University of Mindanao vs. Bangko Sentral ng Pilipinas

A corporation, particularly an educational institution, cannot mortgage its properties to secure the loans of third persons where such act is not expressly authorized by its articles of incorporation and is not necessary or incidental to its stated purposes; such acts are ultra vires and unenforceable against the corporation. Acts of an officer 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.

University of Mindanao is an educational institution established to provide formal instruction. In 1982, its Board of Trustees was chaired by Guillermo B. Torres, whose wife, Dolores P. Torres, served as Assistant Treasurer. The Torres spouses also controlled two thrift banks: First Iligan Savings & Loan Association, Inc. (FISLAI) and Davao Savings and Loan Association, Inc. (DSLAI). When these banks faced financial distress and heavy depositor withdrawals, they obtained emergency credit from the Bangko Sentral ng Pilipinas. To secure these loans, mortgages were executed over properties belonging to University of Mindanao, allegedly by authority of its officers. Years later, after the banks were merged and subsequently liquidated, BSP sought to foreclose on these mortgages, prompting University of Mindanao to file actions for nullification, claiming the mortgages were executed without authority and were beyond the University's corporate powers.

• University of Mindanao is an educational institution with purposes limited to establishing and operating educational facilities, acquiring properties necessary for such operations, and investing in other corporations.
• In 1982, the Board of Trustees was chaired by Guillermo B. Torres, and his wife Dolores P. Torres served as Assistant Treasurer; they also incorporated and operated FISLAI and DSLAI, with Guillermo as President of FISLAI and Dolores as President of DSLAI.
• BSP issued a P1.9 million standby emergency credit to FISLAI, evidenced by promissory notes dated February 8, April 7, and May 4, 1982, signed by Guillermo B. Torres and co-signed by Dolores P. Torres or Edmundo G. Ramos, Jr.
• On May 25, 1982, Saturnino Petalcorin, Vice President for Finance of University of Mindanao, 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 loan.
• Petalcorin presented a Secretary's Certificate dated April 13, 1982, signed by Corporate Secretary Aurora de Leon, purporting to show a Board Resolution dated March 30, 1982, authorizing the mortgage and designating Petalcorin to execute the documents.
• The certificate was supported by an excerpt from minutes of an alleged January 19, 1982 board meeting, certified by Aurora de Leon on March 13, 1982, authorizing Petalcorin to mortgage properties in Cagayan de Oro and Iligan City.
• The mortgage was annotated on TCT No. T-14345 on June 25, 1982.
• On October 21, 1982, BSP granted FISLAI an additional loan of P620,700.00.
• On November 5, 1982, Petalcorin executed another deed of real estate mortgage over two Iligan City properties (TCT Nos. T-15696 and T-15697) as additional security for FISLAI's loans; these were annotated on January 17, 1983.
• BSP also granted emergency advances to DSLAI on May 27, 1983 and August 20, 1984.
• On January 11, 1985, FISLAI and DSLAI entered into a Memorandum of Agreement with Land Bank for rehabilitation, merging FISLAI into DSLAI (later renamed Mindanao Savings and Loan Association, Inc. or MSLAI).
• Guillermo B. Torres died on March 2, 1989, and MSLAI was liquidated on May 24, 1991.
• On June 18, 1999, BSP sent a demand letter to University of Mindanao threatening foreclosure for an outstanding obligation of P12,534,907.73.
• University of Mindanao denied the mortgages and filed complaints for nullification on July 16, 1999, alleging the mortgages were unauthorized and ultra vires.
• At trial, Aurora de Leon testified that no board meeting actually authorized the mortgages; she issued the Secretary's Certificate only upon the orders of Guillermo B. Torres.
• Saturnino Petalcorin testified that he had no authority to execute the mortgages and did so only upon Torres' request.
• BSP's witness admitted there was no board resolution authorizing Petalcorin to mortgage the properties.

• The execution of the mortgage contracts was ultra vires because as an educational institution, University of Mindanao is limited to purposes connected to formal instruction and has no power to secure the loans of third persons, which is not necessary or incidental to its educational purposes.
• There was no valid board resolution authorizing Saturnino Petalcorin to execute the mortgages; the Secretary's Certificate and board minutes were simulated and fictitious.
• The mortgage contracts are unenforceable under Article 1403(1) of the Civil Code because they were entered into without authority or legal representation.
• University of Mindanao never ratified the unauthorized acts, as it never issued a resolution of ratification, never received loan proceeds, and was unaware of the mortgages until the 1999 demand letter.
• The doctrine of apparent authority does not apply because the University never held out Petalcorin as having authority through any corporate act; reliance on simulated documents does not create apparent authority.
• The action had not prescribed because the prescriptive period runs from the date of demand (1999) or the due date of the loans (1990), not from the execution of the mortgages (1982), and the demand letter interrupted any running of the period.

