Rural Bank of Bombon (Camarines Sur), Inc. vs. Court of Appeals

A real estate mortgage executed by an agent in his own name, without indicating that he is acting for and on behalf of the principal, binds only the agent and not the principal, even if the agent was in fact authorized to make the mortgage. The agent must act in the name of the principal; mere authority is insufficient if the agent has not purported to execute the instrument as the act and deed of the principal.

Ederlinda M. Gallardo owned three parcels of land in Las Piñas, Rizal, covered by Transfer Certificate of Title No. S-79238, which constituted her paraphernal property. On January 12, 1981, she executed a special power of attorney in favor of Rufino S. Aquino, authorizing him to secure a loan from any bank or lending institution and to mortgage the property as security, to sign all requisite documents, and to receive the loan proceeds. She delivered to Aquino both the special power of attorney and her owner's copy of the title. The Rural Bank of Bombon (Camarines Sur), Inc. was the lending institution that eventually accepted the mortgage and extended the loans secured thereby.

On January 12, 1981, Ederlinda M. Gallardo, married to Daniel Manzo, executed a special power of attorney in favor of Rufino S. Aquino, authorizing him to secure a loan from any bank or lending institution and to mortgage her paraphernal property covered by Transfer Certificate of Title No. S-79238, situated at Las Piñas, Rizal. The power of attorney authorized Aquino to sign and execute any deed of mortgage, sign all requisite documents, receive the loan proceeds in cash or check, and endorse the check. Gallardo delivered to Aquino both the special power of attorney and her owner's copy of the title.

On August 26, 1981, Aquino executed a Deed of Real Estate Mortgage in favor of the Rural Bank of Bombon (Camarines Sur), Inc. over the three parcels of land covered by TCT No. S-79238. The deed stated that the property was security for loans, advances, or accommodations obtained by the mortgagor from the mortgagee in the total sum of ₱350,000.00, plus interest at fourteen percent per annum. Although the opening of the deed mentioned Aquino as "attorney in fact of Ederlinda H. Gallardo," this was merely descriptive of his person. Aquino signed the deed plainly as mortgagor, with the marital consent of his wife Bibiana P. Aquino, who signed as "wife of mortgagor." The three promissory notes dated August 31, September 23, and October 26, 1981 — all executed after the mortgage deed — were likewise signed by Aquino and his wife without any indication that execution was for and on behalf of Gallardo. The deed of mortgage stipulated that the loan proceeds would be used for "fishpond (bangus and sugpo production)," which was Aquino's personal business.

On January 6, 1984, the spouses Gallardo and Manzo filed an action against Aquino and the Bank for annulment of the mortgage, alleging that Aquino had absconded and that they discovered the property was mortgaged to pay personal loans obtained by Aquino for his own use and benefit. The trial court issued a temporary restraining order enjoining the Bank from enforcing or foreclosing the mortgage. Aquino, in his answer, claimed Gallardo authorized him to mortgage the property to liquidate her ₱350,000 obligation to him, but Gallardo disputed this. The Bank moved to dismiss and filed counterclaims and a crossclaim against Aquino. The Bank also filed a separate foreclosure complaint, which was consolidated with the annulment case.

The trial court rendered summary judgment dismissing the annulment complaint and declaring the Bank entitled to damages. On appeal, the Court of Appeals reversed, declaring the mortgage unauthorized, void, and unenforceable against Gallardo, and making the preliminary injunction permanent. The Bank elevated the case to the Supreme Court via petition for review.

• Validity of the Mortgage: Petitioner Bank argued that the real estate mortgage executed by Aquino was valid because he was expressly authorized by Gallardo under the special power of attorney, which was duly registered and annotated on Gallardo's title. Since the special power of attorney did not specify that the loan would be for Gallardo's benefit, the Bank contended the loan could be for the use and benefit of the attorney-in-fact.
• Applicability of Article 1883: Petitioner claimed the deed of real estate mortgage was enforceable against Gallardo pursuant to Article 1883 of the Civil Code, which provides that if an agent acts in his own name, the agent is directly bound to the person with whom he contracted, except when the contract involves things belonging to the principal.

• Agent Acted in Personal Capacity: Respondent Gallardo argued that Aquino signed the deed of mortgage and the promissory notes in his own name as mortgagor, with his wife's marital consent, without indicating he was signing for and on behalf of Gallardo, thereby making the loans his personal obligations.
• No Authority to Act as Surety: Respondent pointed out that the loan proceeds were for Aquino's personal fishpond business, and the Bank failed to inquire whether the loans would benefit the principal. No special power of attorney was executed authorizing Gallardo to act as surety for Aquino's personal loans, as required under Article 1878 of the Civil Code.
• Bank Dealt with Agent Personally: Respondent contended that the Bank ignored Aquino's representative capacity and dealt with him and his wife in their personal capacities, noting that the Bank extended the mortgage when Gallardo had no existing indebtedness with it at the time.

• Validity of the Real Estate Mortgage: Whether the Deed of Real Estate Mortgage dated August 26, 1981, executed by Rufino S. Aquino as attorney-in-fact of Ederlinda Gallardo in favor of the Rural Bank of Bombon, is valid and enforceable against Gallardo.

