G.R. No. L-7945, December 1, 1914
CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO DEL SAZ OROZCO, ET AL., defendants-appellees.

FACTS:
The plaintiff, Candido Pascual, a shareholder of the Banco Español-Filipino, filed a derivative suit on behalf of the bank and its stockholders against its former directors and councilors (defendants). The suit sought to compel the defendants to refund a portion of the compensation they received, alleging it was improperly computed.

The bank’s by-laws, specifically Article 30, governed the distribution of profits. It stated that after deducting all administration expenses and the legal reserve fund, the net profits were to be apportioned as: 10% for the board of directors, 5% for the board of managers, and the remaining 85% to the shareholders.

The plaintiff’s first cause of action alleged that the defendants fraudulently computed their 10% and 5% shares based on the gross profits instead of the net profits, thereby appropriating approximately ₱100,000 over five years to the detriment of the bank and its shareholders, and that they concealed this practice.

After the Supreme Court reversed the lower court’s dismissal of this cause of action (19 Phil. Rep., 82), the case proceeded to trial. The facts established at trial, based on a stipulation, differed significantly from the initial allegations. It was shown that the defendants did not act fraudulently. They correctly deducted administration expenses before computing their compensation. The central dispute evolved into whether certain deductionsspecifically, amounts set aside to cover bad debts (accounts classified as dudosa y fallida) that were incurred prior to the defendants’ managementshould have been charged against gross profits (which would reduce the base for the defendants’ compensation) or against net profits/ capital (which would not).

The defendants, upon assuming management, found substantial bad debts (over ₱500,000). To avoid depleting the reserve fund, they decided to gradually extinguish these old bad debts by using the bank’s excess net profits (profits remaining after paying expenses, taxes, dividends, and the defendants’ compensation), rather than charging them immediately as an administration expense.

Furthermore, after the plaintiff’s demand, a special shareholders’ meeting was convened. Shareholders holding a vast majority of the bank’s stock (5,550 out of 7,500 shares) ratified and approved the defendants’ method of distributing earnings.

ISSUE:
1. Whether the Supreme Court’s prior decision on the demurrer (19 Phil. Rep., 82) established the “law of the case” that the defendants’ compensation was improperly computed.
2. Whether the defendants rightfully computed their compensation based on profits after deducting administration expenses but before deducting amounts applied to cover pre-existing bad debts.
3. Whether the shareholders had the power to ratify the defendants’ interpretation and application of Article 30 of the by-laws.

RULING:
The Supreme Court AFFIRMED the judgment in favor of the defendants.

1. On the “Law of the Case”: The prior decision on the demurrer established the law only for the case as then pleaded. It merely held that if the defendants had fraudulently taken compensation from gross profits and concealed it, the plaintiff would have a cause of action. At trial, the stipulated facts showed no fraud and that administration expenses were properly deducted. Therefore, the “law of the case” from the demurrer stage did not control the interpretation of Article 30 based on the actual evidence presented.

2. On the Computation of Compensation: The Court held the defendants’ computation was correct. Article 30 requires compensation to be based on profits after deducting all expenses of administration. The amounts used to gradually write off old bad debts incurred before the defendants’ tenure were not “expenses of administration” chargeable against the profits from which their compensation was derived. To rule otherwise would unjustly force the incoming managers to bear the losses of their predecessors, which would deter anyone from accepting such a position. The proper course was to cover these old losses from net profits or reserve funds, which still ultimately belong to the shareholders.

3. On Shareholder Ratification: The Court found it unnecessary to rule definitively on this issue since it had already upheld the defendants’ interpretation of Article 30. However, the extensive discussion of the shareholders’ meeting and the overwhelming vote of approval (555 votes representing 5,550 shares) strongly implies the validity of such ratification, especially in the absence of fraud.