Carlos vs. Mindoro Sugar Co.

A trust corporation organized primarily to engage in the trust business, with the express power to acquire and dispose of bonds, has the implied power to guarantee the payment of those bonds in connection with their sale, and such guaranty is not ultra vires.

Irineo G. Carlos purchased four bonds issued by the Mindoro Sugar Company. The Mindoro Sugar Company was incorporated on July 30, 1917, to acquire and exercise a franchise over the San Jose Estate in Mindoro. The Philippine Trust Company, a domestic corporation registered on October 21, 1917, was primarily a trust corporation with purposes including acquiring, holding, and disposing of stocks, bonds, and other securities, and making guaranties respecting the obligations of any corporation. The Philippine Trust Company acquired the Mindoro Sugar Company's bonds and guaranteed them.

The Mindoro Sugar Company, incorporated on July 30, 1917, issued P3,000,000 worth of 20-year 8 per cent coupon bonds. The Philippine Trust Company, a domestic corporation registered on October 21, 1917, primarily engaged in the trust business, was authorized by its board of directors on November 17, 1917, to purchase these bonds at par and resell them, with or without its guaranty. Pursuant to this resolution, on December 21, 1917, the Mindoro Sugar Company executed a deed of trust transferring all its property to the Philippine Trust Company in consideration of the bonds and the trust company's guaranty of the Mindoro Sugar Company's obligations to the Philippine National Bank up to P2,000,000. The deed was approved by the Governor-General.

The Philippine Trust Company placed the bonds on the market, endorsing them with a guaranty of payment of principal and interest. It sold thirteen bonds, including the four bonds in litigation (Nos. 1219, 1220, 1221, and 1222), to Ramon Diaz. The appellant, Irineo G. Carlos, subsequently became the holder of these four bonds. The Philippine Trust Company paid the stipulated interest on these bonds from their maturity until July 1, 1928, when it ceased payments. It then alleged that it was not bound to pay because the guaranty was illegal and void.

The appellant filed an action to recover the value of the four bonds and unpaid interest. The Court of First Instance of Manila absolved the Philippine Trust Company, prompting this appeal.

• Validity of the Guaranty: Petitioner argued that the lower court erred in holding that the Philippine Trust Company had no power to guarantee the obligation of another juridical personality for value received.
• Effect of the Guaranty: Petitioner maintained that the lower court erred in not recognizing the validity and effect of the guaranty subscribed by the Philippine Trust Company for the payment of the four bonds.
• Demurrer and Dismissal: Petitioner contended that the lower court erred in sustaining the demurrer against the amended complaint filed by defendant J. S. Reis and dismissing the complaint with regard to this defendant.
• Hypothetical Finding: Petitioner argued that the lower court erred in hypothetically finding that the trust funds and deposits would be endangered if the guaranty were held valid.
• Liability of Ex-Directors: Petitioner contended that the lower court erred in absolving the ex-directors of the Philippine Trust Company from the complaint.

• Corporate Power to Guarantee: Whether the Philippine Trust Company had the corporate power to guarantee the bonds issued by the Mindoro Sugar Company.
• Ultra Vires Doctrine: Whether the guaranty made by the Philippine Trust Company was ultra vires and therefore void.
• Applicability of Banking Law Limitations: Whether Section 212 of the Corporation Law, limiting a bank's liabilities to its paid-in capital, applies to the Philippine Trust Company's guaranty.

• Corporate Power to Guarantee: Yes. The Philippine Trust Company, primarily a trust corporation, had the implied power to guarantee the bonds it acquired and sold to make them more marketable.
• Ultra Vires Doctrine: No. The guaranty was not ultra vires, and the corporation was estopped from denying its validity after receiving consideration and performing under the contract.
• Applicability of Banking Law Limitations: No. The prohibition on banks incurring liabilities exceeding their capital stock does not apply because the trust company's primary business was not banking, and it received property of sufficient value to cover the guaranty.

• Corporate Power to Guarantee: The Philippine Trust Company was primarily organized as a trust corporation with the power to acquire personal property such as bonds. Being authorized to acquire the bonds, it had the implied power to guarantee them to secure the profit derived from their sale. A corporation may endorse or guarantee the payment of commercial paper or bonds it acquires in the legitimate transaction of its business to make them more readily marketable.
• Ultra Vires Doctrine: Even assuming the trust company did not acquire the bonds but only guaranteed them, the guaranty was valid and the company was estopped from denying liability. The doctrine of ultra vires should not prevail where it would defeat the ends of justice or work a legal wrong. The company received money and property by virtue of the contract and paid interest for years, which are acts validating the transaction.
• Applicability of Banking Law Limitations: Section 212 of the Corporation Law limits liabilities of banks to their paid-in capital. However, the Philippine Trust Company's primary aim was the trust business, not banking. Furthermore, the Mindoro Sugar Company transferred all its real property to the trust company, the value of which became part of its capital and assets, providing sufficient coverage for the bonds guaranteed.

• Implied Corporate Power to Guarantee — A corporation that has the express power to acquire and dispose of securities of another corporation has the implied power to guarantee their payment to make them more marketable. This guaranty is not ultra vires if done in the legitimate furtherance of its corporate purposes.
• Estoppel in Ultra Vires Contracts — A corporation that has received money or property by virtue of a contract that is not immoral or illegal is estopped from denying liability on the ground that the contract is ultra vires. The ultra vires defense should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.
• Limitation on Bank Liabilities Inapplicable to Trust Companies — The statutory limitation on a bank's liabilities to its paid-in capital stock does not apply to a corporation primarily engaged in the trust business, especially where the corporation has received assets sufficient to cover the guaranteed obligations.

• "It is not, however, ultra vires for a corporation to enter into contracts of guaranty or suretyship where it does so in the legitimate furtherance of its purposes and business. And it is well settled that where a corporation acquires commercial paper or bonds in the legitimate transaction of its business it may sell them, and in furtherance of such a sale it may, in order to make them the more readily marketable, indorse or guarantee their payment." — This passage articulates the rule that a corporation with the power to acquire and sell bonds has the implied power to guarantee them, which forms the ratio decidendi of the case.
• "The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong." — This defines the Court's stance on the ultra vires doctrine, emphasizing that it is an odious defense that should not be used to perpetrate injustice.

• Coleman vs. Hotel de France Co., 29 Phil. 323 — Cited for the proposition that contracts presumed to be within corporate powers are valid, and the ultra vires doctrine should not defeat justice.
• Broadway Nat. Bank vs. Baker, 57 N.E. 603 — Cited as authority that guaranties of payment of bonds taken by a loan and trust company in the ordinary course of business are not ultra vires and are binding.

• Section 13 (par. 5), Corporation Law — Cited to show the Philippine Trust Company's power to acquire personal property such as bonds.
• Section 212, Corporation Law — Cited by the opposing view to argue that the trust company's guaranty exceeded its capital stock. The Court held this provision inapplicable because the company was primarily a trust corporation and had received sufficient assets to cover the guaranty.
• Act No. 2720 — The franchise law granted to George H. Fairchild, which the Mindoro Sugar Company was organized to acquire.

Avanceña, C.J., Ostrand, Villa-Real, Abad Santos, and Butte, JJ., concurred. Malcolm and Hull, JJ., concurred in the result.