Zomer Development Company, Inc. vs. International Exchange Bank

A corporation may validly execute a third-party mortgage to secure the obligations of a subsidiary or sister corporation when it furthers the common interest of the corporations, and the defense of ultra vires is barred when the corporation ratified the mortgage through acquiescence and silence.

Zomer Development Company, Inc.'s Board of Directors authorized its Treasurer and General Manager to obtain a credit line from International Exchange Bank (IEB) and to execute a real estate mortgage over its properties to secure its own credit line as well as the term loan and credit facility of IDHI Prime Aggregates Corporation. Prime Aggregates obtained a ₱60,000,000 term loan, and Zomer executed a REM covering three parcels of land in favor of IEB. Prime Aggregates subsequently availed itself of several loans from September 1997 to September 1998, eventually defaulting on its outstanding obligation of over ₱90,000,000.

• Board Resolution and Mortgage Execution: On August 25, 1997, Zomer's Board authorized the execution of a mortgage to secure the "term loan and credit facility" of Prime Aggregates. On September 2, 1997, Zomer's Treasurer and General Manager executed a REM in favor of IEB. The mortgage document secured all present and subsequent obligations of Zomer and/or Prime Aggregates without need of new agreements.
• Default and Foreclosure: Prime Aggregates defaulted. IEB filed a petition for extrajudicial foreclosure. Sheriff Cabigon scheduled the sale for November 28, 2000.
• Injunction Suit: Zomer filed a complaint for injunction, alleging the REM was void because its officers were authorized to secure only one obligation of Prime Aggregates, not multiple or subsequent ones.
• Consummation of Foreclosure: Despite pending litigation, the properties were foreclosed on November 19, 2001. IEB, as the highest bidder, consolidated its title over the properties pursuant to the General Banking Law.

• Ultra Vires Acts/Excess of Authority: Petitioner argued the REM was void for being ultra vires, as its by-laws did not empower it to mortgage properties for third-party debts, and its officers exceeded their authority by securing multiple subsequent obligations instead of a single term loan.
• Invalid Secretary's Certificate: Petitioner maintained the Secretary's Certificate was void for failing to limit the amount of Prime Aggregates' obligation to be secured.
• Strict Construction against Mortgagee: Petitioner argued the Secretary's Certificate and REM, being adhesion contracts prepared by the bank, must be strictly construed against IEB and effect the least transmission of rights pursuant to Article 1378 of the Civil Code.
• No Ratification: Petitioner contended there was no ratification by inaction, given IEB's awareness of the extent of the officers' authority.
• Judicial Bias: Petitioner alleged the trial judge exhibited bias by releasing an order to respondents before its official release date.

• Mootness: Respondent countered that the petition for injunction had been rendered moot and academic by the dismissal of the principal action for annulment by the trial court, the consummation of the foreclosure sale, and the consolidation of title in IEB's name.

• Mootness: Whether the petition for injunction has been rendered moot and academic by the foreclosure of the mortgaged properties and the consolidation of title in the mortgagee's name.
• Ultra Vires Doctrine: Whether the real estate mortgage is ultra vires and void for being beyond the corporation's power or beyond the agents' authority, considering the corporation's by-laws and the board resolution.
• Ratification/Acquiescence: Whether the corporation ratified the execution of the mortgage despite alleged limitations on the agents' authority.

• Mootness: The petition for injunction was rendered moot by the consummation of the foreclosure sale and consolidation of title. Injunctive relief cannot restrain an act that has already been committed.
• Ultra Vires Doctrine: The mortgage was not ultra vires. While corporate properties are held in trust for corporate creditors, a corporation is not absolutely proscribed from mortgaging assets to secure a third party's debt, especially when the third party is a subsidiary or sister corporation and the mortgage furthers common corporate/family interests. The board resolution's use of "term loan and credit facility" encompassed the subsequent loan agreements.
• Ratification/Acquiescence: The corporation ratified the mortgage through its prolonged silence and acquiescence. It only challenged the mortgage's validity upon the filing of the foreclosure petition. Equity bars a party from invoking ultra vires when it maintained silence when it ought to have spoken, especially to the prejudice of a party who acted in good faith.

• Ultra Vires Doctrine (Corporate) — A corporation cannot shield itself behind the defense of ultra vires when the act was in furtherance of its interest (e.g., aiding a sister/subsidiary corporation) and does not prejudice corporate creditors or infringe the trust fund doctrine, especially when the corporation ratified the act through acquiescence. The plea of ultra vires will not be allowed to prevail when it accomplishes a legal wrong to the prejudice of another who acted in good faith.
• Trust Fund Doctrine — Corporate properties are regarded as held in trust for the payment of corporate creditors, not for the creditors of third parties. However, a third-party mortgage does not automatically infringe this doctrine if there is no evidence it prejudices corporate creditors or hampers business operations.
• Ratification by Acquiescence — Ratification or approval of an agent's act by the corporation may be ascertained through acquiescence with actual or constructive knowledge, even beyond the scope of ordinary powers. Silence when one ought to speak estops the party from speaking when it ought to remain silent.

• "The plea of 'ultra vires' will not be allowed to prevail, whether interposed for or against a corporation, when it will not advance justice but, on the contrary, will accomplish a legal wrong to the prejudice of another who acted in good faith."
• "He who remains silent when he ought to speak cannot be heard to speak when he ought to be silent."

• Union Bank v. Court of Appeals, 311 SCRA 795 — Cited by the CA and affirmed by the SC as the proper basis for denying the injunction, having found no clear legal right to enjoin the foreclosure.
• Republic v. Court of Appeals, 324 SCRA 569 — Cited by petitioner as allowing injunction when the propriety of foreclosure is in serious doubt; distinguished and not applied by the CA.
• Manila Electric Railroad and Light Company v. del Rosario and Jose, 22 Phil 433 (1912) — Cited by petitioner regarding preliminary mandatory injunction for continuing acts; not applied due to mootness.

• Article 1378, Civil Code — Cited by petitioner regarding interpretation of adhesion contracts against the drafter; not explicitly ruled upon by the SC due to the finding of mootness and ratification.
• General Banking Law — Mentioned by respondent regarding consolidation of title within a shorter period for corporate mortgagors, which facilitated the consolidation of title that rendered the case moot.

Leonardo A. Quisumbing, Dante O. Tinga, Presbitero J. Velasco, Jr., Arturo D. Brion.