University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas

Acts of a corporate officer not authorized by a valid board resolution do not bind the corporation unless ratified or the officer is held out with apparent authority; an educational institution acts ultra vires when it mortgages its properties to secure loan obligations of third parties, and the resulting contracts are unenforceable. A bank cannot claim good faith reliance on a notarized secretary’s certificate that is shown to be fictitious when it fails to exercise the highest degree of diligence.

University of Mindanao, Inc. is an educational institution. In 1982, its Board of Trustees was chaired by Guillermo B. Torres, whose wife Dolores P. Torres sat as Assistant Treasurer. The spouses Torres also incorporated and operated two thrift banks: First Iligan Savings & Loan Association, Inc. (FISLAI) and Davao Savings and Loan Association, Inc. (DSLAI). Guillermo Torres chaired both thrift banks and acted as FISLAI’s President; Dolores Torres acted as DSLAI’s President and FISLAI’s Treasurer. Bangko Sentral ng Pilipinas (BSP) extended standby emergency credits to FISLAI, evidenced by three promissory notes in the aggregate sum of ₱1.9 million. As security, Saturnino Petalcorin, the university’s Vice President for Finance, executed deeds of real estate mortgage over university properties in Cagayan de Oro City and Iligan City in 1982, relying on a Secretary’s Certificate and an excerpt of minutes of an alleged board meeting. FISLAI and DSLAI eventually merged into Mindanao Savings and Loan Association, Inc. (MSLAI), which was liquidated in 1991. In 1999, BSP informed the university that it would foreclose the mortgaged properties unless MSLAI’s outstanding obligation was paid. The university denied the mortgages and filed complaints for nullification and cancellation in two regional trial courts.

• Parties: Petitioner University of Mindanao, Inc. is an educational institution. For the year 1982, its Board of Trustees was chaired by Guillermo B. Torres; his wife, Dolores P. Torres, served as Assistant Treasurer. The spouses Torres also incorporated and operated two thrift banks: FISLAI and DSLAI. Guillermo Torres chaired both banks while acting as FISLAI’s President; Dolores Torres was DSLAI’s President and FISLAI’s Treasurer.

• The Loan Transactions: Upon Guillermo Torres’ request, respondent Bangko Sentral ng Pilipinas granted FISLAI a ₱1.9 million standby emergency credit, covered by three promissory notes dated 8 February, 7 April, and 4 May 1982 signed by Guillermo Torres and co-signed by Dolores Torres or Edmundo Ramos, Jr. BSP later granted DSLAI emergency advances on 27 May 1983 (₱1,633,900.00) and 20 August 1984 (₱6,489,000.00). FISLAI and DSLAI eventually merged into MSLAI, with DSLAI as the surviving corporation. MSLAI was liquidated on 24 May 1991.

• The Mortgage Contracts: On 25 May 1982, Saturnino Petalcorin, University of Mindanao’s Vice President for Finance, executed a Deed of Real Estate Mortgage over the university’s Cagayan de Oro City property (TCT No. T-14345) in favor of BSP to secure FISLAI’s ₱1.9 million loan. The mortgage was annotated on the title on 25 June 1982. On 5 November 1982, Petalcorin executed another Deed of Real Estate Mortgage over the university’s two Iligan City properties (TCT Nos. T-15696 and T-15697) as additional security for the same loans. The Iligan mortgages were annotated on 17 January 1983.

• The Alleged Board Resolution and Secretary’s Certificate: Petalcorin presented a Secretary’s Certificate dated 13 April 1982, signed by Corporate Secretary Aurora de Leon, stating that at a regular meeting on 30 March 1982, the Board of Trustees unanimously resolved to authorize the university to mortgage its real estate properties with BSP to secure FISLAI’s credit facility, and authorized the President and/or VP for Finance to execute the mortgage documents. The certificate was supported by an excerpt from the minutes of an alleged 19 January 1982 board meeting (certified by de Leon) authorizing Petalcorin to mortgage the listed properties.

• Evidence of Fictitiousness: At trial, Aurora de Leon testified that no board resolution had actually been passed; she signed the Secretary’s Certificate and certified the excerpt only upon Guillermo Torres’ orders. Saturnino Petalcorin similarly testified that he had no authority and merely followed Torres’ request. BSP’s own witness, Daciano Pagui, Jr., admitted there was no board resolution authorizing Petalcorin. The Iligan RTC found the Secretary’s Certificate fictitious, irregular (unnumbered), and lacking specific description of the mortgaged properties.

