Mercado vs. Allied Banking Corporation

A special power of attorney is strictly construed; an agent’s authority is confined to the powers expressly conferred, and a mortgage constituted over property not covered by the terms of the power of attorney is unenforceable. A mortgagee bank dealing with an agent of the registered owner must exercise a higher degree of diligence than an ordinary prudent person; a bank cannot claim good faith when apparent discrepancies in the agent’s authority — such as different certificate of title numbers and registry designations — would have put a reasonable person on guard.

Perla N. Mercado owned several pieces of real property. On 28 May 1992 she executed a Special Power of Attorney in favor of her husband, Julian D. Mercado, authorizing him to sell, alienate, mortgage, lease, and deal with an enumerated list of properties. Among them was a parcel described as “RT-106338 – 805 Square Meters of the Registry of Deeds of Pasig (now Makati).” Relying on that SPA, Julian obtained loans from Allied Banking Corporation in December 1996 and February 1997, secured by real estate mortgages over a property covered by TCT No. RT-18206 (106338) registered with the Registry of Deeds of Quezon City. When Julian defaulted, the bank initiated extrajudicial foreclosure and acquired the property as the highest bidder at the auction sale. Petitioners, Perla’s heirs, then sought to annul the mortgages and the subsequent foreclosure proceedings.

Nature of the action: Petitioners, as heirs of Perla N. Mercado, sought the annulment of two real estate mortgages constituted over a parcel of land covered by TCT No. RT-18206 (106338) of the Registry of Deeds of Quezon City, as well as the nullity of the extrajudicial foreclosure and auction sale that followed.

The Special Power of Attorney: On 28 May 1992, Perla N. Mercado executed a Special Power of Attorney in favor of her husband Julian D. Mercado, authorizing him, among others, to “sell, alienate, mortgage, lease and deal otherwise” certain enumerated properties. Paragraph 1(b) listed “Susana Heights, Muntinlupa covered by Transfer Certificates of Title Nos. T-108954 – 600 Square Meters and RT-106338 – 805 Square Meters of the Registry of Deeds of Pasig (now Makati).”

The loan transactions and mortgages: Acting under this SPA, Julian obtained a loan of ₱3,000,000.00 from respondent Allied Banking Corporation on 12 December 1996, secured by a real estate mortgage over the property covered by TCT No. RT-18206 (106338) of the Registry of Deeds of Quezon City. An additional loan of ₱5,000,000.00 was obtained on 5 February 1997, secured by another mortgage over the same property.

Revocation of the SPA: Petitioners alleged that Perla revoked the SPA on 10 March 1993, evidenced by a Revocation of SPA. By a letter dated 23 January 1996, Perla notified the Registry of Deeds of Quezon City that any attempt to mortgage or sell the property covered by TCT No. RT-18206 (106338) must be with her full consent documented by a special power of attorney duly authenticated before the Philippine Consulate General in New York. This letter was received and filed by the Registry of Deeds on 7 February 1996.

Default and foreclosure: Julian defaulted on the loans. Respondent initiated extrajudicial foreclosure proceedings over the mortgaged property; it was sold at public auction and respondent was declared the highest bidder, as shown in a Sheriff’s Certificate of Sale dated 15 January 1998.

Petitioners’ position: Petitioners maintained that the SPA did not include the subject property — the SPA referred to TCT No. RT-106338 registered in Pasig (Makati), not TCT No. RT-18206 (106338) registered in Quezon City — and that the SPA had been effectively revoked, thereby depriving Julian of any authority to mortgage the property.

Respondent’s position: Respondent argued that the property listed in the SPA and the mortgaged property were one and the same; TCT No. RT-18206 was merely a reconstitution of TCT No. 106338, the property was actually located in Quezon City, and the reference to the Registry of Deeds of Pasig was a mistake that should not defeat Perla’s clear intention. Respondent further contended that the revocation was not annotated on the certificate of title and therefore could not bind third persons who relied on the SPA in good faith.

• Exclusive enumeration and strict construction: Petitioners argued that the SPA contained an exclusive list of properties over which Julian could exercise authority; the subject property covered by TCT No. RT-18206 (106338) of the Registry of Deeds of Quezon City was not among them, and a power of attorney must be strictly limited to what is expressly stated.
• Effective revocation of agency: Petitioners maintained that the SPA was expressly revoked by Perla on 10 March 1993 through a public document, and that the revocation was constructively known to third parties because a letter informing the Registry of Deeds of Quezon City of the revocation had been received and filed on 7 February 1996, well before the mortgage transactions.
• Absence of good faith on the part of the bank: Petitioners contended that respondent was not a mortgagee in good faith, as it failed to notice the glaring discrepancy between the TCT number in the SPA and the TCT number of the mortgaged property, and disregarded the fact that the registries of deeds were different.