• The action for foreclosure had prescribed because the mortgages were executed in 1982 and the complaint was filed in 1999, beyond the 10-year prescriptive period.
• Saturnino Petalcorin was clothed with apparent authority to execute the mortgages by virtue of the Secretary's Certificate and the excerpt from the board minutes, which BSP relied upon in good faith.
• The Secretary's Certificate was notarized and thus enjoyed the presumption of regularity and authenticity.
• University of Mindanao is estopped from denying Petalcorin's authority because it allowed the annotations to remain on its titles for more than a decade without objection, constituting implied ratification.
• The interlocking directors and officers between University of Mindanao and the thrift banks meant that knowledge of the Torres spouses regarding the transactions was imputable to the University.
• Securing FISLAI's loans was within the University's business interests because it presumably held substantial shares in the thrift banks, making the act valid and within its corporate powers.

• Procedural:
  • Whether the action for nullification of the mortgage contracts filed by University of Mindanao was barred by prescription.
• Substantive Issues:
  • Whether the real estate mortgage contracts executed by Saturnino Petalcorin on behalf of University of Mindanao to secure the loans of third-party thrift banks were valid and binding upon the University.
  • Whether the execution of the mortgage contracts was ultra vires the corporate powers of University of Mindanao as an educational institution.
  • Whether Saturnino Petalcorin possessed actual or apparent authority to execute the mortgage contracts on behalf of University of Mindanao.
  • Whether University of Mindanao ratified the unauthorized execution of the mortgage contracts.

• Procedural:
  • The action had not prescribed. The prescriptive period for actions upon mortgages is ten years from the date the right of action accrues, which is from the date of default or demand for payment, not from the date of execution of the mortgage contract. The loans became due and demandable in 1990 after various extensions, and BSP demanded payment in 1999; thus, the action filed in 1999 was well within the prescriptive period. Furthermore, the written demand letter of June 18, 1999 interrupted the prescriptive period under Article 1155 of the Civil Code.
• Substantive:
  • The mortgage contracts were ultra vires and unenforceable against University of Mindanao. Corporations possess only those powers conferred by law and their articles of incorporation. Securing the loans of third persons (FISLAI) is not within the powers of an educational institution under its articles of incorporation, nor is it necessary or incidental to the purpose of providing formal instruction. Applying the test of logical relation, the act bears no direct and immediate furtherance of the University's educational business.
  • There was no actual authority given to Petalcorin. The Board of Trustees never passed a resolution authorizing him to execute the mortgages. The Secretary's Certificate and board minutes were found to be simulated, issued without an actual board meeting, and thus produced no legal effect.
  • There was no ratification by the University. Ratification requires knowledge of the unauthorized act and voluntary confirmation. The University had no knowledge of the mortgages until 1999, received no proceeds from the loans, and took no action indicating adoption of the unauthorized acts. Silence and lack of objection do not constitute ratification when there is no duty to speak or when the principal is unaware of the act.
  • The doctrine of apparent authority did not apply. Apparent authority requires that the corporation, through its acts or silence, has held out the officer as having authority to contract. Here, the University did not commit any act holding out Petalcorin as authorized; BSP relied solely on simulated documents. Moreover, as a banking institution, BSP was required to exercise the highest degree of diligence and could not rely merely on the Secretary's Certificate without verifying the existence of the board resolution, especially given the lack of logical connection between an educational institution and the securing of third-party loans.

