Metrobank vs. Centro Development Corporation

The appointment of a successor-trustee to an existing mortgage trust indenture, without creating a new encumbrance or substantially altering the terms of the original mortgage, constitutes a regular business transaction that requires only a majority vote of the board of directors present at a meeting with a quorum under Section 25 of the Corporation Code, rather than the two-thirds stockholder vote and written notice required by Section 40 for the sale or other disposition of substantially all corporate assets; however, a trustee-creditor may not foreclose on mortgaged properties securing obligations exceeding the maximum amount stipulated in the indenture where no amendment was executed to accommodate such additional loans, and banks must observe a degree of diligence higher than that of a good father of a family in handling trust indentures and loan transactions.

• On March 20, 1990, the board of directors of Centro Development Corporation (CDC) authorized its president, Go Eng Uy, to mortgage its properties covered by TCT Nos. 139880 and 139881 to secure an P84 million loan of Lucky Two Corporation and Lucky Two Repacking with the Bank of the Philippine Islands (BPI) as trustee.
• On March 21, 1990, CDC executed a Mortgage Trust Indenture (MTI) with BPI, constituting a continuing mortgage on the properties to secure obligations from different creditors.
• On March 31, 1993, CDC and BPI amended the MTI to allow an additional P36 million loan and to include San Carlos Milling Company, Inc. as a borrower, bringing the total obligation to P120 million.
• On July 28, 1994, CDC and BPI again amended the MTI for another P24 million loan, bringing the total secured obligation to P144 million.
• On August 12, 1994, alleged special meetings of the board of directors and stockholders were held, purportedly authorizing the appointment of Metropolitan Bank and Trust Company (Metrobank) as successor-trustee to BPI under the existing MTI.
• On September 27, 1994, CDC and Metrobank executed an MTI appointing Metrobank as successor-trustee, without amending the total obligation amount of P144 million.
• From April to December 1998, San Carlos obtained loans from Metrobank totaling P812,793,513.23, which were not covered by any amendment to the MTI and were not reflected in the TCT annotations.
• In 1998, respondents Chongking Kehyeng (board member since 1989), Manuel Co Kehyeng, and Quirino Kehyeng (stockholders since 1987), collectively owning 30% of CDC's outstanding capital stock, discovered the mortgage and the appointment of Metrobank as trustee.
• On various dates in 1998, respondents wrote to CDC officers and Metrobank questioning the August 12, 1994 meetings and demanding copies of the minutes, but received no response.
• On June 22, 2000, Metrobank filed a Petition for Extrajudicial Foreclosure claiming a total outstanding obligation of P1,178,961,181.45 inclusive of interests and penalties.
• The TCTs only contained annotations up to the P144 million obligation; no annotations were made for the additional loans granted to San Carlos in 1998.
• CDC's financial statements from 1991 to 1998 did not disclose the mortgage of properties securing the additional loans.

• The September 27, 1994 MTI merely appointed Metrobank as successor-trustee to the existing MTI originally executed in 1990 and amended in 1993 and 1994, and did not constitute a new mortgage; thus, the two-thirds stockholder vote requirement under Section 40 of the Corporation Code was inapplicable.
• The authority to mortgage the properties was validly granted in 1990 with the requisite two-thirds stockholder approval, and the 1994 transaction was merely a procedural change of trustee requiring only a majority board vote under Section 25.
• The phrase "at which meeting a quorum was present" in the Secretary's Certificate dated August 18, 1994 meant that at least a quorum was present, not that only a quorum was present, and therefore did not limit the number of attendees or indicate non-compliance with voting requirements.
• Laches attached because respondents allowed eight years to pass from the 1990 mortgage before questioning the transaction, during which time Metrobank acquired rights as successor-trustee.
• Metrobank acted in good faith and exercised due diligence by relying on the Secretary's Certificate issued by CDC's corporate secretary, which established Go Eng Uy's authority.
• The testimony of Metrobank officer Perla Saballe regarding the interpretation of "quorum" should not have been considered by the CA as she was not present during CDC's meetings.

• The September 27, 1994 MTI was a new mortgage of all or substantially all of CDC's assets that required compliance with Section 40 of the Corporation Code, including a two-thirds vote of the outstanding capital stock and written notice to all stockholders.
• The Secretary's Certificate showed only that a quorum was present at the August 12, 1994 meeting, not that the required two-thirds vote was obtained, and petitioner could not impugn the testimony of its own witness, Perla Saballe, who interpreted "quorum" as merely a majority of stockholders.
• No valid stockholders' meeting was held on August 12, 1994, and respondents were not given written notice as required by law; Chongking Kehyeng, as vice-chairperson of the board, testified he was unaware of any such meeting.
• Metrobank failed to exercise due diligence by merely relying on the Secretary's Certificate instead of verifying that the legal requirements of Section 40 were complied with.
• Laches was not raised before the trial court and is thus improperly invoked; in any event, only four years had elapsed since the 1994 MTI, not eight years since 1990, and respondents had no knowledge of the additional loans as these were not annotated on the TCTs or disclosed in financial statements.
• The MTI being void for non-compliance with Section 40 cannot be ratified or validated by laches.

• Procedural Issues:
  • Whether laches attached to bar respondents from assailing the validity of the September 27, 1994 Mortgage Trust Indenture.
• Substantive Issues:
  • Whether the requirements of Section 40 of the Corporation Code on the sale or other disposition of assets were complied with in the execution of the September 27, 1994 MTI.
  • Whether petitioner was negligent or failed to exercise due diligence in transacting with CDC.
  • Whether petitioner was entitled to enforce the mortgage and foreclose on the subject properties for the full amount claimed.

