Zomer Development v. International Exchange Bank
REITERATIONFacts
The Antecedents: Zomer Development Company, Inc. (petitioner) approved a resolution authorizing it to apply for a credit line with International Exchange Bank (IEB) and to assign, pledge, or mortgage its properties as security for this credit line, as well as to secure and guarantee the term loan and other credit facility of IDHI Prime Aggregates Corporation (Prime Aggregates) with IEB. Prime Aggregates obtained a term loan of ₱60,000,000 from IEB. Petitioner, through its Treasurer and General Manager, executed a real estate mortgage over three parcels of land in favor of IEB to secure various obligations of both petitioner and Prime Aggregates. Prime Aggregates subsequently obtained several loans from IEB from September 1997 until September 1998. Prime Aggregates failed to settle its outstanding obligation, prompting IEB to file a petition for extra-judicial foreclosure of mortgage. Respondent Sheriff IV Arthur R. Cabigon issued a Notice of Extra-Judicial Foreclosure and Sale. Procedural History: Petitioner filed a complaint for Injunction with application for writ of preliminary injunction/temporary restraining order, alleging the real estate mortgage was null and void because its officers were authorized to execute it only to secure one obligation of Prime Aggregates. The Regional Trial Court (RTC) denied petitioner's prayer for a writ of preliminary injunction. Petitioner assailed this denial before the Court of Appeals (CA) via certiorari, arguing the mortgage was ultra vires and that its officers exceeded their authority. Meanwhile, the RTC dismissed petitioner's Third Amended Complaint. The CA, acting on the certiorari case, denied it due course, finding no grave abuse of discretion in the denial of the preliminary injunction. The CA also affirmed the dismissal of the main complaint. The Petition: Petitioner filed a petition for review before the Supreme Court, faulting the CA for various errors, including not holding the judge biased, misapplying jurisprudence, not holding Prime Aggregates as a subsidiary, not voiding the Secretary's Certificate and the Real Estate Mortgage for exceeding authority, not construing the documents strictly against IEB, not blaming IEB for the alleged illegal contract, and holding that petitioner ratified the contract by inaction.
Issue(s)
Whether the Court of Appeals committed grave abuse of discretion in denying petitioner's prayer for a writ of preliminary injunction. Whether the real estate mortgage executed by petitioner was null and void for being ultra vires. Whether the officers of petitioner were authorized to mortgage its properties to secure obligations beyond a specific term loan and one credit facility of Prime Aggregates. Whether the foreclosure and consolidation of title in IEB's name rendered the petition moot and academic.
Ruling
The petition is DISMISSED. The Court finds the petition moot and academic due to the foreclosure and consolidation of title in IEB's name. The Court also finds that the real estate mortgage was not ultra vires and was ratified by petitioner's actions.
Ratio Decidendi
On the issue of whether the Court of Appeals committed grave abuse of discretion in denying petitioner's prayer for a writ of preliminary injunction: The Court held that the CA did not commit grave abuse of discretion. The CA correctly found that the trial court did not err in denying the preliminary injunction. The subsequent foreclosure and consolidation of title in IEB's name rendered the issue of preliminary injunction moot and academic. The Court noted that the principal action for annulment of the mortgage was dismissed by the trial court and was on appeal, but the foreclosure and consolidation proceeded. On the issue of whether the real estate mortgage executed by petitioner was null and void for being ultra vires: The Court affirmed the CA's finding that the mortgage was not ultra vires. While petitioner's By-Laws might not explicitly empower it to mortgage properties for third-party obligations, exceptions exist. The Securities and Exchange Commission's opinion, which the CA found persuasive, states that a private corporation may mortgage assets to secure a subsidiary's debt or when done in furtherance of the corporation's interest. The CA found Prime Aggregates to be a subsidiary and petitioner a "family" corporation, with overlapping directors and officers from the Zosa family. The Court agreed that aiding a sister corporation, especially within a family business structure, could be considered in furtherance of the corporation's best interests. On the issue of whether the officers of petitioner were authorized to mortgage its properties to secure obligations beyond a specific term loan and one credit facility of Prime Aggregates: The Court found that the Board of Directors' resolution authorized the Treasurer and General Manager to execute a real estate mortgage over its properties as security for the "term loan and credit facility" of Prime Aggregates. The term "credit facility" is broad and can encompass various forms of financial accommodations. The Court also considered the contemporaneous and subsequent acts of the parties, finding that petitioner conformed to and ratified the execution of the mortgage. The Court emphasized that petitioner maintained a "stoic silence" and a "hands off" stance until IEB filed for foreclosure, which it deemed inequitable. The plea of ultra vires was deemed inapplicable as it would accomplish a legal wrong to the prejudice of IEB, which acted in good faith. On the issue of whether the foreclosure and consolidation of title in IEB's name rendered the petition moot and academic: The Court found this issue dispositive. The records showed that petitioner's mortgaged properties were foreclosed, and ownership had been consolidated and transfer certificates of title issued in IEB's name. Consequently, the prayer for a writ of preliminary injunction, which was the subject of the appeal, could no longer survive. The Court stated that it was unnecessary to dwell further on the ultra vires argument given this development.
Main Doctrine
A corporation may mortgage its properties to secure the debt of a subsidiary or a sister corporation, especially when done in furtherance of its own corporate interests or when such act is ratified by the corporation. The plea of ultra vires will not be allowed to prevail when it will not advance justice but will accomplish a legal wrong to the prejudice of another who acted in good faith.