G.R. No. 194964-65 - University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas

Case Summary (G.R. No. 194964-65)

Factual Background

In 1982 the Board of Trustees of UNIVERSITY OF MINDANAO, INC. was chaired by Guillermo B. Torres, whose wife, Dolores P. Torres, served as Assistant Treasurer. The Torres spouses earlier incorporated and operated two thrift banks: First Iligan Savings & Loan Association, Inc. (FISLAI) and Davao Savings and Loan Association, Inc. (DSLAI). Bangko Sentral ng Pilipinas (BSP) extended standby emergency credit to FISLAI evidenced by three promissory notes dated February 8, 1982, April 7, 1982, and May 4, 1982 for P500,000.00, P600,000.00, and P800,000.00 respectively, signed by Guillermo Torres and co-signed by either Dolores Torres or Edmundo G. Ramos, Jr.

Mortgages and Documentary Basis

On May 25, 1982 Saturnino R. Petalcorin, Vice President for Finance of UNIVERSITY OF MINDANAO, INC., executed a deed of real estate mortgage over a Cagayan de Oro City parcel (TCT No. T-14345) in favor of BANGKO SENTRAL NG PILIPINAS to secure FISLAI’s P1.9 million loan. Petalcorin later executed mortgages on two Iligan City parcels (TCT Nos. T-15696 and T-15697) on November 5, 1982. Petalcorin presented a Secretary’s Certificate dated April 13, 1982 signed by Corporate Secretary Aurora de Leon, and an excerpt of minutes purportedly authorizing him, as the basis for his authority; the Secretary’s Certificate and excerpts were later annotated on the titles.

Financial Developments, Merger, and Rehabilitation

BSP granted additional advances to FISLAI and later to DSLAI, with further monetary board resolutions repeatedly extending loan maturities. On January 11, 1985 FISLAI, DSLAI, and Land Bank entered a Memorandum of Agreement for rehabilitation, which provided for the merger of FISLAI and DSLAI with DSLAI as the surviving entity. DSLAI later became Mindanao Savings and Loan Association, Inc. (MSLAI). MSLAI was liquidated on May 24, 1991.

Notice, Denial, and Judicial Actions

On June 18, 1999 BSP notified UNIVERSITY OF MINDANAO, INC. that it would foreclose the mortgaged properties if MSLAI’s outstanding obligation remained unpaid. The university denied knowledge of any mortgage and contended it had not received loan proceeds. On July 16, 1999 the university filed two separate Complaints for nullification and cancellation of mortgage in the Regional Trial Courts of Cagayan de Oro City and Iligan City.

Trial Court Findings and Judgments

The Regional Trial Court of Cagayan de Oro City rendered judgment on November 23, 2001 annulling the Cagayan de Oro mortgage and ordering cancellation of the annotations on TCT No. T-14345. The court found no board resolution authorizing Petalcorin and credited Aurora de Leon’s testimony that she signed the Secretary’s Certificate at Guillermo Torres’ direction. The Regional Trial Court of Iligan City issued a decision on December 7, 2001 nullifying the Iligan mortgages, finding the Secretary’s Certificate fictitious or irregular and concluding the absence of board authorization rendered the mortgages unenforceable under Article 1403, Civil Code.

Court of Appeals Reversal

On December 17, 2009 the Court of Appeals reversed and dismissed both complaints, holding that although BSP failed to prove an actual board resolution, Aurora de Leon’s Secretary’s Certificate clothed Petalcorin with apparent authority to mortgage the properties. The CA found BSP had acted in good faith, relied on the notarized Secretary’s Certificate, and that the university’s officers’ participation in the loan transactions and the long delay in disavowal constituted implied ratification and constructive notice by title annotations. The CA also held that BSP’s foreclosure action had not prescribed. A December 20, 2010 CA resolution modified the judgment to lift injunctive writs issued by both RTCs.

Issues Presented to the Supreme Court

The Supreme Court framed the issues as twofold: whether BSP’s foreclosure action had prescribed, and whether UNIVERSITY OF MINDANAO, INC. was bound by the mortgages Petalcorin executed.

Prescription of Action — Supreme Court Analysis

The Court reaffirmed that an action on a mortgage prescribed in ten years under Articles 1142, 1144, and 1150, Civil Code, and that the prescriptive period generally ran from the time the obligation became due and demandable, subject to Article 1169 exceptions. The monetary board resolutions had repeatedly extended FISLAI’s loan maturities and the rehabilitation plan rendered loans due in 1990. BSP’s demand letter of June 18, 1999 interrupted prescription under Article 1155, Civil Code, and BSP’s suit filed in 1999 was therefore within the prescriptive period. The Court held BSP’s action had not prescribed.

Corporate Powers and the Ultra Vires Principle

The Court examined the university’s objects and the Corporation Code framework, particularly Section 36 and Section 45, and concluded that mortgaging UNIVERSITY OF MINDANAO, INC. property to secure third-party loans was not within its corporate purposes as an educational institution and was not reasonably incidental or necessary to its educational functions. The Court reiterated the test in Montelibano v. Bacolod-Murcia Milling Co., Inc. for whether an act is within corporate powers and held the mortgages were not even remotely connected to the university’s purposes. The presumption that corporate acts are valid did not apply because securing third-party loans was ultra vires on the face of the university’s articles.

