Metrobank vs. Centro Development Corporation

The appointment of a successor-trustee to an existing MTI covering previously encumbered properties constitutes a regular business transaction requiring only a majority vote of the quorum of the board of directors under Section 25 of the Corporation Code, not the 2/3 stockholder vote and notice required by Section 40; however, a trustee-mortgagee cannot foreclose for obligations exceeding the MTI’s stipulated loan value without strict compliance with the indenture’s amendment provisions, and banks must exercise diligence higher than that of a good father of a family when acting as trustees.

Centro Development Corporation utilized its real estate assets (covered by TCT Nos. 139880 and 139881) as collateral under an MTI to secure financing for its affiliates (Lucky Two Corporation, Lucky Two Repacking, and San Carlos Milling Company). The majority stockholders (Go family) controlled 70% of the outstanding capital stock, while the Kehyeng respondents constituted the 30% minority.

• RTC of Makati City (Branch 138), Civil Case No. 00-942: Dismissed the complaint for annulment of the 1994 MTI; held that laches had attached (eight-year delay) and that the Go family’s 70% ownership satisfied the 2/3 vote requirement under Section 40.
• CA (CA-G.R. CV No. 80778): Reversed the RTC; declared the 27 September 1994 MTI null and void for non-compliance with Section 40’s notice and voting requirements; annulled the foreclosure proceedings and cancelled the certificates of title issued to Metrobank.
• SC: Granted the petition in part; affirmed the nullification of the foreclosure and cancellation of titles, but reversed the CA’s declaration that the 1994 MTI itself was void.

• 21 March 1990: Centro executed an MTI with Bank of the Philippine Islands (BPI) as trustee to secure P84 million in loans for Lucky Two Corporation and Lucky Two Repacking, mortgaging properties covered by TCT Nos. 139880 and 139881.
• 31 March 1993: MTI amended to add P36 million and include San Carlos as a borrower (total obligation: P120 million).
• 28 July 1994: MTI further amended to add P24 million (total obligation: P144 million).
• 12 August 1994: Centro’s board allegedly passed Resolution No. 005 appointing Metrobank as successor-trustee to BPI.
• 27 September 1994: Centro and Metrobank executed the assailed MTI (notarized on this date), appointing Metrobank as successor-trustee without amending the total obligation amount (which remained at P144 million).
• April–December 1998: Metrobank extended loans to San Carlos totaling P812,793,513.23 through Promissory Notes that did not reference the MTI or specify the mortgaged properties as collateral (some were marked "Unsecured" or "Others").
• 1998: Kehyengs (minority stockholders/directors) discovered the mortgage and wrote to Centro’s officers and Metrobank questioning the 12 August 1994 board meeting, receiving no response.
• 22 June 2000: Metrobank filed for extrajudicial foreclosure of the mortgaged properties to satisfy San Carlos’s defaulted loans (claimed total obligation: P1.178 billion).
• 3 August 2000: Kehyengs filed Civil Case No. 00-942 to annul the 1994 MTI and enjoin foreclosure.
• 2 June 2004: Foreclosure sale proceeded despite pending litigation; Metrobank was awarded the properties as highest bidder for P344.7 million.

• The 27 September 1994 MTI merely amended the existing MTI by appointing a successor-trustee; it did not create a new mortgage, hence Section 40 of the Corporation Code was inapplicable.
• The authority to mortgage was granted in 1990; the 1994 action was purely administrative and required only a majority board vote under Section 25.
• The phrase "at which meeting a quorum was present" in the Secretary’s Certificate meant at least a quorum was present (allowing the possibility of the Go family’s 70% stake constituting a 2/3 vote), not that only a quorum was present.
• Perla Saballe’s testimony interpreting "quorum" was incompetent because she was not present at Centro’s meetings.
• The CA erred in finding negligence; Metrobank relied on the Secretary’s Certificate in good faith.
• Laches attached because respondents waited eight years to question the mortgage.

• Metrobank admitted in pre-trial that the subject properties were mortgaged under the 1994 MTI, not the 1990 agreement.
• The Secretary’s Certificate showed only a quorum was present, not the required 2/3 vote under Section 40.
• Chongking Kehyeng testified he was unaware of any stockholders’ meeting on 12 August 1994 and was never notified in writing.
• Metrobank was negligent in relying solely on the Secretary’s Certificate without verifying compliance with Section 40’s notice requirements or confirming the actual vote count.
• Laches was not raised in the trial court and is thus barred; alternatively, the delay was justified because the TCTs were not annotated with the additional loans and the mortgage was not disclosed in Centro’s financial statements from 1991–1998.

• Procedural Issues: Whether laches had attached to bar respondents from assailing the MTI and foreclosure.
• Substantive Issues:
  • Whether the 27 September 1994 MTI complied with Section 40 of the Corporation Code (2/3 stockholder vote and written notice).
  • Whether petitioner was negligent or failed to exercise due diligence as a mortgagee and trustee.
  • Whether the foreclosure proceedings were valid given the loans to San Carlos exceeded the MTI’s secured amount.