• Demand and Nullification Suits: On 18 June 1999, BSP sent a letter to University of Mindanao demanding payment of MSLAI’s outstanding obligation (then ₱12,534,907.73) and stating its intention to foreclose. The university, through its VP for Accounting, denied the mortgages and receipt of any loan proceeds. On 16 July 1999, the university filed separate Complaints for nullification and cancellation of mortgage before the Cagayan de Oro and Iligan RTCs.

• Prescription: BSP’s action to foreclose had prescribed because more than ten years had elapsed since the execution of the mortgages in 1982 without any action on the mortgage contracts.

• Ultra Vires: As an educational institution, the university had no power to mortgage its properties to secure the loans of third persons. Securing FISLAI’s loans was not among the purposes for which the university was established and was thus ultra vires.

• Lack of Authority: No board resolution authorized Saturnino Petalcorin to execute the mortgage contracts. The Secretary’s Certificate and excerpt of minutes were simulated. The contracts were therefore unenforceable under Articles 1317 and 1403 of the Civil Code.

• No Ratification: The university never ratified the mortgages; it received no loan proceeds, derived no consideration, and was unaware of the mortgages until BSP’s demand letter in 1999.

• Bank’s Lack of Diligence: BSP failed to exercise the high degree of diligence required of banks. It relied on a secretary’s certificate without verifying the underlying board resolution despite knowing that no such resolution existed.

• Annotations as Notice: The annotations on the certificates of title did not bind the university as owner, as annotations are constructive notice only to third parties.

• Prescription: The action to foreclose had not prescribed because the maturity dates of the loans were repeatedly extended by the Monetary Board, making them due only in 1990, and BSP’s 18 June 1999 demand letter interrupted the prescriptive period.

• Consistency with Business Interests: The mortgages were consistent with the university’s business interests because the university was a shareholder of FISLAI and key officers interlocked with the thrift banks. The university held substantial shares in MSLAI after the merger, warranting the inference that it held substantial shares in FISLAI when the mortgages were executed.

• Apparent Authority and Estoppel: Saturnino Petalcorin was clothed with apparent and ostensible authority to bind the university by virtue of the notarized Secretary’s Certificate and the excerpt of board minutes. BSP relied on these documents in good faith. The university was estopped from denying Petalcorin’s authority by its silence for over a decade and its failure to disown the mortgages.

• Constructive Notice: The annotations of BSP’s mortgage interests on the certificates of title operated as constructive notice to the university of the existence of the mortgages.

• Knowledge of Officers Imputed to Corporation: The knowledge of Guillermo and Dolores Torres, who signed the promissory notes, was imputed to the university. Their participation created a presumption that the university knew of the transaction.

• Prescription: Whether BSP’s action to foreclose the mortgaged properties had already prescribed.

• Ultra Vires: Whether the mortgage contracts were ultra vires as being outside the purposes and powers of an educational institution.

• Authority and Ratification: Whether Saturnino Petalcorin was authorized by a valid board resolution to execute the mortgages, and if not, whether the university ratified the unauthorized contracts.

• Apparent Authority and Estoppel: Whether Petalcorin was clothed with apparent authority to bind the university, thereby estopping the university from denying the mortgages.

• Bank’s Duty of Diligence: Whether BSP exercised the required degree of diligence as a banking institution in relying on the Secretary’s Certificate without further inquiry.

• Effect of Annotations: Whether the annotations of the mortgage interests on the certificates of title operated as constructive notice to the university and precluded it from denying knowledge of the mortgages.

• Prescription: The action to foreclose had not prescribed. Prescription of a mortgage action runs for ten years from the time the action may be brought—i.e., from default after demand, not from execution of the contract. The loans’ maturity dates were repeatedly extended until they became due and demandable only in 1990. Assuming demand was necessary, BSP’s 18 June 1999 demand letter interrupted the prescriptive period; the complaints for nullification were filed on 16 July 1999. Even if demand were unnecessary under Article 1169(3) of the Civil Code because the obligor had been rendered incapable of performance, BSP would have had until 2000 to file an action. In either scenario, the action was timely.