• Procedural:
  • Laches did not attach to bar the action. Contrary to the RTC's finding that eight years had passed since the 1990 mortgage, only four years had elapsed from the execution of the September 27, 1994 MTI when respondents questioned it in 1998. The TCTs were not annotated to cover the additional loans granted to San Carlos after 1994, and CDC's financial statements from 1991 to 1998 did not disclose these additional mortgages. Absent proof that respondents were notified of the August 12, 1994 meeting or the additional loans, they could not have discovered the violation earlier, and their inaction was not unreasonable.
• Substantive:
  • Section 40 of the Corporation Code was inapplicable because the September 27, 1994 MTI did not constitute a new mortgage or disposition of assets. The resolution merely appointed Metrobank as successor-trustee to the existing MTI previously held by BPI, which was a regular business transaction requiring only a majority vote of the board of directors present at a meeting with a quorum under Section 25. The power granted to Go Eng Uy to sign documents was limited to the existing mortgage conditions, not a new encumbrance.
  • However, the foreclosure proceedings were invalid and of no force and effect. Petitioner failed to establish its right to the proceeds of the MTI because it failed to submit Mortgage Participation Certificates (MPCs) evidencing its interest in the trust indenture, as required by Section 3.3 and defined in Section 1.11 of the MTI.
  • The Promissory Notes executed by San Carlos did not refer to the MTI, violating Section 1.13 which required that notes be covered by outstanding MPCs and secured by the MTI lien.
  • The MTI was not amended to accommodate the additional loans exceeding the P144 million maximum secured obligation, as required by Section 9.4 which mandated written consent of CDC, the trustee, and majority creditors for additional loans. As an accommodation debtor, CDC's liability was limited to the P144 million stipulated in the contract, pursuant to the principle in Caltex Philippines v. Intermediate Appellate Court.
  • Under Republic Act No. 8971 (General Banking Law of 2000), banks must observe high standards of integrity and performance and exercise a degree of diligence higher than that of a good father of a family. Petitioner was negligent in extending unsecured loans to San Carlos and seriously breached its duty as trustee by violating the MTI's terms, failing to protect the interests of the parties, and attempting to foreclose for amounts not secured by the indenture.

• Laches — Defined as the failure or neglect for an unreasonable and unexplained length of time to do that which, by exercising due diligence, could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. The Court applied this definition but found that the delay in this case was not unreasonable given the lack of notice and disclosure regarding the additional loans.
• Section 40 of the Corporation Code (Sale or Other Disposition of Assets) — Requires authorization by the vote of stockholders representing at least two-thirds of the outstanding capital stock, with written notice, for the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of corporate property and assets. The Court held that the mere appointment of a successor-trustee to an existing mortgage, without creating a new encumbrance or altering the secured amount, does not constitute a "sale or other disposition of assets" requiring Section 40 compliance.
• Fiduciary Nature of Banking — Under the General Banking Law of 2000, banks must assume a degree of diligence higher than that of a good father of a family due to the fiduciary nature of banking and their vital role in economic development. The Court applied this to find Metrobank negligent in handling the trust indenture and loan transactions.
• Limitation of Accommodation Debtor's Liability — The liability of mortgaged properties securing an accommodation debtor's obligations is limited to the amount stipulated in the mortgage contract, and cannot be extended to cover additional loans without proper amendment of the mortgage agreement and compliance with contractual conditions precedent.

• "Laches is defined as the failure or neglect for an unreasonable and unexplained length of time to do that which, by exercising due diligence, could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it."
• "Reading carefully the Secretary’s Certificate, it is clear that the main purpose of the directors’ Resolution was to appoint petitioner as the new trustee of the previously executed and amended MTI... Thus, Section 40 of the Corporation Code finds no application in the present case, as there was no new mortgage to speak of under the assailed directors’ Resolution."
• "The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family."
• "Petitioner thus miserably failed to prove that it was entitled to the benefits of the MTI."
• "As an accommodation debtor, Centro’s properties may not be liable for San Carlos’ debts beyond this maximum amount, pursuant to the MTI executed with petitioner."

• Municipality of Carcar v. Court of First Instance of Cebu — Cited as authority for the definition of laches and the elements necessary for it to attach.
• Caltex Philippines v. Intermediate Appellate Court — Cited for the principle that the value of the mortgage should be limited only to the amount provided by the contract between the parties, supporting the limitation of Centro's liability to the P144 million stipulated in the MTI.
• Philippine Banking Corp. v. Court of Appeals — Cited for the proposition that the fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family.

• Section 40 of the Corporation Code (Batas Pambansa Blg. 68) — Governs the sale or other disposition of all or substantially all of corporate assets, requiring two-thirds stockholder vote and written notice. The Court held this inapplicable to the appointment of a successor-trustee where no new mortgage was created.
• Section 25 of the Corporation Code — Governs the quorum and voting requirements for board meetings, providing that the affirmative vote of a majority of the directors present at a meeting at which there is a quorum is the act of the board. Applied to hold that appointing a successor-trustee is a regular business transaction requiring only majority board approval.
• Section 4 of Rule 68 of the Rules of Court — Governs the disposition of proceeds of foreclosure sale, requiring payment to the foreclosing mortgagee only of the mortgage debt due.
• Section 7 of Rule 45 of the Rules of Court — Allows the Supreme Court to require or allow the filing of pleadings, briefs, memoranda or documents as it may deem necessary in the interest of justice, which the Court invoked to require submission of MPCs.
• Republic Act No. 8971 (General Banking Law of 2000) — Recognizes the fiduciary nature of banking and requires banks to have high standards of integrity and performance, mandating diligence higher than that of a good father of a family.