In the case of University of Mindanao vs. Bangko Sentral ng Pilipinas, the Supreme Court clarified that a corporation is not bound by the unauthorized acts of its officers unless those acts are ratified by the corporation or the corporation leads others to believe the officer has the authority to act on its behalf. This means that companies must ensure their representatives have proper authorization, and third parties dealing with corporations should verify this authority to avoid unenforceable contracts. The decision protects corporations from liabilities incurred without proper consent and emphasizes the importance of due diligence in commercial transactions.

When a Secretary’s Certificate Isn’t Enough: UM vs. BSP and the Mortgage Mess

The University of Mindanao (UM) found itself in a legal battle with Bangko Sentral ng Pilipinas (BSP) over mortgage contracts executed by its Vice President for Finance, Saturnino Petalcorin, to secure loans for First Iligan Savings & Loan Association, Inc. (FISLAI). BSP sought to foreclose on UM’s properties when FISLAI, later merged into Mindanao Savings and Loan Association, Inc. (MSLAI), defaulted on its obligations. UM argued that Petalcorin lacked the authority to mortgage its properties, rendering the contracts unenforceable. This dispute raised critical questions about the scope of corporate authority, the validity of actions taken by corporate officers, and the responsibilities of entities dealing with corporations.

The core of the issue revolved around whether UM was bound by the real estate mortgage contracts executed by Petalcorin. UM contended that it never authorized Petalcorin to mortgage its properties, and the alleged Secretary’s Certificate attesting to such authorization was fraudulent. BSP, on the other hand, argued that the Secretary’s Certificate gave Petalcorin the apparent authority to act on behalf of UM, and BSP relied on this certificate in good faith. The trial courts initially sided with UM, but the Court of Appeals reversed, finding that UM was estopped from denying Petalcorin’s authority. The Supreme Court, however, ultimately sided with UM, underscoring the principle that corporations are bound only by acts authorized by their board of directors or trustees.

The Supreme Court emphasized that corporations, as artificial entities, can only exercise powers granted to them by law and their articles of incorporation. Corporate actions beyond these defined powers are considered ultra vires, or beyond the corporation’s legal capacity. While corporations have the power to mortgage property, this power must be exercised in direct furtherance of the corporation’s business. Securing loans for third parties, like FISLAI in this case, was deemed inconsistent with UM’s purpose as an educational institution. The Court referenced Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc., highlighting that a corporate act must bear a “logical relation of the act to the corporate purpose expressed in the charter” to be considered within the corporation’s powers. The mortgage, in this instance, did not meet that criteria.

It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers.

Building on this principle, the Court underscored that a corporation’s board of trustees or directors must authorize its representatives to act on its behalf. Section 23 of the Corporation Code stipulates that corporate powers are exercised by the board. Without proper delegation through a board resolution, actions taken by individuals, even corporate officers, are generally not binding on the corporation. In this case, the trial courts found the Secretary’s Certificate and board resolution presented by BSP to be either non-existent or fictitious, based on the testimony of the Corporate Secretary herself. The absence of a valid board resolution authorizing Petalcorin meant that the mortgage contracts were unenforceable against UM. The Court reinforced that contracts entered into without proper authority are considered ultra vires and unenforceable.

ART. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

The Supreme Court addressed the issue of ratification, which occurs when a principal voluntarily adopts a previously unauthorized act. Ratification can be express or implied, but it must be done knowingly and voluntarily. In UM’s case, there was no evidence of ratification. UM did not issue a resolution ratifying the mortgages, did not receive proceeds from the loans, and appeared unaware of the contracts until BSP sought foreclosure. Ratification requires that the principal has full knowledge of the unauthorized act and then takes actions indicating approval. Since UM lacked knowledge of the mortgage contracts, there could be no ratification. This lack of knowledge was crucial in the Court’s decision, preventing any implication of UM’s consent to the mortgages.

The Court also dismissed BSP’s argument that UM should have known about the transactions because its officers, the Spouses Guillermo and Dolores Torres, were involved in obtaining the loan. The Court clarified that knowledge of an officer is considered knowledge of the corporation only when the officer is acting within their authorized capacity. The Torres spouses’ knowledge was obtained as representatives of the thrift banks, not as authorized agents of UM. The Court also emphasized the separate legal personalities of UM and its officers. This separation means that the interests of individual officers, even if they hold positions in multiple entities, do not automatically align with the interests of the corporation itself. Maintaining this separation is vital for protecting the corporation from liabilities incurred without its knowledge or consent.