• Validity of the Real Estate Mortgage: No. The mortgage was void and unenforceable against Gallardo because Aquino signed the deed in his own name as mortgagor without indicating he was acting for and on behalf of the principal. Under the law of agency, an agent must execute the mortgage in the name of the principal to bind the principal; mere authority is insufficient.

• Validity of the Real Estate Mortgage: The governing rule, as articulated in Philippine Sugar Estates Development Co. vs. Poizat, 48 Phil. 536, is that to bind the principal by a mortgage on real property executed by an agent, the mortgage must upon its face purport to be made, signed, and sealed in the name of the principal; otherwise, it will bind the agent only. It is not enough that the agent was in fact authorized to make the mortgage if he has not acted in the name of the principal. Neither is it sufficient that the agent describes himself as acting by virtue of a power of attorney if in fact he has acted in his own name and set his own hand to the instrument. Applying this rule, Aquino's act of signing the deed in his own name alone as mortgagor, without any indication he was signing for and on behalf of Gallardo, bound him alone in his personal capacity and not as agent of Gallardo. The mention of "attorney in fact of Ederlinda H. Gallardo" at the beginning of the deed was merely descriptive of Aquino's person. His wife's signature as "wife of mortgagor" further confirmed the personal nature of the obligation, as she had not been appointed co-agent. The Bank also ignored Aquino's representative capacity, dealt with him and his wife personally, and failed to inquire whether the loans would benefit the principal, even though the deed explicitly stated the loan was for Aquino's bangus and sugpo production. Because the loan was exclusively for Aquino's business, Gallardo would in effect become a surety for Aquino's personal loans, which requires a special power of attorney under Article 1878 of the Civil Code — none having been executed. Petitioner's reliance on Article 1883 was misplaced, as that provision applies when an agent acts in his own name in a transaction involving things belonging to the principal; here, Aquino acted purportedly as agent but actually in his personal capacity, and the properties titled in Gallardo's name could not be foreclosed on a mortgage executed by an agent acting personally. The Court affirmed the rule that a person cannot become liable on a real mortgage she never executed either in person or by attorney-in-fact, and that title to real property cannot be divested except through the formalities of a deed.

• Doctrine of Agency in Real Estate Mortgages — In order to bind the principal by a mortgage on real property executed by an agent, the mortgage must upon its face purport to be made, signed, and sealed in the name of the principal; otherwise, it will bind the agent only. It is not enough merely that the agent was in fact authorized to make the mortgage if he has not acted in the name of the principal. Neither is it ordinarily sufficient that in the mortgage the agent describes himself as acting by virtue of a power of attorney if in fact the agent has acted in his own name and has set his own hand and seal to the mortgage. This is especially true where the agent himself is a party to the instrument. The Court applied this doctrine from Philippine Sugar Estates Development Co. vs. Poizat, 48 Phil. 536, to hold that Aquino's signing in his own name as mortgagor bound only him and not Gallardo.
• Special Power of Attorney to Act as Surety — Under Article 1878 of the Civil Code, a special power of attorney is required to obligate the principal as a guarantor or surety. Where the loan proceeds are used exclusively for the agent's personal business, the principal in effect becomes a surety for the agent's personal loans, which requires express authority. No such special power of attorney had been executed by Gallardo.

• "It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real property executed by an agent, it must upon its face purport to be made, signed and sealed in the name of the principal, otherwise, it will bind the agent only." — This is the canonical formulation of the doctrine governing agent-executed real estate mortgages, quoted from Philippine Sugar Estates Development Co. vs. Poizat, and the ratio decidendi of the case.
• "There is no principle of law by which a person can become liable on a real mortgage which she never executed either in person or by attorney in fact." — This passage underscores the fundamental principle protecting property owners from being bound by mortgages they did not personally execute or validly authorize through an agent acting in their name.
• "It should be noted that this is a mortgage upon real property, the title to which cannot be divested except by sale on execution or the formalities of a will or deed." — This emphasizes the heightened formality required for instruments affecting real property title, distinguishing them from ordinary contracts.

• Philippine Sugar Estates Development Co. vs. Poizat, 48 Phil. 536 — Controlling precedent. The Court applied its rule that an agent must execute a mortgage in the name of the principal to bind the principal, and that a person cannot become liable on a real mortgage she never executed either in person or by attorney-in-fact. The Court relied on this case to hold Gallardo's property not liable on the mortgage.

• Article 1878, Civil Code — Requires a special power of attorney to obligate the principal as a guarantor or surety. The Court found that because the loan proceeds were used exclusively for Aquino's personal fishpond business, Gallardo would in effect become a surety, which required a special power of attorney that was never executed.
• Article 1883, Civil Code — Provides that if an agent acts in his own name, the principal has no right of action against persons with whom the agent contracted, and vice versa; the agent is directly bound as if the transaction were his own, except when the contract involves things belonging to the principal. The Court held this provision inapplicable because Aquino acted purportedly as agent but actually in his personal capacity, and the properties titled in Gallardo's name could not be foreclosed on a mortgage constituted by an agent acting personally.

Cruz, J., Medialdea, J., and Bellosillo, J., concurred.