• Identity of the property: Respondent argued that no property existed under TCT No. 106338 with the Registry of Deeds of Pasig; the only property matching the description was the subject property covered by TCT No. RT-18206 (106338) registered in Quezon City, which was merely a reconstitution of TCT No. 106338. The discrepancy in the designation of the register of deeds was an error, and Perla’s clear intention was to include the subject property.
• Revocation not binding on third parties: Respondent countered that the revocation of the SPA was not contained in a public instrument annotated on the certificate of title, and therefore could not bind third persons who relied on the SPA in good faith.
• Exercise of due diligence: Respondent maintained it exercised the reasonable diligence required of a prudent person: it verified Julian’s authority by examining the SPA annotated at the back of the TCT, and after investigation concluded that the property covered by TCT No. 106338 referred to in the SPA and the subject property were the same.

• Scope of the SPA: Whether the subject property covered by TCT No. RT-18206 (106338) of the Registry of Deeds of Quezon City was included in the properties enumerated in the Special Power of Attorney, such that Julian D. Mercado had authority to mortgage it.
• Revocation: Whether the express revocation of the SPA by Perla on 10 March 1993, and the subsequent notice letter to the Registry of Deeds of Quezon City received on 7 February 1996, were effective as against respondent, a third party.
• Mortgagee in good faith: Whether respondent Allied Banking Corporation, as a banking institution, exercised the degree of diligence required to be considered an innocent mortgagee for value.

• Scope of the SPA: The subject property was not among those enumerated in the SPA. The literal terms of the SPA made no reference to TCT No. RT-18206 (106338) or to the Registry of Deeds of Quezon City; only “RT-106338 – 805 Square Meters of the Registry of Deeds of Pasig (now Makati)” appeared. Where the language of a contract is clear and leaves no doubt as to the intention of the parties, the literal meaning controls, and courts may not read into it any other intention. A power of attorney must be strictly construed; the agent may neither go beyond nor deviate from the powers specified. Powers not expressly conferred are excluded. Respondent failed to present any certification from the relevant Registries of Deeds or to submit copies of the certificates of title for comparison; its bare assertion that the two titles covered the same property was without evidentiary weight. Thus, Julian had no authority to mortgage the subject property, rendering the real estate mortgages unenforceable under Article 1403(1) of the Civil Code.

• Revocation: Even assuming the subject property was included in the SPA, the agency had been effectively revoked. Agency is extinguished by its revocation (Article 1999, Civil Code), and the principal may revoke the agency at will (Article 1920). Perla executed a revocation in a public document on 10 March 1993 and subsequently informed the Registry of Deeds of Quezon City by letter received on 7 February 1996. Although the revocation was not annotated on the certificate of title, actual notice of the revocation was filed with the register of deeds. Under Section 52 of Presidential Decree No. 1529, every instrument affecting registered land, if filed in the Office of the Register of Deeds, constitutes constructive notice to all persons from the time of such filing. Neither the register of deeds nor the bank denied receipt of the letter. Consequently, at the time the first loan transaction was entered into in December 1996, third parties were constructively notified that the SPA had been revoked and Julian no longer had authority to mortgage the subject property.

• Mortgagee in good faith: Respondent was not an innocent mortgagee. The patent difference between the TCT number in the SPA (“RT-106338”) and the TCT number in the mortgages (“RT-18206 (106338)”), together with the fact that the titles referred to different registries of deeds, should have put respondent on guard. A purchaser or mortgagee cannot close his eyes to facts that would place a reasonable person on inquiry and then claim good faith. A mortgagee dealing with one who is not the registered owner must examine not only the certificate of title but all factual circumstances necessary to determine flaws in the transferor’s title or capacity. A banking institution is held to a higher standard: it must exercise greater care and prudence than a private individual, subjecting all transactions to rigorous scrutiny because its business is imbued with public interest and fiduciary character. Had respondent exercised the required degree of diligence, it would have discovered the letter of revocation on file with the Registry of Deeds. By disregarding the readily apparent defects in Julian’s authority, respondent failed to act as a prudent bank and could not claim the status of an innocent mortgagee.

• Strict construction of powers of attorney — A power of attorney is strictly construed and must be pursued. The instrument grants only those powers specified; the agent may neither go beyond nor deviate from them. All powers and duties not expressly conferred are excluded. This rule prevents a principal from being despoiled by vague or general grants of authority and requires that broad authority over real rights be set down in the most formal and explicit terms. Applied here, Julian’s authority was limited to the expressly enumerated parcels; the subject property not being listed, the mortgage was unauthorized.

• Literal meaning of clear contract terms controls — If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations shall govern. Courts may not interpret a clear contract to impose obligations the parties did not assume. The SPA’s enumeration of properties was clear and exclusive; no intention to include the subject property could be inferred.

