The Supreme Court ruled that a verbal agreement with a bank manager does not override a written mortgage contract containing a cross-collateral stipulation. This means borrowers are bound by the original terms of their mortgage, even if a bank representative makes later promises to release the property under different conditions. The ruling underscores the importance of written contracts and the limits of a bank manager’s authority to alter them.

Can a Bank Manager’s Promise Undo a Mortgage? The Banate Case

In Violeta Tudtud Banate, et al. vs. Philippine Countryside Rural Bank, the core issue revolved around whether a bank was obligated to release a mortgage on a property after one loan was paid, despite a “cross-collateral” clause in the mortgage agreement. The petitioners argued that a verbal agreement with the bank’s branch manager superseded the original contract, while the bank maintained that all loans had to be settled before any release. This case explores the limits of verbal agreements against written contracts, especially when dealing with financial institutions and real estate.

The factual backdrop begins with spouses Rosendo Maglasang and Patrocinia Monilar securing a loan of P1,070,000.00 from Philippine Countryside Rural Bank (PCRB), evidenced by a promissory note and secured by a real estate mortgage. This mortgage covered not only their property but also a house owned by their daughter and son-in-law, Mary Melgrid and Bonifacio Cortel. Before the loan’s due date, the Maglasangs and Cortels sought PCRB’s consent to sell the mortgaged properties, requesting their release from the mortgage as other loans were purportedly well-secured. They claimed PCRB, through its branch manager Pancrasio Mondigo, verbally agreed, contingent on full payment of the initial loan.

Subsequently, the properties were sold to Violeta Banate, who used the funds to settle the P1,070,000.00 loan with PCRB. PCRB then released the owner’s duplicate certificate of title to Banate, who secured a new title in her name. However, the new title still reflected the mortgage lien in favor of PCRB, prompting the petitioners to request a formal Deed of Release of Mortgage. PCRB refused, leading to the petitioners filing a specific performance action in court, seeking to compel PCRB to execute the release deed and seeking damages due to alleged malicious news reports about the property transfer.

PCRB defended its position by invoking the cross-collateral stipulation within the mortgage deed. This stipulation stated that the mortgage secured not only the initial loan but also any other existing or future loans obtained by the mortgagors. The specific clause read:

That as security for the payment of the loan or advance in principal sum of one million seventy thousand pesos only (P1,070,000.00) and such other loans or advances already obtained, or still to be obtained by the MORTGAGOR(s) as MAKER(s), CO-MAKER(s) or GUARANTOR(s) from the MORTGAGEE plus interest at the rate of _____ per annum and penalty and litigation charges payable on the dates mentioned in the corresponding promissory notes, the MORTGAGOR(s) hereby transfer(s) and convey(s) to MORTGAGEE by way of first mortgage the parcel(s) of land described hereunder, together with the improvements now existing for which may hereafter be made thereon, of which MORTGAGOR(s) represent(s) and warrant(s) that MORTGAGOR(s) is/are the absolute owner(s) and that the same is/are free from all liens and encumbrances.

This meant that until all loans were paid, PCRB argued, the mortgage remained in effect. The lower court initially favored the petitioners, deeming the mortgage a contract of adhesion and ruling any ambiguity against PCRB. It also considered the payment of the loan and the release of the title as evidence of the agreement to release the mortgage. However, the Court of Appeals reversed this decision, finding that the branch manager’s purported agreement could not validly amend the original mortgage contract, which contained the cross-collateral stipulation.

At the heart of the Supreme Court’s analysis was the principle of novation, specifically whether the alleged agreement with Mondigo, the branch manager, effectively changed the original mortgage contract. Novation requires a previous valid obligation, agreement of all parties to a new contract, extinguishment of the old obligation, and the birth of a valid new obligation. Crucially, the Court found that the second requirement—agreement of all parties—was lacking, especially considering that PCRB, as a corporation, could only be bound by individuals with proper authority.

The Court emphasized the importance of corporate governance, citing Section 23 of the Corporation Code, which vests corporate powers in the board of directors. This means that contracts binding the corporation must generally be authorized by the board. While the board can delegate authority to officers or agents, such authority must be either express, implied, or apparent. In this case, the petitioners failed to demonstrate that Mondigo possessed the necessary authority to unilaterally alter the terms of the mortgage contract.

Furthermore, the Supreme Court examined the doctrine of apparent authority, which can bind a principal to the acts of an agent who appears to have the authority to act. However, apparent authority arises from the actions of the principal, not the agent. The Court found no evidence that PCRB had represented Mondigo as having the power to release the mortgage independently of the cross-collateral clause. The Court stated that the petitioners did not establish that:

the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers.

The Court noted that “persons dealing with an agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of the agent’s authority.” Since the petitioners failed to prove Mondigo’s authority to alter the mortgage contract, PCRB was not bound by his alleged agreement.

The petitioners alternatively sought restitution of the amount paid, arguing that if Mondigo lacked authority to accept payment for a separate release, the agreement should be rescinded. The Court rejected this argument, stating that Article 2154 of the Civil Code, concerning undue payment by mistake, did not apply. The payment was made by Banate to Cortel, not directly to PCRB, and the existence of the debt was never disputed. Therefore, no right to recover accrued to Banate against PCRB.

This case underscores the importance of clearly defined contractual terms and the limitations of verbal agreements, especially in the context of real estate and banking. Borrowers must be aware of the implications of clauses like cross-collateral stipulations and should ensure that any modifications to loan agreements are properly documented and authorized by the appropriate corporate bodies. The ruling also clarifies the scope of a bank manager’s authority, reinforcing the principle that individuals dealing with agents of corporations must verify the extent of their authority to bind the corporation.

FAQs

What is a cross-collateral clause in a mortgage?	It’s a provision that secures a loan with multiple properties or secures multiple loans with the same property. This means that all debts must be settled before any individual property can be released from the mortgage.
Can a verbal agreement override a written contract?	Generally, no. Written contracts are presumed to contain the complete agreement between parties. Verbal agreements can be difficult to prove and may not be enforceable, especially if they contradict the terms of a written contract.
What is “apparent authority” in corporate law?	It refers to a situation where a corporation leads a third party to reasonably believe that its agent has the authority to act on its behalf, even if the agent lacks actual authority. The corporation can be bound by the agent’s actions in such cases.
Who has the power to bind a corporation to a contract?	Typically, the board of directors holds the power to bind a corporation. While the board can delegate this power to officers or agents, such delegation must be properly authorized.
What is novation, and how does it relate to contracts?	Novation is the substitution of a new contract for an existing one. For novation to occur, there must be a clear intent to extinguish the old contract and create a new one, with the consent of all parties involved.
What is the significance of Section 23 of the Corporation Code?	This section states that the corporate powers of all corporations shall be exercised by the board of directors, meaning contracts must be authorized by the board, unless specified otherwise.
What happens if someone pays a debt by mistake?	Under Article 2154 of the Civil Code, if someone receives something when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.
Why did the court deny restitution in this case?	Because the payment was made to the co-petitioner and not directly to the bank, and the debt was valid, the court ruled that Article 2154 of the Civil Code did not apply.

In conclusion, this case emphasizes the importance of adhering to the written terms of contracts, especially in financial agreements. It also highlights the need to verify the authority of individuals acting on behalf of corporations before relying on their representations. This ruling serves as a reminder for borrowers to fully understand the implications of mortgage clauses and to ensure that any modifications to their agreements are properly documented and authorized.

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: Banate vs. PCRB, G.R. No. 163825, July 13, 2010