• Procedural: Laches had not attached. Only four years elapsed from the execution of the 1994 MTI (which respondents specifically assailed), not eight years from the 1990 MTI (which respondents accepted). Furthermore, the TCTs were not annotated to reflect the P812 million additional loans to San Carlos, and the mortgage was not disclosed in Centro’s financial statements, preventing respondents from discovering the violation earlier.
• Substantive:
  • Section 40 inapplicable: The 1994 MTI merely appointed Metrobank as successor-trustee to an existing MTI covering properties already mortgaged in 1990. This constituted a regular business transaction under Section 25 of the Corporation Code, requiring only a majority vote of the board quorum, not a 2/3 stockholder vote. The resolution empowering the President to sign documents was limited by the existing mortgage conditions and did not create a new encumbrance triggering Section 40.
  • Negligence/Fiduciary Breach: Metrobank failed to exercise the higher degree of diligence required of banks under the General Banking Law. It failed to submit Mortgage Participation Certificates (MPCs) proving its aliquot interest in the mortgage when ordered by the SC. The Promissory Notes to San Carlos violated Section 1.13 of the MTI (requiring notes to be covered by MPCs and secured by the MTI lien) and were effectively unsecured.
  • Foreclosure Invalid: Section 9.4 of the MTI required written consent of the Company, Trustee, and Majority Creditors to amend the indenture for additional loans. Metrobank granted loans exceeding the P144 million cap without such amendment. As an accommodation debtor, Centro’s liability was limited to the MTI’s maximum amount. The foreclosure covering P812 million+ was void; Metrobank could only have foreclosed for P144 million.

• Mortgage Trust Indenture (MTI): A trust agreement where a corporation (accommodation debtor) mortgages its properties to secure loans of affiliates, with a trustee holding the mortgage for the benefit of creditors who hold Mortgage Participation Certificates (MPCs) representing aliquot interests. Application: The SC strictly enforced the MTI’s terms regarding amendment procedures (Section 9.4) and the requirement that promissory notes be linked to MPCs (Section 1.13).
• Section 40 vs. Section 25 of the Corporation Code: Section 40 applies to the sale, lease, exchange, mortgage, or disposition of all or substantially all of corporate assets, requiring a 2/3 stockholder vote with prior written notice. Section 25 governs regular business transactions, requiring only a majority vote of the quorum of the board. Application: The SC distinguished between the original 1990 MTI (which potentially required Section 40 compliance) and the 1994 appointment of a successor-trustee, which was administrative and fell under Section 25.
• Fiduciary Nature of Banking: Under R.A. No. 8971 (General Banking Law of 2000), banks must exercise a degree of diligence higher than that of a good father of a family due to their fiduciary role in the national economy. Application: Metrobank breached this standard by extending unsecured loans, violating the MTI’s trustee duties, and failing to protect the interests of the parties to the indenture.
• Laches: The failure or neglect for an unreasonable and unexplained length of time to assert a right, creating a presumption of abandonment. Application: The SC found the delay reasonable due to lack of annotation and disclosure, and the period was only four years, not eight.

• "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... The appointment necessitated only a decision of at least a majority of the directors present at the meeting in which there was a quorum, pursuant to Section 25 of the Corporation Code."
• "Section 4 of Rule 68 of the Rules of Court provides: Disposition of proceeds of sale - The amount realized from the foreclosure sale of the mortgaged property shall... be paid to the person foreclosing the mortgage... when there shall be any balance or residue... the same shall be paid to junior encumbrancers... or... to the mortgagor..."
• "The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family... petitioner itself was negligent in the conduct of its business when it extended unsecured loans to the debtors."

• Caltex Philippines v. Intermediate Appellate Court (257 Phil. 753) — Cited to support the principle that the value of the mortgage foreclosure should be limited to the amount provided in the contract between the parties.
• Municipality of Carcar v. Court of First Instance of Cebu (204 Phil. 719) — Cited for the definition of laches.
• Philippine Banking Corp. v. Court of Appeals (464 Phil. 614) — Cited regarding the fiduciary nature of banking and the high standard of diligence required of banks.

• Section 40, Corporation Code (B.P. Blg. 68) — Requirements for sale/mortgage of substantially all corporate assets (2/3 vote, written notice).
• Section 25, Corporation Code — Quorum and voting requirements for board meetings (majority of quorum for regular business).
• Section 4, Rule 68, Rules of Court — Disposition of proceeds of foreclosure sale.
• Section 7, Rule 45, Rules of Court — Authority of the SC to require submission of pleadings/documents in the interest of justice.
• R.A. No. 8971 (General Banking Law of 2000) — Fiduciary nature of banking; requires high standards of integrity and diligence.

N/A (Carpio, Brion, Perez, and Reyes, JJ., concurred without separate opinions).