Upholding Corporate Rights When a Mortgage Is Made Without Board Authority

Lisam Enterprises v. Banco de Oro Unibank (G.R. No. 143264, April 23, 2012) is an important reminder that a corporation's property cannot be validly mortgaged by its officers without proper board authority. The case also clarifies the rules on derivative suits, amendments to complaints, and the distinction between intra-corporate disputes and actions against third parties like banks.

The Facts

Lisam Enterprises, Inc. (LEI) owned a parcel of land in Legaspi City. In March 1996, the spouses Leandro Soriano, Jr. and Lilian Soriano—who were the corporation's president and treasurer—obtained a P20 million personal loan from Philippine Commercial International Bank (now Banco de Oro). To secure that personal loan, they executed a real estate mortgage over LEI's property.

The spouses allegedly used a falsified board resolution to make it appear that LEI's board had authorized the mortgage. Lolita Soriano, a stockholder and corporate secretary of LEI, claimed she never signed any such resolution and that no board meeting had been held. She later discovered the irregularity and, after the bank moved to foreclose, filed a complaint for annulment of mortgage with the Regional Trial Court (RTC).

The RTC dismissed the complaint, ruling that Lolita lacked legal capacity to sue because she was not a real party-in-interest. The trial court also found that the complaint failed to state a cause of action and that a pending case before the Securities and Exchange Commission (SEC) constituted litis pendentia. When Lolita sought to amend the complaint to allege that she had demanded action from LEI's board, the RTC denied the motion, saying the amendment would change the cause of action.

The Issue

The Supreme Court was asked to determine whether the RTC erred in dismissing the complaint and in refusing to admit the amended complaint.

The Ruling

The Supreme Court reversed the RTC and ordered the admission of the amended complaint.

Amendments to pleadings are liberally allowed. Under Rule 10 of the Rules of Court, after a responsive pleading has been filed, amendments require leave of court. However, the Court emphasized that amendments are generally favored and should be liberally allowed in furtherance of justice. Even if an amendment substantially alters the cause of action, it may still be permitted when it serves the higher interest of substantial justice and prevents delay. Since the amended complaint was filed before the dismissal order became final and before trial began, the Court held that the RTC should have admitted it.

The amended complaint sufficiently stated a cause of action for a derivative suit. A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce a corporate right. The Court reiterated the three requisites:

1. The party bringing the suit must be a shareholder at the time of the act or transaction complained of;
2. The shareholder must have exhausted intra-corporate remedies by demanding that the board take appropriate action, and the board failed or refused to do so; and
3. The cause of action must devolve on the corporation, not on the stockholder personally.

The amended complaint alleged all three elements: Lolita was a stockholder, she had made demands on LEI's board to protect the corporation's interest, and the board had taken no action. This cured the defect in the original complaint.

The case against the bank properly belonged in the regular courts. The Court distinguished between the SEC case and the RTC action. The SEC case involved the validity of board resolutions and documents—an intra-corporate dispute. The RTC case, however, sought to annul the mortgage itself, with the bank as a defendant. Because the bank had no intra-corporate relationship with the stockholders, the regular courts had jurisdiction. There was also no forum shopping because the issues were not identical.

Practical takeaways

• Board authority is essential. Corporate officers cannot mortgage or encumber corporate property without a valid board resolution. A mortgage executed without such authority may be annulled.
• Banks must exercise due diligence. Financial institutions are expected to verify the genuineness of board resolutions and secretary's certificates before accepting corporate property as collateral.
• Stockholders can sue on behalf of the corporation. A stockholder may file a derivative suit, but must first demand that the board act. The demand requirement must be alleged in the complaint.
• Amendments should be allowed liberally. Courts should permit amendments to pleadings, especially in the early stages of a case, to ensure that disputes are resolved on their merits.
• Distinguish the forum. Actions against third parties like banks for annulment of mortgage belong in the regular courts, even if related intra-corporate issues are pending before the SEC.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.