Bad faith

The exercise of a right though legal by itself, must nonetheless be in accordance with proper norms. This case of Carding enumerates these norms.

As senior vice president and operations manager for the Visayas and Mindanao of a food conglomerate (SMC), Carding was his company’s special non-proprietary member in an elite Cebu country club (CCCI) where the company has a proprietary share.

In 1996 Carding himself decided to personally become a proprietary member in the club. Thus he was made to fill up, sign and submit an application form. Printed in the form was Section 3 © of the by-laws stating that the application should be approved by the Board. The said section however does not specify the number of votes needed for the approval. Carding’s application was endorsed by two proprietary members.

Thereafter, Carding sought to purchase a proprietary share which at that time was within the price range of P5 million. The president of the Club offered him a share for P3.5 million but he opted to purchase the share offered by another person for only P3 million.

After being issued a Proprietary Ownership Certificate however, action on his application for proprietary membership was deferred twice by the Board. In another Board meeting his application was finally voted upon and disapproved because the Board relied on Section 3 © as amended way back on March 1, 1978 requiring unanimous vote of all directors present. In Carding’s application, the Board adopted a secret balloting known as the “black ball system” wherein each member drops in the ballot box either a white ball which represents conformity or a black ball which means disapproval. In Carding’s application for membership, the ballot box contained one black ball. So it was disapproved.

When notified, Carding wrote the board twice asking for reconsideration. Both his letters were not answered. Then he sent another letter again inquiring whether any member of the board objected to his application. Again CCCI did not reply.

So on December 23, 1998, Carding filed with the Regional Trial Court (RTC) a complaint for damages against CCCI and the Board members jointly and severally. For their defense CCCI and the Board members alleged that they did not act in bad faith so they are not liable for damages. Were they correct?

No. While the CCCI Board of Directors has a right to approve or disapprove an application for proprietary membership, such right should be exercised in accordance with the norms of human conduct set forth in Article 19 of the Civil Code. These standards are the following: to act with justice; to give everyone his due; and to observe honesty and good faith.

In rejecting Carding’s application for proprietary membership, CCCI and the Board members violated the basic principles to be observed for the rightful relationship between human beings and for the stability of the social order. They committed fraud and evident bad faith in disapproving his application.

The amendment to Section 3 © requiring unanimous vote of directors was not printed on the application form that Carding filed and submitted. What was printed was the original provision which was silent on the required number of votes needed for admission of an applicant for proprietary membership. The amendment was introduced way back in 1978 or almost 20 years before Carding filed his application. An exclusive country club like CCCI, whose members are all affluent, should have enough money to cause the printing of an updated application form.

It is clear that Carding was left groping in the dark wondering why his application was disapproved. He was not even informed that a unanimous vote of the directors was required. When he sent letters of reconsideration and an inquiry whether there was an objection to his application, he was ignored. Certainly he did not deserve this kind of treatment. At the very least they should have informed him why his application was disapproved.

Pursuant to Section 31 of the Corporation Code, the directors who are guilty of bad faith in directing the affairs of the corporation shall be liable jointly and severally. So CCCI and its directors should pay Carding P50,000 moral damages, P25,000 exemplary damages, P50,000 attorney’s fees and P25,000 expenses of litigation (Cebu Country Club Inc. et. al. vs. Elizagaque, G.R. 160273, January 18, 2008).