IRINEO G. CARLOS, PLAINTIFF AND APPELLANT, VS. MINDORO SUGAR CO., ET AL., DEFENDANTS AND APPELLEES.

The plaintiff brought this action to recover from the defendants the value of
four bonds, Nos. 1219, 1220, 1221, and 1222, with due and unpaid interest
thereon, issued by the Mindoro Sugar Company and placed in trust with the
Philippine Trust Company which, in turn, guaranteed them for value received.
Said plaintiff appealed from the judgment rendered by the Court of First
Instance of Manila absolving the defendants from the complaint, excepting the
Mindoro Sugar Company, which was sentenced to pay the value of the four bonds
with interest at 8 per cent per annum, plus costs.

The Mindoro Sugar Company is a corporation constituted in accordance with the
laws of the country and registered on July 30, 1917. According to its articles
of incorporation, Exhibit 5, one of its principal purposes was to acquire and
exercise the franchise granted by Act No. 2720 to George H. Fairchild, to
substitute the organized corporation, the Mindoro Company, and to acquire all
the rights and obligations of the latter and of Horace Havemeyer and Charles J.
Welch in the so-called San Jose Estate in the Province of Mindoro.

The Philippine Trust Company is another domestic corporation, registered on
October 21, 1917. In its articles of incorporation, Exhibit A, some of its
purposes are expressed thus: “To acquire by purchase, subscription, or
otherwise, and to invest in, hold, sell, or otherwise dispose of stocks, bonds,
mortgages, and other securities, or any interest in either, or any obligations
or evidences of indebtedness, of any other corporation or corporations, domestic
or foreign.* * * Without in any particular limiting any of the powers of the
corporation, it is hereby expressly declared that the corporation shall have
power to make any guaranty respecting the dividends, interest, stock, bonds,
mortgages, notes, contracts or other obligations of any corporation, so far as
the same may be permitted by, the laws of the Philippine Islands now or
hereafter in force.” Its principal purpose, then, as its name indicates, is to
engage in the trust business.

On November 17, 1917, the board of directors of the Philippine Trust Company,
composed of Phil. C. Whitaker, chairman, and James Ross, Otto Vorster, Charles’
D. Ay ton, and William J, O’Donovan, members, adopted a resolution authorizing
its president, among other things, to purchase at par and in the name and for
the use of the trust corporation all or such part as he may deem expedient, of
the bonds in the value of P3,000,000 that the Mindoro Sugar Company was about to
issue, and to resell them, with or without the guarantee of said trust
corporation, at a price not less than par, and to guarantee to the Philippine
National Bank the payment of the indebtedness to said bank by the Mindoro Sugar
Company or Charles J. Welch and Horace Havemeyer, up to P2,000,000. The relevant
part of the resolution, Exhibit 3, reads as follows:

“Resolved that Mr. Phil. C. Whitaker, president of this company, be and he
hereby is authorized to purchase at par in the name and for the use of this
company all, or such part as he may deem expedient, of the said P3,000,000 of
20-year 8 per cent coupon bonds of the said Mindoro Sugar Company, and to resell
or otherwise dispose of the said bonds, with or withqut this company’s guaranty,
at a price not less than par; and it was further

“Resolved that Mr. Phil. C. Whitaker, president of the company be and he
hereby is authorized in the name of this company alone or in connection with
others, by joint and several obligations, to guarantee to the Philippine
National Bank the due and punctual payment of any and all indebtedness owing to
the said Bank by either the Mindoro Sugar Company, the Mindoro Company, or
Charles J. Welch and Horace Havemeyer, up to P2,000,000; and it was further
“Resolved that the said president, Mr. Phil. C. Whitaker, be and he hereby is
authorized to execute in the name of this company any and all notes, mortgages,
bonds, guaranties, or instruments in writing whatever necessary for the carrying
into effect of the authority hereby granted.”