• Ultra Vires: The mortgage contracts were ultra vires. A corporation possesses only the powers expressly conferred by law and its articles of incorporation, plus those necessary or incidental to carry out its purposes. The university’s amended articles of incorporation enumerated purposes limited to educational instruction, acquisition of properties for its operations, housing projects for faculty, and related undertakings. Mortgaging its properties to secure loans of a thrift bank had no substantial, direct, or immediate connection to the university’s educational business. The test in Montelibano et al. v. Bacolod-Murcia Milling Co., Inc. requires that an act be in direct and immediate furtherance of the corporation’s business. Securing third-party loans fails this test. Although corporate acts are presumed valid if they appear on their face to be within corporate powers, that presumption is disputable and does not apply when the act is patently outside the corporation’s power, as here. Respondent’s argument that the university was a FISLAI shareholder and had interlocking officers did not expand the university’s corporate powers; the separate juridical personality of each corporation means that acquiring shares in another entity does not alter the acquiring corporation’s purpose absent an amendment of its articles.

• Authority and Ratification: The mortgage contracts were unenforceable for want of authority. The corporate powers of a corporation must be exercised by its board of directors/trustees acting as a body (Section 23, Corporation Code). The board may delegate authority through a resolution, but without delegation, acts of officers are not binding. The trial courts found—and the Court of Appeals acknowledged—that no board resolution authorizing Petalcorin was ever passed. Aurora de Leon and Petalcorin testified that the board meeting never took place and the documents were issued upon Guillermo Torres’ orders. Hence, the contracts fall under Article 1403(1) of the Civil Code as unenforceable unless ratified. No ratification occurred: the university did not issue a ratifying resolution, received no proceeds or consideration, and was unaware of the mortgages until BSP’s demand. Ratification must be knowing and voluntary; silence alone does not constitute ratification when the corporation lacked actual knowledge communicated through an authorized representative. The knowledge of Guillermo and Dolores Torres could not be imputed to the university because they acquired that knowledge while acting for the thrift banks, not within the scope of their authority as university officers.

• Apparent Authority and Estoppel: The doctrine of apparent authority did not apply. Apparent authority arises when the principal, through its acts, silence, or lack of action, leads third persons to believe that the agent possesses authority. Here, the documentary basis for Petalcorin’s authority was a simulated Secretary’s Certificate and fictitious board resolution. These could not constitute the corporate acts that held Petalcorin out as an authorized representative. Moreover, BSP’s own witness admitted that no board resolution existed, yet BSP made no further inquiry. Without evidence that the university had previously allowed Petalcorin to contract on its behalf without a board resolution, there was no basis to estop the university.

• Bank’s Duty of Diligence: BSP failed to exercise the highest degree of diligence required of banking institutions. Banks are impressed with public interest and must exercise more care and prudence than private individuals. BSP relied on a notarized Secretary’s Certificate and excerpt of minutes that were shown to be simulated; notarization vests a document with a presumption of regularity, but that presumption is disputable and was rebutted by the evidence of the absence of any board meeting. BSP’s failure to question the due execution of the Secretary’s Certificate, especially when its own witness knew of the absence of a board resolution, precluded a claim of good faith.

• Effect of Annotations: The mortgage annotations on the certificates of title were not constructive notice to the university as the registered owner. Under Sajonas v. Court of Appeals, annotations of adverse claims serve as a warning only to third parties dealing with the property, not to the registered owner. The annotations did not validate the defective mortgages or preclude the university from challenging their validity.

• Ultra Vires Acts — Distinguished from Illegal Acts — Corporate acts that are merely beyond the scope of the articles of incorporation but not contrary to law, morals, or public policy are ultra vires and not void ab initio; they are voidable and may be ratified by the stockholders. Illegal acts, on the other hand, are void and incapable of ratification. ( Pirovano, et al. v. De la Rama Steamship Co. )

• Test for Ultra Vires (Montelibano Test) — An act is within corporate powers if it is lawful, not otherwise prohibited, done for corporate ends, and reasonably tributary to the promotion of those ends in a substantial, not remote and fanciful, sense. The question is whether the act is in direct and immediate furtherance of the corporation’s business, fairly incident to express powers and reasonably necessary to their exercise. ( Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc. )

• Presumption of Validity of Corporate Contracts — Disputable — A contract not on its face necessarily beyond the scope of the corporation’s power is presumed valid; however, the presumption is disputable and yields when the act patently exceeds corporate powers or contrary evidence is presented.

