The Supreme Court ruled that a real estate mortgage executed by corporate officers without proper board authorization is null and void, protecting the corporation’s assets. This decision emphasizes the importance of due diligence by banks in verifying the authority of corporate officers and ensures that corporations are not unfairly burdened by unauthorized debts. It clarifies the rights of minority shareholders to bring derivative suits to protect their corporation’s interests.

Protecting the Corporation: Can a Shareholder Sue to Nullify an Unauthorized Mortgage?

This case revolves around Lisam Enterprises, Inc. (LEI), a company whose property was mortgaged without proper authorization. In 1996, Lilian S. Soriano and her husband, Leandro A. Soriano, Jr., obtained a P20 million loan from Philippine Commercial International Bank (PCIB, now Banco de Oro Unibank, Inc.), using LEI’s property as collateral. Lolita A. Soriano, a stockholder and Corporate Secretary of LEI, claimed that the Spouses Soriano, acting as President and Treasurer of LEI respectively, falsified a board resolution to secure the mortgage without the knowledge or consent of the board. Upon discovering this, Lolita filed a complaint seeking to annul the mortgage, leading to a legal battle that reached the Supreme Court. The central legal question is whether Lolita, as a minority shareholder, had the right to sue on behalf of the corporation to annul the mortgage.

The Regional Trial Court (RTC) initially dismissed the complaint, citing Lolita’s lack of legal capacity to sue and failure to state a cause of action. The RTC also denied the motion to admit an amended complaint, which aimed to address these deficiencies. The Supreme Court, however, disagreed with the RTC’s decision. The Court emphasized that amendments to pleadings should be liberally allowed, especially when they serve the higher interests of substantial justice and prevent unnecessary delays. The Court noted that while amendments after a responsive pleading require leave of court, such leave should be granted unless there is evidence of intent to delay or prejudice the opposing party.

In this case, the Supreme Court found that the RTC should have allowed the amended complaint, as it was filed before the order dismissing the original complaint became final. Allowing the amendment would not have caused undue delay and would have provided an opportunity for all issues to be thoroughly addressed. Moreover, the Court highlighted that the amended complaint sufficiently stated a cause of action for a derivative suit. A derivative suit is an action brought by a shareholder on behalf of the corporation to protect its rights and interests when the corporation’s management fails to do so. The Supreme Court has laid out specific requirements for filing a derivative suit, as articulated in Hi-Yield Realty, Incorporated v. Court of Appeals:

a) the party bringing the suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.

The amended complaint alleged that Lolita, as a shareholder, had demanded that the Board of Directors take legal action to protect the corporation’s interests, but the Board failed to do so. This fulfilled the requirement of exhausting intra-corporate remedies. Furthermore, the cause of action—annulment of the mortgage—belonged to the corporation, as the unauthorized mortgage directly harmed LEI’s assets. This established a valid basis for Lolita to bring a derivative suit on behalf of LEI.

Building on this principle, the Supreme Court addressed the issue of whether the complaint should be dismissed due to litis pendentia—the existence of another pending action between the same parties for the same cause. The Court distinguished the case from the pending action in the Securities and Exchange Commission (SEC), noting that the issues were not identical. The SEC case focused on the validity of the board resolutions and documents used to facilitate the mortgage, while the RTC case concerned the validity of the mortgage itself. The Court cited Saura v. Saura, Jr., a similar case where the Court allowed a separate action in the regular courts to proceed alongside a SEC case, ordering only a suspension of proceedings in the RTC until the SEC case was resolved.

This approach contrasts with a strict interpretation of litis pendentia, which would have resulted in the dismissal of the RTC case. The Supreme Court’s decision reflects a pragmatic approach, recognizing that the presence of a mortgagee bank as a defendant in the RTC case made it distinct from the intra-corporate dispute before the SEC. The Court emphasized that the regular courts have jurisdiction over cases involving parties with no intra-corporate relationship, ensuring that all parties involved have their rights properly adjudicated. The Court also underscored the importance of due diligence on the part of banks when dealing with corporations. Banks are expected to exercise a higher degree of care and prudence, including verifying the authority of corporate officers to enter into transactions.

In conclusion, the Supreme Court reversed the RTC’s decision, ordering the admission of the amended complaint and directing the RTC to proceed with the case. This ruling affirms the rights of minority shareholders to bring derivative suits to protect their corporations and underscores the importance of proper authorization in corporate transactions. It also highlights the duty of banks to exercise due diligence when dealing with corporations to ensure the validity of their transactions. The decision safeguards corporate assets from unauthorized encumbrances and reinforces the principles of corporate governance.

FAQs

What was the key issue in this case?	The key issue was whether a minority shareholder could bring a derivative suit to annul a real estate mortgage executed by corporate officers without proper authorization.
What is a derivative suit?	A derivative suit is an action brought by a shareholder on behalf of the corporation to protect its rights and interests when the corporation’s management fails to do so. It allows shareholders to step in and take legal action when the corporation itself is unable or unwilling to do so.
What are the requirements for filing a derivative suit?	The requirements include being a shareholder at the time of the act complained of, exhausting intra-corporate remedies by demanding action from the board, and the cause of action belonging to the corporation. These conditions must be met to establish the right to bring a derivative suit.
Why did the RTC initially dismiss the complaint?	The RTC dismissed the complaint because it believed Lolita Soriano lacked legal capacity to sue and that the complaint failed to state a cause of action. The RTC also denied the motion to admit the amended complaint.
Why did the Supreme Court reverse the RTC’s decision?	The Supreme Court reversed the RTC because the amended complaint sufficiently stated a cause of action for a derivative suit and the RTC should have allowed the amendment. The Court emphasized the importance of liberal amendments to serve justice.
What is the significance of exhausting intra-corporate remedies?	Exhausting intra-corporate remedies means that the shareholder must first demand that the board of directors take action before filing a derivative suit. This ensures that the corporation has the first opportunity to address the issue internally.
What is the duty of banks when dealing with corporations?	Banks have a duty to exercise due diligence and verify the authority of corporate officers to enter into transactions. This includes ensuring that proper board resolutions and authorizations are in place.
What is litis pendentia, and why was it not applicable in this case?	Litis pendentia refers to the existence of another pending action between the same parties for the same cause. It was not applicable here because the issues in the SEC case and the RTC case were distinct, and the parties were not entirely the same.

This case underscores the importance of corporate governance and the rights of shareholders to protect their corporation’s interests. It serves as a reminder to banks to exercise due diligence when dealing with corporations and to verify the authority of corporate officers. It also reinforces the principle that unauthorized actions by corporate officers can be challenged and annulled to safeguard corporate assets.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: LISAM ENTERPRISES, INC. VS. BANCO DE ORO UNIBANK, INC., G.R. No. 143264, April 23, 2012