Apparent Authority, Ratification, and Knowledge of Officers

The Court addressed the doctrines of apparent authority and ratification. It held that a corporation acts only through its board and properly authorized agents under Section 23, Corporation Code, and that contracts executed without board delegation are generally unenforceable per Articles 1317 and 1403, Civil Code. The Court gave controlling weight to trial-court findings that the Secretary’s Certificate and minutes were simulated and that no board resolution existed; it emphasized that apparent authority requires corporate acts or silence that would lead third parties to reasonably believe a representative has authority. The Court found no evidence that the university held out Petalcorin as authorized, and it rejected BSP’s contention that knowledge of the Torres spouses, who were officers of both the university and the thrift banks, could be imputed to the university because their knowledge was not shown to have been acquired in the course of authority for the university. The Court further held that no implied ratification occurred because the university did not knowingly accept benefits, receive loan proceeds, or issue a ratifying resolution.

Notarization, Presumption of Regularity, and Rebuttal

The Court considered BSP’s reliance on the notarized Secretary’s Certificate. It acknowledged that notarization creates a presumption of regularity and authenticity but held that this presumption may be overcome by strong, conclusive evidence of fabrication. Because the Secretary’s Certificate was found simulated and unauthoritative, notarization did not validate its legal effect on the university.

Bank’s Duty of Diligence

The Court underlined that banking institutions are charged with high standards of diligence given their public interest character. Relying on China Banking Corporation v. Lagon, the Court held BSP failed to exercise the required degree of inquiry when its own witness admitted the absence of a board resolution and BSP did not probe further into Petalcorin’s authority. The Court concluded

Case Syllabus (G.R. No. 194964-65)

Parties and Procedural Posture

University of Mindanao, Inc., Petitioner, filed separate Complaints for nullification and cancellation of mortgage before the Regional Trial Courts of Cagayan de Oro City and Iligan City contesting mortgages allegedly executed in its name.
Bangko Sentral ng Pilipinas, Respondent, initiated actions to foreclose the mortgages and appealed the trial courts' decisions cancelling the mortgages to the Court of Appeals.
The Court of Appeals reversed both trial court decisions and dismissed the Complaints, prompting this Petition for Review on Certiorari to the Supreme Court.
The Supreme Court granted the Petition and reviewed the factual findings and legal conclusions on prescription, authority to contract, ratification, apparent authority, and the bank's diligence.

Key Factual Allegations

Guillermo B. Torres chaired Petitioner’s Board of Trustees in 1982 while his wife, Dolores P. Torres, served as Assistant Treasurer, and both were officers/stockholders of the thrift banks involved.
First Iligan Savings & Loan Association, Inc. (FISLAI) and Davao Savings and Loan Association, Inc. (DSLAI) obtained emergency credits from Respondent evidenced by promissory notes signed by Guillermo B. Torres and co-signed by Dolores P. Torres or other bank officers.
Saturnino R. Petalcorin, Petitioner’s Vice-President for Finance, executed deeds of real estate mortgage in 1982 and 1983 over Petitioner’s properties allegedly to secure FISLAI’s and later MSLAI’s obligations.
A purported Secretary’s Certificate and an excerpt of board minutes, both signed by corporate secretary Aurora de Leon, purported to authorize Petalcorin to mortgage the properties, but the corporate secretary later testified those documents were issued at Guillermo Torres’s instruction and that no board resolution was passed.
Mortgages were annotated on the relevant Transfer Certificates of Title and tax declarations, MSLAI was later liquidated, and Respondent sent a demand letter to Petitioner in June 1999 threatening foreclosure.

Trial Court Findings

The Regional Trial Court of Cagayan de Oro found no board resolution authorizing Petalcorin to execute the mortgage on behalf of Petitioner and annulled the Cagayan de Oro mortgage.
The Regional Trial Court of Iligan found the Secretary’s Certificate fictitious and irregular, concluded the Iligan mortgages were unenforceable under Art. 1403 of the Civil Code, and nullified the mortgages and subsequent foreclosure acts.
Both trial courts credited Aurora de Leon’s testimony that she signed the Secretary’s Certificate only upon the orders of Guillermo B. Torres and that the board never authorized the mortgages.

Court of Appeals Decision

The Court of Appeals reversed and set aside both trial court decisions and dismissed Petitioner’s Complaints.
The Court of Appeals held that Aurora de Leon’s Secretary’s Certificate clothed Petalcorin with apparent and ostensible authority to execute the mortgages and that Respondent relied in good faith on the notarized certificate.
The Court of Appeals also found that Petitioner’s officers’ signatures on promissory notes and the annotations on titles constituted knowledge and implied ratification by Petitioner and that Respondent’s foreclosure action had not prescribed.

Issues Presented

Whether Respondent’s action to foreclose the mortgaged properties had prescribed.
Whether Petitioner was bound by the real estate mortgage contracts executed by Petalcorin given the absence of an authentic board resolution and the alleged ultra vires character of the acts.

Supreme Court Ruling and Disposition

The Supreme Court granted the Petition, reversed the Court of Appeals Decision dated December 17, 2009, set it aside, and reinstated the Regional Trial Courts’ Decisions of Novembe