In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar
Company executed in favor of the Philippine Trust Company the deed of trust,
Exhibit 6, transferring all of its property to it in consideration of the bonds
it had issued to the value of P3,000,000, the value of each bond being $1,000,
which par value, with interest at 8 per cent per annum, the Philippine Trust
Company had guaranteed to the holders, and in consideration, furthermore, of
said trust corporation having guaranteed to the Philippine National Bank all the
obligations contracted by the Mindoro Sugar Company, Charles J. Welch and Horace
Havemeyer up to the aforesaid amount of P2,000,000. The aforementioned deed was
approved by His Excellency, the Governor-General, upon recommendation of the
Secretary of Agriculture and Natural Resources, and in accordance with the
provisions of Act No. 2720 of the Philippine Legislature. Following are the
clauses of said Exhibit 6 material to this decision:

“Whereas, for the purposes aforesaid, and in further pursuance of said
resolutions of its board of directors and of its stockholders, the Company, in
order to secure the payment of said First Mortgage, Twenty Year, Sight Per Cent,
Gold Bonds, has1 determined to execute and deliver to safd Philippine Trust
Company, as trustee, a deed of trust of its properties hereinafter described,
and the board of directors of the Company has approved the form of this
indenture and directed that the same be executed and delivered to said trustee;
and

“Whereas, all things necessary to make said bonds, when certified by said
trustee as in this indenture provided, valid, binding, legal and negotiable
obligations of the company and this indenture a valid deed of trust to secure
the payment of said bonds, have been done and performed, and the creation and
issue of said bonds, and the execution, acknowledgment and delivery of this deed
of trust have been duly authorized;

“Now, therefore, in order to secure the payment of the principal and interest
of all such bonds at any time issued and outstanding under this indenture,
according to their tenor, purport and effect, and to secure the performance and
observance of all the covenants and conditions herein contained and to declare
the terms and conditions upon which said bonds are issued, received and held,
and for and in consideration of the premises, and of the purchase or acceptance
of such bonds by the holders thereof, and of the sum of one dollar, United
States currency, to it duly paid at or before the ensealing and delivery of
these presents, the receipt whereof is hereby acknowledged, the Mindoro Sugar
Company, party of the first part, has sold and conveyed, and by these presents
does sell and convey to the Philippine Trust Company, party of the second part,
its successors and assigns forever:”

(Description of the property.)

In consequence of this transaction, the bonds, with their coupons were placed
on the market and sold by the Philippine Trust Company, all endorsed as follows:

“This is to certify that the within bond is one of the series described in
the trust deed therein mentioned.

	“PHILIPPINE TRUST COMPANY
“by: (Sgd.)	PHIL. C. WHITAKER
	“President”

 

“For value received, the Philippine Trust Company hereby guarantees the
payment of principal and interest of the within bond. “Manila, Jan.-2, 1918

	“PHILIPPINE TRUST COMPANY
“by: (Sgd.)	PHIL. C. WHITAKER
	“President”

The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to Ramon
Diaz for P27,300, at a net profit of P100 per bond. The four bonds Nos. 1219,
1220, 1221, and 1222, here in litigation, are included in the thirteen sold to
Diaz. The Philippine Trust Company paid the appellant, upon presentation of the
coupons, the stipulated interest from the date of their maturity until the 1st
of July, 1928, when it stopped payments; and thenceforth it alleged that it did
not deem itself bound to pay such interest or to redeem the obligation because
the guarantee given for the bonds was illegal and void.

The appellant now contends that the judgment appealed from is untenable,
assigning the following errors:

“FIRST ERROR

“The lower court erred in sustaining the demurrer against the amended
complaint, filed by defendant J. S. Reis (Reese) and consequently in dismissing
the same with regard to this defendant.

“SECOND ERROR

“The lower court, without a proof to support it or an averment in defense by
the defendant Philippine Trust Company, erred in finding hypothetically that if
the guarantee made by this company be held valid, the trust funds and deposits
in its hands would probably be endangered.

“THIRD ERROR

“The lower court erred in holding that the Philippine Trust Company has no
power to guarantee the obligation of another juridical personality, for value
received.

“The lower court erred in not recognizing the validity and effect of the
guarantee subscribed by the Philippine Trust Company for the payment of the four
bonds claimed in the complaint, endorsed upon them, and in absolving said
institution from the complaint.

