The Supreme Court in Lillian N. Mercado, Cynthia M. Fekaris, and Julian Mercado, Jr. vs. Allied Banking Corporation, ruled that a real estate mortgage executed by an agent without proper authority from the property owner is unenforceable. This decision underscores the importance of strictly interpreting the powers granted in a Special Power of Attorney (SPA) and the due diligence required of banks when dealing with mortgaged properties.

Double Check the Fine Print: When a Power of Attorney Falls Short

This case revolves around a dispute over real estate mortgages constituted by Julian D. Mercado on behalf of his wife, Perla N. Mercado, using a Special Power of Attorney (SPA). Julian secured loans from Allied Banking Corporation using a property registered under Perla’s name. However, the SPA contained discrepancies regarding the property’s title number and registry, leading to a legal battle over the validity of the mortgage when Julian defaulted on the loan. The central issue was whether Julian acted within the scope of his authority when he mortgaged the property. This case highlights the critical importance of clear and specific authorization in SPAs, particularly when dealing with real estate transactions.

The Civil Code provides specific requisites for a valid mortgage under Article 2085, emphasizing that the mortgagor must be the absolute owner of the property and have the free disposal thereof, or be legally authorized for that purpose. Here, Perla owned the property, making her a third party to the loan obligations between Julian and Allied Banking Corporation. Thus, the validity hinged on whether Perla duly authorized Julian to mortgage the property on her behalf.

Article 1878 of the Civil Code mandates a special power of attorney for acts involving real rights over immovable property. The SPA granted Julian the authority to “sell, alienate, mortgage, lease and deal otherwise” with Perla’s properties. The dispute arose because the SPA listed a property with a different Transfer Certificate of Title (TCT) number and registry than the one actually mortgaged. Petitioners argued that the SPA did not include the subject property covered by TCT No. RT – 18206 (106338) registered with the Registry of Deeds of Quezon City. Therefore, Julian acted beyond his authorized powers.

Allied Banking Corporation contended that the property listed in the SPA, TCT No. RT-106338 registered with the Registry of Deeds of Pasig (now Makati), was the same as the subject property, with the discrepancy being a mere clerical error. They argued that Perla intended to include the subject property in the SPA, and the technical inaccuracies should not invalidate her intent. However, the Court emphasized the principle of strict interpretation of powers of attorney. As the Supreme Court stated in JMA House, Incorporated v. Sta. Monica Industrial and Development Corporation:

[T]he law is that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. When the language of the contract is explicit, leaving no doubt as to the intention of the drafters, the courts may not read into it [in] any other intention that would contradict its main import.

Building on this principle, the Court reiterated that a power of attorney must be strictly construed and pursued. The agent cannot exceed the powers specified therein, as highlighted in Angeles v. Philippine National Railways (PNR), where the Court stated that “the instrument will be held to grant only those powers which are specified therein, and the agent may neither go beyond nor deviate from the power of attorney.” This strict interpretation aligns with the cautious approach courts take when evaluating an agent’s authority to act on behalf of a principal.

The Court found no convincing evidence to support Allied Banking Corporation’s claim that the properties covered by the different TCT numbers were the same. The bank failed to provide sufficient documentation, such as certifications from the Registries of Deeds or comparative technical descriptions of the properties. Without concrete proof, the Court rejected the bank’s assertion. Furthermore, the Court noted that Perla had revoked the SPA before Julian obtained the loans. Although the revocation was not annotated on the TCT, Perla had notified the Registry of Deeds of Quezon City, providing constructive notice to third parties.

Addressing the issue of whether Allied Banking Corporation was a mortgagee in good faith, the Court found that the bank failed to exercise the required due diligence. The discrepancies between the TCT numbers in the SPA and the real estate mortgages should have alerted the bank to a potential issue with Julian’s authority. As elucidated in Arrofo v. Quiño:

[A] purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. His mere refusal to face up the fact that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the vendor’s or mortgagor’s title, will not make him an innocent purchaser for value.

The Court emphasized that banks, as financial institutions, are expected to exercise a higher degree of care and prudence in their dealings. In Cruz v. Bancom Finance Corporation, the Court stated that “A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.” Allied Banking Corporation’s failure to thoroughly investigate Julian’s authority and the property’s identity prevented it from claiming the status of a mortgagee in good faith. Building on this, the Court classified the real estate mortgages as unenforceable under Article 1403(1) of the Civil Code, since Julian acted without Perla’s proper authority. This ruling meant that the foreclosure proceedings and auction sale were also void, though Allied Banking Corporation could still pursue a claim against Julian personally for the loans.

FAQs

What was the key issue in this case?	The central issue was whether Julian Mercado had the proper authority, via a Special Power of Attorney (SPA), to mortgage his wife’s property to Allied Banking Corporation. The SPA contained discrepancies that raised questions about the extent of his authority.
What is a Special Power of Attorney (SPA)?	A Special Power of Attorney is a legal document authorizing a person (the agent) to act on behalf of another (the principal) in specific matters. It must clearly define the scope of the agent’s authority to be valid.
Why is strict interpretation important in SPAs?	Strict interpretation ensures that the agent acts only within the bounds of the authority explicitly granted by the principal. This protects the principal from unauthorized actions by the agent.
What does it mean to be a ‘mortgagee in good faith’?	A mortgagee in good faith is one who, without any knowledge or suspicion of defect, accepts a mortgage on a property. However, this status requires the mortgagee to exercise due diligence in verifying the mortgagor’s rights.
What level of due diligence is expected of banks?	Banks are expected to exercise a higher degree of diligence than private individuals when dealing with mortgages. This is due to the public interest in the banking system and their fiduciary responsibilities.
What happens when a mortgage is deemed unenforceable?	An unenforceable mortgage cannot be enforced through legal action unless it is ratified by the principal. This means the lender cannot foreclose on the property based on that mortgage.
What was the impact of the SPA revocation in this case?	Although not annotated on the title, the notice of revocation sent to the Registry of Deeds served as constructive notice to third parties. This meant Allied Banking Corporation should have been aware that Julian’s authority had been terminated.
Who is liable for the loan if the mortgage is unenforceable?	In this case, the Supreme Court clarified that while the mortgage was unenforceable against the property owner (Perla Mercado), Allied Banking Corporation could still pursue legal action against Julian Mercado personally for the amount of the loans.

The Supreme Court’s decision reinforces the need for precise and unambiguous language in Special Powers of Attorney, particularly when dealing with real estate. It also highlights the stringent due diligence requirements imposed on banking institutions to protect the interests of property owners and maintain the integrity of the mortgage system.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: LILLIAN N. MERCADO, CYNTHIA M. FEKARIS, AND JULIAN MERCADO, JR. VS. ALLIED BANKING CORPORATION, G.R. NO. 171460, July 27, 2007