G.R. Nos. 194964-65, 11 January 2016

FACTS:

University of Mindanao is an educational institution. For the year 1982, its Board of Trustees was chaired by Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao’s Assistant Treasurer.

Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift banks:

(1) First Iligan Savings & Loan Association, Inc. (FISLAI); and
(2) Davao Savings and Loan Association, Inc. (DSLAI).

Guillermo B. Torres chaired both thrift banks. He acted as FISLAI’s President, while his wife, Dolores P. Torres, acted as DSLAI’s President and FISLAI’s Treasurer.

BSP issued a P1.9 million standby emergency credit to FISLAI. The release of standby emergency credit was evidenced by three (3) promissory notes. University of Mindanao’s Vice President for Finance, Saturnino Petalcorin, executed a deed of real estate mortgage over University of Mindanao’s property in Cagayan de Oro City in favor of BSP.

“The mortgage served as security for FISLAI’s PI.9 Million loan. It was allegedly executed on University of Mindanao’s behalf. As proof of his authority to execute a real estate mortgage for University of Mindanao, Saturnino Petalcorin showed a Secretary’s Certificate.

FISLAI, DSLAI, and Land Bank of the Philippines entered into a Memorandum of Agreement intended to rehabilitate the thrift banks, which had been suffering from their depositors’ heavy withdrawals. Among the terms of the agreement was the merger of FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later became known as Mindanao Savings and Loan Association, Inc. (MSLAI).

MSLAI failed to recover from its losses and was liquidated on May 24, 1991.

BSP sent a letter to University of Mindanao, informing it that the bank would foreclose its properties if MSLAI’s total outstanding obligation of P12,534,907.73 remained unpaid.
Gloria E. Detoya, denied that University of Mindanao’s properties were mortgaged. It also denied having received any loan proceeds from BSP.

Petitioner argues that the execution of the mortgage contract was ultra vires. As an educational institution, it may not secure the loans of third persons. Securing loans of third persons is not among the purposes for which petitioner was established.

Respondent argues that petitioner’s act of mortgaging its properties to guarantee FISLAI’s loans was consistent with petitioner’s business interests, since petitioner was presumably a FISLAI shareholder whose officers and shareholders interlock with FISLAI. Respondent points out that petitioner and its key officers held substantial shares in MSLAI when DSLAI and FISLAI merged. Therefore, it was safe to assume that when the mortgages were executed in 1982, petitioner held substantial shares in FISLAI.

Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on its behalf. There was no board resolution to that effect. Thus, the mortgages executed by Saturnino Petalcorin were unenforceable.

ISSUE:

Whether petitioner University of Mindanao is bound by the real estate mortgage contracts executed by Saturnino Petalcorin.

RULING:

Petitioner, is correct.

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.

A corporation may exercise its powers only within those definitions. Corporate acts that are outside those express definitions under the law or articles of incorporation or those “committed outside the object for which a corporation is created” are ultra vires.

The only exception to this, rule is when acts are necessary and incidental to carry out a corporation’s purposes, and to the exercise of powers conferred by the Corporation Code and under a corporation’s articles of incorporation. This exception is specifically included in the general powers of a corporation under Section 36 of the Corporation Code.

Petitioner does not have the power to mortgage its properties in order to secure loans of other persons. As an educational institution, it is limited to developing human capital through formal instruction. It is not a corporation engaged in the business of securing loans of others. 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. It does not appear that securing third-party loans was necessary to maintain petitioner’s business of providing instruction to individuals.

In this case, the presumption that the execution of mortgage contracts was within petitioner’s corporate powers does not apply. Securing third-party loans is not connected to petitioner’s purposes as an educational institution. Parties dealing with corporations cannot simply assume that their transaction is within the corporate powers. The acts of a corporation are still limited by its powers and purposes as provided in the law and its articles of incorporation.

Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI, securing loans of third persons is still beyond petitioner’s power to do. It is still inconsistent with its purposes under the law and its articles of incorporation.

Corporations are given separate personalities to allow natural persons to balance the risks of business as they accumulate capital. They are, however, given limited competence as a means to protect the public from fraudulent acts that may be committed using the separate juridical personality given to corporations. Since petitioner is an entity distinct and separate not only from its own officers and shareholders but also from FISLAI, its interests as an educational institution may not be consistent with FISLAI’s.

The mortgage contracts executed in favor of respondent do not bind petitioner. They were executed without authority from petitioner.

Hence, without delegation by the board of directors or trustees, acts of a person—including those of the corporation’s directors, trustees, shareholders, or officers—executed on behalf of the corporation are generally not binding on the corporation.

Unauthorized acts that are merely beyond the powers of the corporation under its articles of incorporation are not void ab initio.

Thus, even though a person did not give another person authority to act on his or her behalf, the action may be enforced against him or her if it is shown that he or she ratified it or allowed the other person to act as if he or she had full authority to do so. Ratification must be knowingly and voluntarily done. Petitioner’s lack of knowledge about the mortgage executed in its name precludes an interpretation that there was any ratification on its part. Even though the Spouses Guillermo and Dolores Torres were officers of both the thrift banks and petitioner, their knowledge of the mortgage contracts cannot be considered as knowledge of the corporation.

The rule that knowledge of an officer is considered knowledge of the corporation applies only when the officer is acting within the authority given to him or her by the corporation.

Thus, knowledge should be actually communicated to the corporation through its authorized representatives. A corporation cannot be expected to act or not act on a knowledge that had not been communicated to it through an authorized representative. There can be no implied ratification without actual communication. Knowledge of the existence of contract must be brought to the corporation’s representative who has authority to ratify it. Further, “the circumstances must be shown from which such knowledge may be presumed.”

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. A finding that there is apparent authority is not the same as a finding that the corporate act in question is within the corporation’s limited powers.

There can be no apparent authority and the corporation cannot be estopped from denying the binding affect of an act when there is no evidence pointing to similar acts and other circumstances that can be interpreted as the corporation holding out a representative as having authority to contract on its behalf.

Saturnino Petalcorin’s authority to transact on behalf of petitioner cannot be presumed based on a Secretary’s Certificate and excerpt from the minutes of the alleged board meeting that were found to have been simulated. These documents cannot be considered as the corporate acts that held out Saturnino Petalcorin as petitioner’s authorized representative for mortgage transactions. They were not supported by an actual board meeting.

*Case Digest by Legine S. Ramayla, JD-IV, Andres Bonifacio College, SY: 2019-2020