ZOMER DEVELOPMENT COMPANY, INC. PETITIONER, VS. INTERNATIONAL EXCHANGE BANK AND SHERIFF IV ARTHUR R. CABIGON, RESPONDENTS.

Zomer Development versus International Exchange Bank

The Case

This is a petition for review brought by Zomer Development Company, Incorporated against International Exchange Bank and Sheriff Arthur Cabigon. Zomer asks the Supreme Court to reverse the Court of Appeals, which had refused to disturb the trial court's denial of Zomer's prayer for a writ of preliminary injunction to stop the extrajudicial foreclosure of three parcels of land it had mortgaged to the bank. The case matters because it gathers in one place the rules on a corporation's power to mortgage its own property to secure a third party's debt, on the scope of authority given to corporate officers, and on the equitable doctrine of ratification by silence — all tested against the extraordinary remedy of injunction.

Procedural History

Zomer filed a complaint for injunction with a prayer for a writ of preliminary injunction or a temporary restraining order before the Regional Trial Court of Cebu City, docketed as Civil Case Number CEB-25762, seeking to declare the real estate mortgage and its extrajudicial foreclosure sale null and void. Branch 9 of that court denied the prayer for a writ of preliminary injunction. Zomer moved for reconsideration and sought to amend its complaint, but the trial court denied reconsideration.

Zomer then went up to the Court of Appeals by a petition for certiorari, arguing that the trial court gravely abused its discretion. Meanwhile, the case was re-raffled to Branch 15 of the Cebu City Regional Trial Court, which dismissed Zomer's third amended complaint; Zomer appealed that dismissal to the Court of Appeals. The Court of Appeals denied the certiorari petition, finding no grave abuse of discretion in the denial of the injunction and brushing aside Zomer's arguments that the mortgage was beyond corporate powers and that its officers were authorized to secure only one loan. Hence this petition for review before the Supreme Court.

Facts

On August 25, 1997, the Board of Directors of Zomer approved a resolution authorizing it to apply for and obtain a credit line with International Exchange Bank in the amount of 60,000,000 pesos, as well as temporary excesses or permanent increases thereon as the bank might approve. The same resolution authorized Zomer to assign, pledge, or mortgage its properties as security for this credit line, and to secure and guarantee the term loan and other credit facility of IDHI Prime Aggregates Corporation with the bank.

The next day, Prime Aggregates obtained a 60,000,000 peso term loan from the bank. On September 2, 1997, Zomer, through its Treasurer Amparo Zosa and its General Manager Manuel Zosa, Junior, executed a real estate mortgage over three parcels of land in favor of the bank. The mortgage secured not only Zomer's own obligations but also those of Prime Aggregates, present and future. Prime Aggregates obtained several more loans from September 1997 until September 1998, then failed to pay. Its outstanding obligation stood at over 90,000,000 pesos and over 211,000 dollars as of September 15, 2000.

The bank applied for extrajudicial foreclosure, and Sheriff Cabigon issued a notice of sale scheduled for November 28, 2000. Zomer then sued for injunction, claiming the mortgage was void because its officers were authorized to secure only one obligation of Prime Aggregates. The properties were in fact foreclosed on November 19, 2001, and title was consolidated and transferred in the bank's name.

Issues

• Whether or not the prayer for a writ of preliminary injunction had been rendered moot and academic by the foreclosure of the mortgaged properties and the consolidation of title in the bank's name.
• Whether or not Zomer was empowered under its By-Laws to mortgage its properties to secure the obligations of a third party.
• Whether or not the officers who executed the real estate mortgage exceeded their authority under the board resolution.
• Whether or not Zomer ratified the mortgage through its silence and inaction.

Applicable Provisions

The decision does not quote a statute in full; it rests on the general law on corporate powers and on the equitable rule against speaking after silence. The governing principle on corporate property is stated in the Court's own words:

The properties of a corporation are regarded as held in trust for the payment of corporate creditors and not for the creditors of third parties.

This is the trust fund doctrine, and it is the premise from which the Court reasons that a corporation's assets are not ordinarily pledged for another's debt.

The decision also invokes the equitable rule on silence, expressed in the Court's words:

He who remains silent when he ought to speak cannot be heard to speak when he ought to be silent.

This is the ratification principle that defeats Zomer's belated claim that the mortgage was beyond its powers.

Ruling

On the first issue, the Court held that the prayer for a writ of preliminary injunction had become moot and academic. The records showed that the mortgaged properties had already been foreclosed, as evidenced by the certificate of sale issued on November 19, 2001, and that ownership had been consolidated and transfer certificates of title issued in the bank's name. An injunction can no longer restrain what has already been done.

On the second issue, the Court agreed that Zomer was not empowered under its By-Laws to mortgage its properties as security for the obligations of third parties, resting on the trust fund doctrine. But it held that Zomer was not absolutely proscribed from doing so. It adopted the Securities and Exchange Commission opinion of April 15, 1987, recognizing exceptions: when the mortgage is done in furtherance of the corporation's interest and in the usual and regular course of business, and to secure the debt of a subsidiary. The Court found Prime Aggregates to be a subsidiary and Zomer a family corporation, with the Zosa family owning and directing both, so that aiding a sister corporation promoted a common interest.

On the third issue, the Court held that the term loan and credit facility secured by the mortgage were within the terms of the board resolution. The resolution did not fix maximum amounts, and the term credit facility is broad enough to cover the subsequent agreements, each disbursement evidenced by separate documents depending on Prime Aggregates' needs.

On the fourth issue, the Court held that Zomer ratified the acts of its officers. It approved the appellate court's reasoning that ratification may be ascertained through acquiescence in acts of a particular nature, with actual or constructive knowledge, whether within or beyond the scope of ordinary powers. Zomer kept a stoic silence until foreclosure, and the Court found that stance grossly inequitable. It added that the transactions were neither wrong in themselves nor prohibited by law, so Zomer could not hide behind the cloak of ultra vires, a Latin phrase meaning beyond the corporate powers. The plea of ultra vires will not be allowed to prevail when it will not advance justice but will accomplish a legal wrong against one who acted in good faith.

Doctrine

A corporation's properties are held in trust for its own creditors, not for the creditors of third parties, so it is not ordinarily empowered to mortgage its assets for another's debt. By way of exception, it may do so when the mortgage is in furtherance of its own interest and in the usual and regular course of business, or to secure the debt of a subsidiary. Where the board resolution authorizes the mortgage without fixing a maximum amount, the officers do not exceed their authority by securing a term loan and credit facility that fall within its terms. And a corporation that keeps silent with knowledge of its officers' acts ratifies them, for he who remains silent when he ought to speak cannot be heard to speak when he ought to be silent. The plea of ultra vires will not be allowed to prevail when it will not advance justice but will accomplish a legal wrong against one who acted in good faith.

Disposition

The petition was dismissed, with costs against Zomer, so the bank and the sheriff prevailed and the denial of the injunction stood.

Remember This

Memorize the line: he who remains silent when he ought to speak cannot be heard to speak when he ought to be silent — silence with knowledge ratifies the acts of corporate officers. Examiners use this case for the exceptions to the rule against third party mortgages and for the doctrine that ultra vires cannot be raised to defeat justice against a good faith creditor.