The Court found the doctrine of apparent authority inapplicable in this case. Apparent authority arises when a corporation leads third parties to believe that an officer has the authority to act on its behalf, even if that officer lacks explicit authorization. This is based on the principle of estoppel, preventing a corporation from denying the actions of its representatives when it has created the impression of authority. However, in UM’s case, the Secretary’s Certificate and alleged board resolution were deemed simulated, preventing them from serving as the basis for apparent authority. There was no evidence of UM consistently holding out Petalcorin as an authorized representative for mortgage transactions. The Court emphasized that BSP could not reasonably rely on fraudulent documents to claim apparent authority. This highlights the need for third parties to exercise due diligence and verify the authority of corporate representatives.

Further, the Supreme Court rejected BSP’s claim that the notarization of the Secretary’s Certificate validated the document. While notarization creates a presumption of regularity and authenticity, this presumption can be rebutted by strong evidence. In this case, the trial courts found the certificate to be invalid due to the lack of a supporting board resolution, rendering the presumption of regularity inapplicable. The Court also highlighted the heightened duty of diligence required of banking institutions. Banks, due to their public interest nature, must exercise a higher degree of care and prudence in their transactions. BSP failed to meet this standard, as its own witness admitted the absence of a board resolution and BSP did not conduct further inquiry into Petalcorin’s authority. Banks cannot rely solely on assumptions; they must conduct reasonable investigations to ensure the validity of transactions.

The Supreme Court dismissed BSP’s argument that the annotations on UM’s property titles served as constructive notice of the mortgages. Annotations on property titles provide constructive notice to third parties, warning them of potential claims or interests. However, the Court clarified that annotations do not validate defective claims or documents. The annotations merely reflected BSP’s claim of a mortgage interest; they did not establish the validity of the mortgage itself. Annotations serve as a warning to potential buyers or lenders, but they do not bind the registered owner or transform an invalid contract into a valid one.

FAQs

What was the key issue in this case?	The key issue was whether the University of Mindanao (UM) was bound by mortgage contracts executed by its Vice President for Finance without proper authorization from the Board of Trustees.
What is an ultra vires act?	An ultra vires act is an action taken by a corporation that exceeds its legal powers and purposes as defined by law and its articles of incorporation. Such acts are generally considered unenforceable.
What is required for a corporate officer to bind the corporation?	A corporate officer must have proper authorization from the corporation’s Board of Directors or Trustees, typically in the form of a board resolution, to bind the corporation to contracts or agreements.
What is ratification in contract law?	Ratification is the voluntary adoption of a previously unauthorized act, making it as binding as if it had been originally authorized. Ratification must be done knowingly and voluntarily by the principal.
What is apparent authority?	Apparent authority arises when a corporation leads third parties to believe that an officer has the authority to act on its behalf, even if the officer lacks explicit authorization. It is based on the principle of estoppel.
What is the duty of diligence required of banks?	Due to their public interest nature, banks are required to exercise a higher degree of care and prudence in their transactions, including verifying the authority of parties they deal with.
Do annotations on property titles validate defective claims?	No, annotations on property titles provide constructive notice to third parties but do not validate defective claims or transform invalid contracts into valid ones.
What was the Supreme Court’s ruling in this case?	The Supreme Court ruled in favor of the University of Mindanao, stating that it was not bound by the mortgage contracts because its Vice President for Finance lacked proper authorization.

The Supreme Court’s decision in University of Mindanao vs. Bangko Sentral ng Pilipinas reinforces the critical need for corporations to ensure their representatives possess the necessary authority to act on their behalf. Furthermore, third parties engaging with corporations must exercise due diligence in verifying this authority. This ruling serves as a vital reminder that corporate actions exceeding defined powers or lacking proper authorization are unenforceable, safeguarding corporations from unauthorized liabilities and upholding the integrity of commercial transactions.

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: UNIVERSITY OF MINDANAO, INC., VS. BANGKO SENTRAL PILIPINAS, ET AL., G.R. No. 194964-65, January 11, 2016