• Board Authority Required to Bind Corporation — Under Section 23 of the Corporation Code, corporate powers must be exercised, business conducted, and property controlled by the board of directors or trustees acting as a body. Individual directors or officers have no authority to bind the corporation absent a delegation by board resolution. Contracts entered into by an officer without authority are unenforceable under Articles 1317 and 1403(1) of the Civil Code unless ratified.

• Ratification — Requisites and Effects — Ratification is the voluntary, knowing, and deliberate confirmation of a prior unauthorized act; it retroacts to the time of the original act and cures the defect of consent. Implied ratification requires that no acceptable explanation exists for the principal’s conduct other than an intention to adopt the act. Silence or acquiescence alone does not constitute ratification where the corporation lacked actual knowledge through an authorized representative.

• Imputation of Officer’s Knowledge to Corporation — Scope Limitation — The knowledge of an officer is notice to the corporation only when acquired in the course of employment and in relation to matters within the scope of his authority. Knowledge obtained by an officer while acting in a personal capacity or in the interest of another entity is not imputed to the corporation.

• Doctrine of Apparent Authority — Elements — A corporation may be bound by the acts of a person who is held out as having authority, based on estoppel. Apparent authority does not arise unless the principal committed acts or conduct that a third party knew and relied upon in good faith as a result of reasonable prudence, and the agent’s conduct must have caused a change of position to the third party’s detriment. ( Advance Paper Corporation v. Arma Traders Corporation )

• Bank’s Duty of Highest Diligence — Banks are required to exercise the highest degree of diligence in their transactions due to the public interest involved. A bank cannot rely on assumptions and must exercise more care and prudence than private individuals, particularly in verifying the authority of persons purporting to act for corporate borrowers or mortgagors. ( China Banking Corporation v. Lagon )

• Annotations on Certificate of Title — Constructive Notice Only to Third Parties — Annotations of adverse claims or mortgage liens on a certificate of title serve as a warning to third parties dealing with the property, not to the registered owner, and do not validate an otherwise defective claim. ( Sajonas v. Court of Appeals )

• Separate Corporate Personality — Interlocking Directors/Shareholders — The separate juridical personality of a corporation means its assets, liabilities, and interests are distinct from those of its officers, shareholders, and other corporations. Ownership of shares in another corporation does not expand the investing corporation’s own powers or purposes, and interlocking directors do not merge corporate identities absent grounds to pierce the corporate veil.

• “Acts of an officer that are not authorized by the board of directors/trustees do not bind the corporation unless the corporation ratifies the acts or holds the officer out as a person with authority to transact on its behalf.” — Opening formulation of the core principle.

• “Corporations are artificial entities granted legal personalities upon their creation by their incorporators in accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing with corporations cannot assume that corporations have powers. It is up to those persons dealing with corporations to determine their competence as expressly defined by the law and their articles of incorporation.” — Emphasizing the limited capacity of corporations.

• “Securing FISLAI’s loans by mortgaging petitioner’s properties does not appear to have even the remotest connection to the operations of petitioner as an educational institution. Securing loans is not an adjunct of the educational institution’s conduct of business.” — On the ultra vires nature of the mortgages.

• “The doctrine of apparent authority does not apply if the principal did not commit any acts or conduct which a third party knew and relied upon in good faith as a result of the exercise of reasonable prudence.” — On the limits of apparent authority.

• “Banks are required to exercise the highest degree of diligence in their transactions. … Banks cannot rely on assumptions. This will be contrary to the high standard of diligence required of them.” — On the standard imposed on banking institutions.

• “[A]nnotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real property … and serves a warning to third parties dealing with said property that someone is claiming an interest on the same or a better right than that of the registered owner thereof.” — Defining the limited effect of annotations.

• Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc., 115 Phil. 18 (1962) — Established the “direct and immediate furtherance” test for determining whether a corporate act is ultra vires; applied to hold that securing third-party loans was outside the university’s purposes.

