United Coconut Planters Bank vs. Planters Products, Inc., Janet Layson and Gregory Grey

A bank cannot be bound by a branch manager's guarantee of a client's obligation where the manager signs the undertaking in his personal capacity, without any allusion to the bank, and without authority from the bank's board of directors.

Respondent Planters Products, Incorporated (PPI) was a fertilizer manufacturer that supplied fertilizers to dealers on credit. Respondent Janet Layson was a client who sought to purchase fertilizers from PPI, and petitioner United Coconut Planters Bank (UCPB) was the bank that had approved a loan in her favor. The arrangement contemplated that the fertilizers delivered to Layson would be paid out of the proceeds of the UCPB loan. Under banking law, guarantees issued by banks are highly regulated transactions that may be entered into only under authority granted by the bank's board of directors.

Respondent Planters Products, Incorporated (PPI) was a fertilizer manufacturer that entered into an arrangement with respondent Janet Layson for the delivery of fertilizers to her, payable from the proceeds of a loan that petitioner United Coconut Planters Bank (UCPB) extended to her. On February 11, 1980, Layson executed a document called a "pagares," written on the dorsal side of a UCPB promissory note. The pagares stated that Layson had an approved loan with UCPB-Iloilo Branch for ₱200,000.00 and irrevocably assigned the proceeds of the promissory note to PPI for her account as payment for her fertilizer and agchemical withdrawals. The second portion of the pagares, signed by that branch's manager, respondent Gregory Grey, stated that the "assignment has been duly accepted and payment duly guaranteed within 60 days from PPI's Invoice."

Subsequently, Layson executed a third document, a "Letter Guarantee by the Dealer," binding herself to pay PPI the face value of the pagares in case UCPB did not pay the same at maturity. Contrary to her undertakings, however, on the following day, February 12, 1980, Layson withdrew the ₱200,000.00 loan that UCPB had granted her, with Grey's connivance. On the strength of the three documents, PPI delivered quantities of fertilizers to Layson. Layson and Grey duplicated their transactions with PPI on February 18 and 27, 1980, covering two loans of ₱100,000.00 each.

On April 28, 1980, PPI presented the documents of the financed transactions to UCPB for collection. The bank denied the claim on the ground that it neither authorized the transactions nor the execution of the documents, which were not part of its usual banking transactions. UCPB claimed that Grey exceeded his authority in guaranteeing payment of Layson's purchases on credit, and that the pagares were illegal and void since banking laws prohibit bank officers from guaranteeing loans of bank clients.

Consequently, in April 1980, PPI sued Layson, UCPB, and Grey for breach of contract with damages before the Regional Trial Court of Makati. Grey died while the case was on trial; although the RTC ordered his substitution by any of his heirs, no one came to substitute him, and trial proceeded without prejudice to the claims against his estate.

The evidence established that Grey connived with Layson to lure PPI into delivering fertilizers worth ₱200,000.00 to her on credit, and that notwithstanding his undertaking, he released the ₱200,000.00 loan proceeds to Layson the day after the assignment. UCPB also adduced evidence that Grey lent Layson the ₱200,000.00 without proper authorization from the bank: the authority given him for unilaterally extending unsecured loans had a ceiling of ₱10,000.00 only, and he needed the unanimous approval of the Branch Credit Committee, of which he was only a member, before he could grant a higher loan of that kind. Layson never denied her business dealings with PPI and her receipt of PPI's fertilizer products.

• Lack of Authority: UCPB argued that branch manager Grey exceeded his authority in guaranteeing payment of Layson's purchases on credit, and that the bank neither authorized the transactions nor the execution of the documents.
• Void Guarantee: UCPB contended that the pagares were illegal and void since banking laws prohibit bank officers from guaranteeing the loans of bank clients.
• Not a Usual Banking Transaction: UCPB maintained that the documents were not part of its usual banking transactions and that Grey had no authority on his own to grant Layson the credit accommodation and the bank's guarantee.

• Liability of UCPB: Whether UCPB is bound by Grey's undertaking on its behalf to deliver to PPI the proceeds of the bank's loan to Layson in payment of the fertilizers she bought.
• Attorney's Fees: Whether, in the negative, UCPB is entitled to an award of attorney's fees.

• Liability of UCPB: No. Grey made the undertaking in his personal capacity, signing under his own name rather than in UCPB's name or as its branch manager, and the wording of the undertaking made no allusion to UCPB; as a bank guarantee, it could bind the bank only under authority from its board of directors, which was absent.
• Attorney's Fees: No. PPI had good reason to implead UCPB since its branch manager played a pivotal role in facilitating the anomalous transaction, so PPI cannot be said to have acted in bad faith in impleading the bank.