“FIFTH ERROR

“The lower court erred in absolving the ex-directors of the Philippine Trust
Company, Phil. C. Whitaker, O. Vorster, and Charles D. Ayton, from the
complaint.”

We shall not follow the order of the appellant’s argument, deeming it
unnecessary, but shall decide only the third and fourth assignments of error
upon which the merits of the case depend. For the clear understanding of this
decision and to avoid erroneous interpretations, however, we wish to state that
in this decision we shall decide only the rights’ of the parties with regard to
the four bonds in question and whatever we say in no wise affects or applies to
the rest of the bonds.

We shall begin by saying that the majority of the justices of this court who
took part in the case are of opinion that the only point of law to be decided is
whether the Philippine Trust Company acquired the four bonds in question, and
whether as such it bound itself legally and acted within its corporate powers in
guaranteeing them. This question was answered in the affirmative.

In adopting this conclusion we have relied principally upon the following
facts and circumstances: Firstly, that the Philippine Trust Company, although
secondarily engaged in banking, was primarily organized as a trust corporation
with full power to acquire personal property such as the bonds in question,
according to both section 13 (par. 5) of the Corporation Law and its duly
registered by-laws and articles of incorporation; secondly, that being thus
authorized to acquire the bonds, it was given implied power to guarantee them in
order to place them upon the market under better, more advantageous conditions,
and thereby secure the profit derived from their sale:

“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.” (7 R. C. L., p.
604 and cases cited.)

“Whenever a corporation has the power to take and dispose of the securities
of another corporation, of whatsoever kind, it may, for the purpose of giving
them a marketable quality, guarantee their payment, even though the amount
involved in the guaranty may subject the corporation to liabilities in excess of
the limit of indebtedness which it is authorized to incur. A corporation which,
has power by its charter to issue its own bonds has power to guarantee the bonds
of another corporation, which has been taken in payment of a debt due to it, and
which it sells or transfers in payment of its own debt, the guaranty being given
to enable it to dispose of the bond to better advantage. And so guaranties of
payment of bonds taken by a loan and trust company in the ordinary course of its
business, made in connection with their sale, are not ultra vires, and are
binding.” (14-A C. J., pp. 742-743 and cases.cited); thirdly, that although it
does not clearly appear in the deed of trust (Exhibit 6) that the Mindoro Sugar
Company transferred the bonds therein referred to, to the Philippine Trust
Company, nevertheless, in the resolution of the board of directors (Exhibit 3),
the president of the Philippine Trust Company was expressly authorized to
purchase all or some of the bonds and to guarantee them; whence it may be
inferred that subsequent purchasers of the bonds in the market relied upon the
belief that they were acquiring securities of the Philippine Trust Company,
guaranteed by this corporation; fourthly, that as soon as P3,000,000 worth of
bonds was issued, and by the deed of trust the Mindoro Sugar Company transferred
all its real property to the Philippine Trust Company, the cause or
consideration of the transfer being, (1) the guarantee given by the purchaser to
the bonds, and (2) its having likewise guaranteed its obligations and those of
Welch and’ Havemeyer in favor of the Philippine National Bank up to the amount
of P2,000,000; fifthly, that in transferring its real property as aforesaid the
Mindoro Sugar Company was reduced to a real state of bankruptcy, as the parties
specifically agreed during the hearing of the case, to the point of having
become a nominal corporation without any assets whatsoever; sixthly, that such
operation or transaction cannot mean anything other than that the real intention
of the parties was that the Philippine Trust Company acquired the bonds issued,
and at the same time guaranteed the payment of their par value with interest,
because otherwise the transaction would be fraudulent, inasmuch as nobody would
be answerable to the bond-holders for their value and interest; seventhly, that
the Philippine Trust Company had been paying the appellant the interest accrued
upon the four bonds from the date of their issuance until July 1, 1928, such
payment of interest being , another proof that said corporation had really
become the owner of the aforesaid bonds; and, eighthly, that the Philippine
Trust Company has not adduced any evidence to show any other conclusions.

