club had Clemente's residential address and telephone numbers on file, but made no effort to contact him through those channels.

The Court emphasized that the by-law provisions were designed to afford due notice to the delinquent member, not to provide a "façade" for the corporation to sell the share. By sending the final letter to a known-closed address, Calatagan acted in bad faith. This bad faith triggered liability under the Civil Code provisions requiring every person to act with justice, honesty, and good faith, and to indemnify another for damage caused by willful or negligent acts.

Practical Takeaways

• Follow your own by-laws strictly. A corporation that fails to observe its own procedures for terminating membership or selling shares risks having the sale invalidated and being held liable for damages.
• Use all available contact information. When a member cannot be reached at one address, the corporation should make reasonable efforts using other addresses or phone numbers on file. A "simple telephone call and an ounce of good faith" could prevent costly litigation.
• Know the correct prescriptive period. The six-month period under Section 69 of the Corporation Code applies only to sales for unpaid stock subscriptions, not to sales for other debts like membership dues. For recovery of shares, the eight-year period under the Civil Code provision on actions to recover movables generally applies.
• Termination of membership must accord with substantial justice. The Corporation Code allows termination of membership in non-stock corporations as provided in the articles or by-laws, but the procedure must be followed in good faith and with due regard for the member's property rights.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.