Metropolitan Bank v. Centro Development
MODIFICATIONFacts
The Antecedents: Centro Development Corporation (Centro) authorized its president, Go Eng Uy, to mortgage its properties to secure loans for Lucky Two Corporation and Lucky Two Repacking. This led to a Mortgage Trust Indenture (MTI) with Bank of the Philippine Islands (BPI). The MTI was amended thrice, increasing the secured obligations to ₱144 million. Subsequently, Centro proposed Metropolitan Bank and Trust Company (Metrobank) as successor-trustee. On August 12, 1994, Centro's board allegedly resolved to appoint Metrobank as successor-trustee, and on September 27, 1994, an MTI was executed with Metrobank. In 1998, minority stockholders (Kehyengs) discovered the mortgage and questioned the validity of the August 12, 1994 board meeting. Meanwhile, San Carlos Milling Company, Inc. (San Carlos) obtained substantial loans from Metrobank, which were allegedly secured by the MTI. San Carlos defaulted, and Metrobank initiated extrajudicial foreclosure proceedings on Centro's properties. Procedural History: The Kehyengs filed a complaint for annulment of the September 27, 1994 MTI, arguing that Section 40 of the Corporation Code (requiring 2/3 stockholders' vote for disposition of substantially all corporate assets) was not complied with. The Regional Trial Court (RTC) dismissed the complaint, finding laches had attached and that the Kehyengs' evidence was insufficient. The Court of Appeals (CA) reversed the RTC, declaring the MTI null and void, and consequently, the foreclosure and sale of the properties as having no force and effect. The CA found that the stockholders' meeting lacked the required 2/3 vote and that Metrobank failed to exercise due diligence. The CA also denied Metrobank's motion for reconsideration. The Petition: Metrobank filed a Petition for Review, arguing that appointing a successor-trustee did not require a 2/3 stockholders' vote as it was merely an amendment to an existing MTI. Metrobank also contended that the CA erred in interpreting the term "quorum" and in relying on the testimony of its officer. Metrobank further argued that laches had attached and that a separate CA decision upheld the foreclosure.
Issue(s)
Whether the requirements of Section 40 of the Corporation Code were complied with in the execution of the Mortgage Trust Indenture (MTI) appointing Metrobank as successor-trustee. Whether petitioner Metrobank was negligent or failed to exercise due diligence in its capacity as trustee. Whether laches had already attached, barring respondents from questioning the MTI.
Ruling
The Supreme Court ruled that the appointment of Metrobank as successor-trustee was a valid corporate act requiring only a majority vote of the directors present at a meeting with a quorum, as it was an amendment to an existing MTI and not a disposition of substantially all corporate assets under Section 40 of the Corporation Code. However, the Court affirmed the CA's decision declaring the extrajudicial foreclosure proceedings null and void. This was based on Metrobank's failure to prove its entitlement to the proceeds of the MTI, its failure to comply with the MTI's conditions for granting additional loans to San Carlos, and its breach of fiduciary duty as a trustee by extending unsecured loans and failing to properly amend the MTI to cover the increased obligations. The cancellation of the certificates of title in Metrobank's name and the denial of damages were also affirmed.
Ratio Decidendi
On the issue of Section 40 of the Corporation Code compliance: The Court held that Section 40 of the Corporation Code, which requires a 2/3 vote of stockholders for the sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of its property and assets, was not applicable. The resolution appointing Metrobank as successor-trustee was merely an amendment to an existing MTI, not the constitution of a new mortgage or disposition of assets. The Court clarified that the appointment of a new trustee is a regular business transaction that requires only a majority vote of the directors present at a meeting where a quorum exists, pursuant to Section 25 of the Corporation Code. Therefore, the minority stockholders' contention that the 2/3 vote requirement was violated was dismissed. On the issue of petitioner's negligence and failure to exercise due diligence: The Court found that Metrobank, acting as trustee, failed to exercise the required higher degree of diligence expected of a bank. It failed to present evidence of its entitlement to the proceeds of the MTI, specifically Mortgage Participation Certificates (MPCs), as required by Section 3.3 and Section 1.11 of the MTI. Furthermore, the Promissory Notes executed by San Carlos in favor of Metrobank did not refer to the MTI, violating Section 1.13. Metrobank also failed to amend the MTI to accommodate the additional loans granted to San Carlos, which significantly exceeded the ₱144 million limit stipulated in the MTI, thereby breaching Section 9.4 of the MTI. This failure to comply with the MTI's conditions rendered the extrajudicial foreclosure invalid. On the issue of laches: The Court ruled that laches had not attached. While the RTC found that eight years had passed since the initial mortgage in 1990, the respondents' challenge was specifically directed at the MTI executed on September 27, 1994, and the subsequent loans granted to San Carlos. From the execution of the 1994 MTI to the questioning of the mortgage in 1998, only four years had elapsed. Moreover, the Court noted that the Transfer Certificates of Title (TCTs) were not annotated to cover these additional loans, and Centro's financial statements did not disclose the mortgage of properties securing these loans. Without proof of notification or presence at the August 12, 1994 stockholders' meeting, the respondents could not have been aware of the alleged additional loans and corresponding mortgage, thus negating the element of unreasonable delay required for laches.
Main Doctrine
The appointment of a successor-trustee to an existing Mortgage Trust Indenture (MTI) is a regular business transaction requiring only a majority vote of the directors present at a meeting with a quorum, not the 2/3 vote of stockholders required for the disposition of all or substantially all corporate assets under Section 40 of the Corporation Code. However, a bank acting as trustee must exercise a higher degree of diligence and must strictly comply with the terms of the MTI, including proper amendment and issuance of Mortgage Participation Certificates, to be entitled to foreclose the mortgaged properties.