• Pirovano, et al. v. De la Rama Steamship Co., 96 Phil. 335 (1954) — Distinguished between illegal corporate acts (void ab initio) and merely ultra vires acts (voidable and ratifiable); cited to explain that the unauthorized mortgages were unenforceable but not void ab initio.

• Coleman v. Hotel De France, 29 Phil. 323 (1915) — Recognized the disputable presumption that corporate contracts are valid if on their face within corporate powers; distinguished because the mortgages were patently beyond the university’s powers.

• People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals, 357 Phil. 850 (1998) — Applied the doctrine of apparent authority based on prior corporate practice of allowing the officer to contract without board resolution; distinguished for lack of similar prior acts.

• Francisco v. Government Service Insurance System, 117 Phil. 586 (1963) — Held that the knowledge of an officer is imputed to the corporation only if acquired within the scope of his authority; distinguished because the Torres spouses obtained knowledge while acting for the thrift banks.

• China Banking Corporation v. Lagon, 527 Phil. 143 (2006) — Ruled that a bank was not a mortgagee in good faith for failing to question a special power of attorney; relied upon to hold BSP to the highest diligence standard.

• Advance Paper Corporation v. Arma Traders Corporation, G.R. No. 176897, 11 December 2013, 712 SCRA 313 — Stated the requisites for apparent authority, emphasizing that the principal must have committed acts known and relied upon by the third party in good faith.

• Sajonas v. Court of Appeals, 327 Phil. 689 (1996) — Held that annotations on certificates of title operate as constructive notice only to third parties, not to the registered owner; applied to rule that the university was not bound by the annotations.

• Lanuza, Jr. v. BF Corporation, G.R. No. 174938, 1 October 2014, 737 SCRA 275 — Enumerated the grounds for piercing the corporate veil; cited to show that interlocking officers did not justify disregarding separate personalities.

• Article 1169, Civil Code — General rule on delay: debtor incurs delay from judicial or extrajudicial demand; exceptions when demand is unnecessary, including when the obligor has rendered performance impossible. Applied to determine when the prescriptive period commenced.

• Article 1193, Civil Code — Obligation with a fixed day is demandable only upon arrival of the day certain. Applied to establish that the loans became due upon maturity, not upon execution of the mortgage.

• Article 1403(1), Civil Code — Contracts entered into in the name of another without authority or legal representation are unenforceable unless ratified. Central provision for declaring the mortgages unenforceable.

• Article 1317, Civil Code — No one may contract in the name of another without authorization; unauthorized contracts are unenforceable unless ratified. Applied in tandem with Article 1403.

• Articles 1392 and 1393, Civil Code — Ratification extinguishes the action to annul a voidable contract; may be express or tacit, requiring knowledge and an act implying waiver. Referenced in discussing the absence of ratification.

• Articles 1431 and 1869, Civil Code — Estoppel through admission or representation; agency may be implied from the principal’s silence or lack of action. Discussed in connection with apparent authority.

• Section 23, Corporation Code — Corporate powers, business, and property shall be exercised and controlled by the board of directors or trustees elected from among stockholders or members. Foundation for the requirement of board authorization.

• Section 36, Corporation Code — Enumerates corporate powers and capacity, including the power to exercise such other powers as may be essential or necessary to carry out its purposes. Applied to determine whether securing third-party loans was incidental.

• Section 45, Corporation Code — No corporation shall possess or exercise any corporate powers except those conferred by the Code or its articles of incorporation and those necessary or incidental to the exercise of conferred powers. Basis for ultra vires doctrine.

• Section 31, Corporation Code — Liability of directors, trustees, or officers for willfully voting for patently unlawful acts or gross negligence. Mentioned obiter regarding the potential personal liability of directors who assented to the unauthorized act.

• Rule 131, Sections 2 and 3, Rules of Court — Conclusive and disputable presumptions. Referenced to explain that the presumption of regularity of a notarized document is disputable and was rebutted by evidence of simulation.

Associate Justice Antonio T. Carpio (Chairperson), Associate Justice Arturo D. Brion, Associate Justice Mariano C. Del Castillo, and Associate Justice Jose Catral Mendoza.

N/A — The decision was unanimous.