There are other considerations leading to the same result even in the
supposition that the Philippine Trust Company did not acquire the bonds in
question, but only guaranteed them. In such a case the guarantee of these bonds
would, at any rate, be valid and the said corporation would be bound to pay the
appellant their value with the accrued interest in view of the fact that they
become due on account of the lapse of sixty (60) days, without the accrued
interest due having been paid; and the reason is that it is estopped from
denying the validity of its guarantee.

“* * * On the other hand, according to the view taken by other courts, which
it must” be acknowledged are in the majority, a recovery directly upon the
contract is permitted, on the ground that the corporation, having received money
or property by virtue of a contract not immoral or illegal of itself, is
estopped to deny liability; and that the only remecjy is one on behalf of the
state to punish the corporation for violating the law.” (7 R. C. L., pp. 680-681
and cases cited.)

“* * * The doctrine of ultra vires has been declared to be entirely the
creation of the courts and is of comparatively modern origin. The defense is by
some courts regarded as an ungracious and odious one, to be sustained only where
the most persuasive considerations of public policy are involved, and there are
numerous decisions and dicta to the effect that the plea should not as a general
rule prevail whether interposed for or against the corporation, where it will
not advance justice but on the contrary will accomplish a legal wrong.” (14-A C.
J., pp. 314-315.)

“The doctrine of the Supreme Court of the United States together with the
English courts and some of the state courts is that no performance upon either
side can validate an ultra vires transaction or authorize an action to be
maintained directly upon it. However, the great weight of authority in the state
courts is to the effect that a transaction which is merely ultra vires and not
malum in se or malum prohibitum although it may be made by the state a basis for
the forfeiture of the corporate charter or the dissolution of the corporation,
is, if performed by one party, not void as between the parties to all intents
and purposes, and that an action may be brought directly upon the transaction
and relief had according to its terms.” (14-A C. J., pp. 319-320.)

“When a contract is not on its face necessarily beyond the scope of the power
of the corporation by which it was made, it will, in the absence of proof to the
contrary, be presumed to be valid. Corporations are presumed to contract within
their powers. 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.” (Coleman vs. Hotel de France Co., 29 Phil.,
323.)

“Guaranties of payment of bonds taken by a loan and’ trust company in the
ordinary course of its business, made in connection with their sale, are not
ultra vires, and are binding.” (Broadway Nat. Bank vs. Baker, 57 N. E., p. 603.)

It has been intimated that according to section 121 of the Corporation Law,
the Philippine Trust Company, as a banking institution, could not guarantee the
bonds to the value of P3,000,000 because this amount far exceeds its capital of
P1,000,000 of which only one-half has been subscribed and paid. Section 121
reads as follows:

“SEC. 121. No such bank shall at any time be indebted or in any way liable to
an amount exceeding the amount of its capital stock at such time actually paid
in and remaining undiminished by losses or otherwise, except on account of
demands of the following nature:

“(1) Moneys deposited with or collected by the bank;

“(2) Bills of exchange or drafts drawn against money actually on deposit to
the credit of the bank or due thereto;

“(3) Liabilities to the stockholders of the bank for dividends and reserve
profits.”

This difficulty is easily obviated by bearing in mind that, as we stated
above, the banking operations are not the primary aim of said corporation, which
is engaged essentially in the trust business, and that the prohibition of the
law is not applicable to the Philippine Trust Company, for the evidence shows
that Mindoro Sugar Company transferred all its real property, with the
improvements, to it, and the value of both, which surely could not be less than
the value of the obligation guaranteed, became a part of its capital and assets;
in other words, with the value of the’ real property transferred to it, the
Philippine Trust Company had enough capital and assets to meet the amount of the
bonds guaranteed with interest thereon.

Wherefore, the decision appealed from is reversed and the Philippine Trust
Company is sentenced to pay to the appellant the sum of four thousand dollars
($4,000) with interest at eight per cent (8%) per annum from July 1, 1928 until
fully paid, and the costs of both instances. So ordered.

Avanceña, C. J., Ostrand, Villa-Real, Abad Santos, and Butte,
JJ., concur.

Malcolm and Hull, JJ., concur in the result.