METROPOLITAN BANK & TRUST COMPANY v. SALAZAR REALTY CORPORATION [G.R. No. 218738, March 9, 2022]

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METROPOLITAN BANK & TRUST COMPANY v. SALAZAR REALTY CORPORATION

[G.R. No. 218738, March 9, 2022]

FIRST DIVISION, GAERLAN, J.

 

Intra-Corporate Controversy; Derivative Suit; Jurisdiction of Special Commercial Courts; Relationship Test; Nature of the Controversy Test; Interim Rules of Procedure Governing Intra-Corporate Controversies; Section 40, Corporation Code; Mortgage of Substantially All Corporate Assets; Appraisal Right; Nuisance or Harassment Suit Certification

 

A suit filed nominally as an ordinary civil action for annulment of mortgage and foreclosure may in substance be a derivative suit, which by its very nature arises out of intra-corporate relations and is therefore cognizable exclusively by special commercial courts, not regular trial courts. Classification follows a two-tier test: the relationship test, asking whether the controversy arises out of intra-corporate relations among the parties enumerated by law; and the nature of the controversy test, asking whether the dispute is intrinsically connected with the regulation of the corporation and pertains to the enforcement of the parties' correlative rights and obligations. Because a derivative suit is an equitable exception to the rule that corporate power of suit is exercisable only through the board of directors, a stockholder invoking it must strictly satisfy every procedural requisite — contemporaneous ownership, exhaustion or valid excuse from exhaustion of intra-corporate remedies, particular allegations regarding availment or the impossibility or futility of the appraisal right where a mortgage of all or substantially all corporate assets is challenged, and a categorical verified statement that the action is not a nuisance or harassment suit. Non-compliance with any mandatory requisite warrants dismissal, whatever the merits of the underlying corporate-authority allegations.

 

Petitioner Metropolitan Bank & Trust Company (Metrobank) extended a loan to Tacloban RAS Construction Corporation, a corporation distinct from respondent Salazar Realty Corporation (SARC). The loan, originally PHP 10,000,000.00 in 1992, was increased to PHP 12,000,000.00 in 1996 and finally to PHP 18,500,000.00 in 1999. 

To secure that obligation, five parcels of land in Tacloban City registered in SARC's name — not the borrower's — were mortgaged to Metrobank under a mortgage contract executed January 9, 1996, signed by SARC's President and Secretary. SARC alleged that one of its directors had died on March 30, 1995, before the mortgage was executed, and that the resulting board vacancies were never filled — facts it used to question the board's composition and authority when the mortgage was approved. 

SARC, represented by its incorporators and stockholders, filed a complaint before the Regional Trial Court of Tacloban City against Metrobank, the Ex Officio Sheriff, a Sheriff IV, and the Register of Deeds. It alleged that the borrower had no authority to use SARC's properties as collateral; that the mortgage was ultra vires, SARC's assets having been pledged to secure the debt of a separate, distinct, and unrelated corporation; that the mortgage encumbered substantially all of SARC's corporate assets without the stockholder authorization required under Section 40 of the Corporation Code; and that the foreclosure was procedurally defective. 

Metrobank moved to dismiss, arguing that the suit was in substance a derivative and intra-corporate suit cognizable only by a special commercial court. The Regional Trial Court denied the motion, holding that the case was not an intra-corporate controversy because it involved not a dispute between a corporation and its stockholders but a suit by a corporation through its shareholders against another corporation. 

The Court of Appeals dismissed Metrobank's petition for certiorari, reasoning that because the mortgagee bank had no intra-corporate relationship with the stockholders, jurisdiction belonged to the regular courts. Metrobank elevated the case to the Supreme Court.

 

 

Whether the action, though filed as an ordinary civil action for annulment of mortgage, is in substance an intra-corporate controversy in the nature of a derivative suit cognizable only by a special commercial court.

YES. The Court applied the two-tier test: the relationship test, asking whether the controversy arises out of intra-corporate or partnership relations among the parties enumerated by law — the corporation, its stockholders or members, and the State as regards its franchise; and the nature of the controversy test, under which the dispute must not only be rooted in the existence of an intra-corporate relationship but must also pertain to the enforcement of the parties' correlative rights and obligations. 

Reversing the Court of Appeals, the Court held that the mere resort to a derivative suit implies the existence of a controversy arising out of intra-corporate relations between and among stockholders or members, and that derivative suits necessarily touch upon the internal affairs of a corporation. SARC's stockholders having sued to challenge board action approving the mortgage of corporate assets, the suit was in essence a derivative suit required to be filed before and tried by a special commercial court — the Court adding that, for the sake of uniformity and efficiency in judicial administration, all cases governed by the Interim Rules, derivative suits included, must be tried by the special commercial courts.

 

 

Whether a mortgage by a corporation of all or substantially all of its assets requires prior stockholder authorization under Section 40 of the Corporation Code.

YES. Among SARC's grounds was that the mortgage constituted an encumbrance of substantially all the assets of the corporation, which must be authorized by its stockholders in a meeting called for that purpose pursuant to Section 40 of the Corporation Code, and that under that provision a mortgage of all or substantially all of the corporation's assets is subject to the exercise of the appraisal right. Because a challenge to such a mortgage necessarily implicates the stockholder's statutory appraisal right, a suit raising this ground is intra-corporate in character, and a stockholder pursuing it derivatively must specifically allege the availment, or the impossibility or futility of availing, of that appraisal right.

 

 

Whether the Court resolved on the merits SARC's claim that the mortgage securing another corporation's debt was an ultra vires act.

NO. SARC alleged that it had exceeded its corporate powers in mortgaging its properties to secure the obligation of a separate, distinct, and unrelated corporation, and that the board's approval was illegal and ultra vires. The Court, however, treated that allegation only as part of what made the controversy intra-corporate in character — that is, as relevant to classification and jurisdiction. Having found the derivative suit procedurally defective, the Court disposed of the case on that ground and did not independently adjudicate whether the mortgage was in fact ultra vires. Practitioners should therefore not cite this case as a merits ruling on that question.

 

 

Whether the suit nonetheless failed for non-compliance with the mandatory requisites of a derivative suit under the Interim Rules.

YES. The Court found two fatal defects. First, the petition did not comply with the requirement respecting appraisal rights: it was incumbent upon the suing stockholders to make particular allegations regarding their availment of their appraisal rights or the impossibility or futility thereof, which they failed to do. Second, the petition lacked a categorical statement that it is not a nuisance or harassment suit — stockholders resorting to the equitable remedy of a derivative suit must categorically declare under oath that the remedy is sought for just and legitimate purposes and not as a form of nuisance or harassment. 

The Court found no defect as to contemporaneous ownership or exhaustion of intra-corporate remedies. Nevertheless, because a derivative suit is an equitable exception to the rule that the corporate power of suit is exercisable only through the board of directors, courts must deny resort when the requisites are not met. The two defects identified sufficed to warrant dismissal of the entire civil case.

 

DISPOSITION: The Petition was GRANTED. The Decision and Resolution of the Court of Appeals were REVERSED and SET ASIDE, and the civil case was DISMISSED.




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