• Liability of UCPB: The CA had characterized the pagares as an assignment of credit, holding that Layson simply assigned to PPI the ₱200,000.00 proceeds of her approved loan and that UCPB, as obligor, was bound by the assignment even without formal notice, and that UCPB may be deemed to have acted in bad faith when it delivered the loan proceeds to Layson despite its undertaking to turn them over to PPI. While a corporation is liable to innocent third persons where it knowingly permits its officer or agent to perform acts within the scope of his general or apparent authority, holding him out to the public as possessing power to do those acts, the guarantee Grey executed showed that he was acting for himself, not in representation of UCPB. Grey wrote the undertaking at the bottom of the pagares and signed it under his own name, not in UCPB's name or as its branch manager, and the wordings of the undertaking did not at all make any allusion to UCPB. By its tenor, Grey's undertaking was a guarantee, stating that "payment unconditionally guaranteed within sixty (60) days from Planters Products, Inc. Invoice date up to Pesos: Two Hundred Thousand (₱200,000.00) only." Bank guarantees are highly regulated transactions under the law; they are undertakings not so casually issued by banks or by their branch managers at the dorsal side of a client's promissory note as if an afterthought. A bank guarantee is a contract that binds the bank and may be entered into only under authority granted by its board of directors, and no such authority appeared on any document; PPI had no right to expect branch manager Grey to issue one without such authorization. The evidence further showed that Grey connived with Layson to lure PPI into delivering fertilizers worth ₱200,000.00 on credit, and that Grey released the loan proceeds to Layson the day after the assignment notwithstanding his undertaking, and that he lent Layson the ₱200,000.00 without proper authorization, the bank's authority to him for unilaterally extending unsecured loans having a ceiling of ₱10,000.00 only. With UCPB absolved of liability, the RTC's ruling was affirmed finding Layson primarily liable to PPI, with the latter having the right of recourse to Grey should it be unable to recover from her; Layson never denied her business dealings with PPI and her receipt of its fertilizer products, an admission that cemented her liability.
• Attorney's Fees: The CA properly deleted the award of attorney's fees in favor of UCPB. Such fees may be awarded when one is compelled to litigate and incurs expenses to protect his interests, or when the suit filed was baseless, or when the defendant acted in bad faith in filing or impleading the litigant. Here, PPI had good reason to implead UCPB since its branch manager played a pivotal role in facilitating the anomalous transaction; thus, PPI did not act in bad faith in impleading the bank.

• Corporate liability for acts of officers within apparent authority — A corporation is liable to innocent third persons where it knowingly permits its officer, or any other agent, to perform acts within the scope of his general or apparent authority, holding him out to the public as possessing power to do those acts. The doctrine did not apply in this case because Grey signed the undertaking under his own name, not in UCPB's name or as its branch manager, and the wording of the undertaking made no allusion to the bank; the guarantee therefore appeared to have been made in his personal capacity.
• Bank guarantees as highly regulated transactions — A bank guarantee is a contract that binds the bank and may be entered into only under authority granted by the bank's board of directors. Such guarantees are not casually issued by banks or by their branch managers at the dorsal side of a client's promissory note as if an afterthought, and a third person has no right to expect a branch manager to issue one without such authorization. Because no board authority appeared on any document, UCPB could not be bound by Grey's undertaking.
• Guaranty distinguished from assignment of credit — By its tenor, Grey's undertaking was a guarantee, not merely an assignment of credit, since it stated that payment was "unconditionally guaranteed within sixty (60) days from Planters Products, Inc. Invoice date up to Pesos: Two Hundred Thousand (₱200,000.00) only." The Court thus rejected the CA's treatment of the pagares as an assignment of credit binding on the bank.

• "UCPB cannot be bound by Grey's above undertaking since he appears to have made it in his personal capacity. He signed it under his own name, not in UCPB's name or as its branch manager. Indeed, the wordings of the undertaking do not at all make any allusion to UCPB." — This passage states the ratio decidendi for absolving the bank: the branch manager's personal signing and the absence of any reference to UCPB negated any binding corporate undertaking.
• "A bank guarantee is a contract that binds the bank and so may be entered into only under authority granted by its board of directors. Such authority does not appear on any document. Indeed, PPI had no right to expect branch manager Grey to issue one without such authorization." — This is the Court's canonical formulation of the rule governing bank guarantees, which supplied the controlling reason for rejecting the CA's finding of bank liability.
• "True, a corporation like UCPB is liable to innocent third persons where it knowingly permits its officer, or any other agent, to perform acts within the scope of his general or apparent authority, holding him out to the public as possessing power to do those acts." — The Court acknowledged the general rule on apparent authority before distinguishing it on the facts, making the passage useful for contrasting the rule with its exception.
• "It is evident that Grey connived with Layson to lure PPI to deliver to her fertilizers worth ₱200,000.00 on credit." — This factual finding anchored the Court's conclusion that Grey acted in his personal capacity and in bad faith, and supported the affirmance of Layson's primary liability with recourse to Grey.

• BPI Family Savings Bank, Inc. vs. First Metro Investment Corporation, G.R. No. 132390, May 21, 2004, 429 SCRA 30 — Cited for the rule that a corporation is liable to innocent third persons where it knowingly permits its officer or agent to perform acts within the scope of his general or apparent authority, holding him out to the public as possessing power to do those acts; the Court acknowledged the rule but distinguished it on the facts.
• Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993, 223 SCRA 350 — Cited in the same vein as the earlier authority for the apparent-authority rule relied upon by the Court in framing the exception to bank liability.

• Article 1626, Civil Code of the Philippines — Referenced in relation to the CA's characterization of Layson's pagares as an assignment of credit; the Court rejected the CA's treatment of the pagares as a mere assignment binding on the bank, holding instead that Grey's undertaking was a guarantee.
• Republic Act 8791 (General Banking Law of 2000) — Cited for the proposition that bank guarantees are highly regulated transactions under the law, supporting the holding that a bank guarantee binds the bank only when issued under authority from its board of directors.
• Section 83, General Banking Act — Cited by the RTC as prohibiting bank officers from guaranteeing the loans of bank clients, which rendered the pagares void; the RTC's ruling on this point was reinstated in toto.

• Diosdado M. Peralta (Acting Chairperson)
• Martin S. Villarama, Jr.
• Jose Catral Mendoza
• Estela M. Perlas-Bernabe