• Higher degree of diligence required of banks as mortgagees — A banking institution is expected to exercise greater care and prudence than an ordinary mortgagee. In mortgage transactions, especially where the mortgagor is not the registered owner, the bank must scrutinize not only the certificate of title but all surrounding factual circumstances to determine any defect in the transferor’s authority or title. The failure to observe this elevated standard defeats a claim of good faith. The Court applied this to deny respondent’s claim of innocent mortgagee status.

• Constructive notice under Section 52 of P.D. No. 1529 — Every instrument affecting registered land, if registered, filed, or entered in the Office of the Register of Deeds, serves as constructive notice to all persons from the time of such filing. Perla’s letter notifying the register of deeds of the revocation of the SPA, received and filed on 7 February 1996, thereby bound third parties with constructive knowledge of the revocation before the loan transactions.

• Unenforceable contracts under Article 1403(1) — Contracts entered into in the name of another person by one who has no authority or legal representation, or who has acted beyond his powers, are unenforceable. Such contracts cannot be enforced by a proper action in court unless they are ratified. The real estate mortgages constituted by Julian without Perla’s authority were unenforceable, not void, because they fell squarely within this provision. An unenforceable contract may be ratified by the person in whose behalf it was executed before revocation by the other party; until ratification, it cannot be enforced against the principal or her successors.

• “The law is that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. x x x The clear terms of the contract should never be the subject matter of interpretation. Neither abstract justice nor the rule on liberal interpretation justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract or obligation not assumed simply or merely to avoid seeming hardships.” — Articulates the controlling rule on interpretation that foreclosed respondent’s intent theory.

• “[A] power of attorney must be strictly construed and pursued. The instrument will be held to grant only those powers which are specified therein, and the agent may neither go beyond nor deviate from the power of attorney.” — Defines the strict construction principle central to the ruling on lack of authority.

• “[A] purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. His mere refusal to face up the fact that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect x x x, will not make him an innocent purchaser for value.” — Establishes the standard that defeated the bank’s good faith claim.

• “Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract.” — Lays down the elevated diligence standard applied to respondent.

• JMA House, Incorporated v. Sta. Monica Industrial and Development Corporation, G.R. No. 154156, 31 August 2006, 500 SCRA 526 — Followed for the rule that the literal meaning of clear contractual stipulations must control, precluding interpretation that would read into the SPA an intention contrary to its express terms.

• Angeles v. Philippine National Railways, G.R. No. 150128, 31 August 2006, 500 SCRA 444 — Cited in support of the strict construction rule for powers of attorney.

• Bank of the Philippine Islands v. De Coster, 49 Phil. 574 (1926) and Philippine National Bank v. Sta. Maria, 139 Phil. 781 (1969) — Referred to for the principle that powers not specified in a power of attorney are deemed excluded.

• Arrofo v. Quiño, G.R. No. 145794, 26 January 2005, 449 SCRA 284 — Relied on for the doctrine that a mortgagee cannot ignore facts that would put a reasonable person on guard and still claim good faith.

• Abad v. Guimba, G.R. No. 157002, 29 July 2005, 465 SCRA 356 — Applied for the rule that one who deals with an agent who is not the registered owner must examine not only the certificate of title but all factual circumstances relevant to the transferor’s capacity.

• Cruz v. Bancom Finance Corporation, 429 Phil. 225 (2002) — Followed for the heightened standard of diligence required of banks as mortgagees.

• Article 2085, Civil Code — Enumerates the essential requisites of a valid mortgage, including that the mortgagor have free disposal of the property or be legally authorized; the third paragraph recognizes that a third person may mortgage her property to secure another’s debt, the scenario presented.

• Article 1878(12), Civil Code — Requires a special power of attorney for the creation or conveyance of real rights over immovable property; the provision that made the SPA necessary for Julian’s authority to mortgage real property.

• Article 1403(1), Civil Code — Classifies contracts entered into in the name of another by one without authority as unenforceable; the basis for characterizing the mortgages as unenforceable rather than void.

• Article 1317, Civil Code — States that unenforceable contracts may be ratified by the person in whose behalf they were executed before revocation by the other party; provided the possibility of ratification.

• Articles 1919, 1920, and 1999, Civil Code — Govern the extinguishment of agency by revocation and the principal’s power to revoke at will, whether express or implied.

• Section 52, Presidential Decree No. 1529 (Property Registration Decree) — Provides that every instrument affecting registered land, if filed in the Office of the Register of Deeds, constitutes constructive notice to all persons from the time of such filing; applied to the letter notifying the register of deeds of the revocation.

• Section 2, General Banking Law of 2000 — Declares that the business of banking is impressed with public interest and fiduciary character, imposing high standards of integrity and performance; cited to reinforce the elevated diligence expected of respondent.

Associate Justice Consuelo Ynares-Santiago (Chairperson), Associate Justice Ma. Alicia Austria-Martinez, and Associate Justice Antonio Eduardo B. Nachura concurred.