• Ultra Vires Acts — Corporate acts performed outside the scope of powers expressly conferred by law or the articles of incorporation, which are not necessary or incidental to the exercise of those powers. Distinguished from illegal acts in that ultra vires acts are merely voidable (not void ab initio) and may become binding if ratified by the corporation. Applied to hold that an educational institution mortgaging its properties to secure third-party loans is ultra vires because such act is not reasonably tributary to its educational purposes.
• Doctrine of Apparent Authority (Ostensible Authority) — A corporation may be bound by acts of officers without actual authority if the corporation, through its positive acts or silence, has held out the officer as having authority to transact on its behalf, thereby creating an appearance of authority that third parties rely upon in good faith. Does not apply where the third party relies solely on forged or simulated documents not sanctioned by corporate acts.
• Doctrine of Ratification — The voluntary and deliberate confirmation or adoption by a corporation of an unauthorized act performed by its officers or agents, converting the act into a corporate act and curing any defect in authority. Requires actual knowledge of the unauthorized act and intent to ratify; cannot be inferred from mere silence or lack of objection without knowledge.
• Separate Corporate Personality and Knowledge of Officers — A corporation has a personality distinct from its officers and shareholders. Knowledge of an officer is imputed to the corporation only when the officer is acting within the scope of his or her authority; knowledge acquired in a different capacity (e.g., as officer of another corporation) is not imputed.
• Duty of Banks — Banking institutions are impressed with public interest and must exercise the highest degree of diligence in their transactions; they cannot rely on assumptions and must verify the authority of persons purporting to act on behalf of corporate clients.
• Prescription of Mortgage Actions — Actions upon mortgages prescribe after ten years from the time the right of action accrues, which is the date of default or demand, not the date of execution of the mortgage contract.

• "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."
• "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."
• "Securing loans of third persons is not connected to petitioner's purposes as an educational institution. Securing loans is not an adjunct of the educational institution's conduct of business."
• "The doctrine of apparent authority does not go into the question of the corporation's competence or power to do a particular act. It involves the question of whether the officer has the power or is clothed with the appearance of having the power to act for the corporation."
• "Annotations of adverse claims on certificates of title to properties operate as constructive notice only to third parties—not to the court or the registered owner."
• "Presumptions are not allegations, nor do they supply their absence. Presumptions are conclusions. They do not apply when there are no facts or allegations to support them."

• Montelibano v. Bacolod-Murcia Milling Co., Inc. — Cited for the test to determine if a corporate act is within the corporation's purposes: whether the act is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers, and reasonably necessary to their exercise.
• Pirovano v. De la Rama Steamship Co. — Cited for the distinction between ultra vires acts (voidable, capable of ratification) and illegal acts (void ab initio), and for the principle that ratification relates back to the time of the unauthorized act.
• Coleman v. Hotel De France — Cited for the rule that contracts entered into by corporations are presumed valid if on their face they are within corporate powers, but this presumption is disputable and may be overcome by contrary evidence.
• Francisco v. Government Service Insurance System — Cited for the rule that knowledge of an officer is considered knowledge of the corporation only when the officer is acting within the scope of his or her authority.
• People's Aircargo and Warehousing Co. v. Court of Appeals — Cited for the doctrine of apparent authority arising from the corporation's silence or acts of recognition holding out an officer as authorized.
• China Banking Corporation v. Lagon — Cited for the duty of banks to exercise the highest degree of diligence and prudence in their dealings, including verification of authority to mortgage.
• Sajonas v. Court of Appeals — Cited for the rule that annotations of adverse claims on certificates of title operate as constructive notice only to third parties, not to the registered owner.
• Lanuza, Jr. v. BF Corporation — Cited for the principle of piercing the corporate veil and the separate personality of corporations.

• Corporation Code, Section 36 — Enumerates general powers of corporations, including the power to exercise those essential or necessary to carry out its purposes stated in the articles of incorporation.
• Corporation Code, Section 45 — Defines ultra vires acts as those not conferred by the Code or the articles of incorporation, except those necessary or incidental to the exercise of conferred powers.
• Corporation Code, Section 23 — Provides that corporate powers are exercised by the board of directors or trustees.
• Civil Code, Article 1317 — Requires authority to contract in the name of another; contracts entered into without authority are unenforceable unless ratified.
• Civil Code, Article 1403(1) — Classifies as unenforceable those contracts entered into in the name of another by one without authority or legal representation.
• Civil Code, Article 1910 — Provides that the principal is not bound by acts of an agent exceeding his power unless ratified expressly or tacitly.
• Civil Code, Article 1142 — States that a mortgage action prescribes after ten years.
• Civil Code, Article 1169 — Defines delay and provides exceptions when demand is not necessary to put the debtor in default.
• Civil Code, Article 1155 — Enumerates instances when prescription is interrupted, including written extrajudicial demand.
• Rules of Court, Rule 131, Section 2 — Defines conclusive presumptions.
• Rules of Court, Rule 131, Section 3 — Defines disputable presumptions, which may be contradicted and overcome by other evidence.