In United Coconut Planters Bank v. Planters Products, Inc., the Supreme Court ruled that a bank is not liable for the unauthorized guarantee made by its branch manager, emphasizing that such guarantees require specific board approval and cannot be casually issued. This decision clarifies the extent to which corporations are bound by the actions of their employees, particularly in regulated transactions like bank guarantees. It underscores the importance of due diligence in verifying the authority of bank officers and the limitations of their apparent authority.

The Rogue Guarantee: Unpacking a Bank Manager’s Overreach and its Legal Fallout

This case revolves around a series of transactions initiated by Janet Layson with Planters Products, Inc. (PPI), a fertilizer manufacturer. Layson’s scheme was facilitated by Gregory Grey, the branch manager of United Coconut Planters Bank (UCPB) in Iloilo. Layson entered into an arrangement with PPI to receive fertilizers, promising payment through a loan she claimed to have secured from UCPB. To formalize this, Layson executed “pagares” on the back of UCPB promissory notes, stating that her loan was approved. Grey then signed these pagares, guaranteeing payment to PPI within 60 days of invoice.

However, the following day, Layson, with Grey’s assistance, withdrew the P200,000.00 loan, deviating from the agreed-upon arrangement with PPI. Based on these documents, PPI delivered fertilizers to Layson, and similar transactions occurred later in February 1980 involving additional loans. When PPI sought to collect from UCPB, the bank denied any liability, asserting that Grey had exceeded his authority and that such guarantees were not part of their standard banking procedures. UCPB argued that Grey’s actions were beyond his authority, and the pagares were legally void, citing banking laws that prohibit bank officers from guaranteeing loans of bank clients.

The Regional Trial Court (RTC) initially absolved UCPB, holding Layson primarily liable and Grey subsidiarily liable, as he had acted beyond his authority. PPI appealed, and the Court of Appeals (CA) reversed the RTC decision, finding UCPB jointly and severally liable with Layson, but only for the initial P200,000.00 transaction. The CA viewed the pagares as an assignment of credit, with UCPB undertaking to deliver loan proceeds to PPI. This led UCPB to petition the Supreme Court, questioning whether it was bound by Grey’s actions and whether it was entitled to attorney’s fees.

The Supreme Court emphasized that while corporations are generally liable for the acts of their officers within the scope of their apparent authority, this principle has limitations. The Court noted that Grey’s guarantee appeared to be a personal undertaking rather than an act on behalf of UCPB. The guarantee was written beneath Layson’s assignment, and Grey signed it under his own name, without indicating that he was acting on behalf of the bank. The wording of the guarantee also did not explicitly reference UCPB.

“Assignment accepted and payment unconditionally guaranteed within sixty (60) days from Planters Products, Inc. Invoice date up to Pesos: Two Hundred Thousand (P200,000.00) only.”

Furthermore, the Supreme Court highlighted that bank guarantees are highly regulated transactions, requiring specific authorization from the bank’s board of directors. This requirement stems from Republic Act 8791, “An Act Providing For the Regulation of the Organizations and Operations of Banks, Quasi-Banks, Trust Entities, and For Other Purposes.” PPI should have verified that Grey had the authority to issue such a guarantee. The Court found it implausible that a branch manager could casually issue a bank guarantee on the back of a client’s promissory note.

“Bank guarantees are highly regulated transactions under the law…They are undertakings that are not so casually issued by banks or by their branch managers at the dorsal side of a client’s promissory note as if an afterthought. A bank guarantee is a contract that binds the bank and so may be entered into only under authority granted by its board of directors.”

The Court pointed out that Grey’s actions were part of a collusive scheme with Layson to defraud PPI. Grey approved Layson’s loan and guaranteed payment to PPI, yet he released the loan proceeds directly to Layson the next day. This demonstrated Grey’s intent to deceive PPI into delivering fertilizers to Layson on credit. UCPB also presented evidence that Grey lacked the authority to unilaterally grant loans of that amount without the approval of the Branch Credit Committee. The evidence showed that Grey needed the unanimous approval of the Branch Credit Committee, before he could grant a higher loan of the kind. This cemented the bank’s argument that Grey had acted outside his authority, thus absolving UCPB of liability.

The Supreme Court affirmed the RTC’s ruling that Layson was primarily liable to PPI for the value of the fertilizers she received. PPI, in turn, had recourse to Grey if they could not recover from Layson. The Court upheld the CA’s decision to deny attorney’s fees to UCPB, finding that PPI had legitimate reasons to implead the bank, given the branch manager’s involvement in the transaction. PPI had good reason to implead UCPB since, after all, its branch manager played a pivotal role in facilitating the anomalous transaction.

FAQs

What was the key issue in this case?	The central issue was whether UCPB was liable for the unauthorized guarantee made by its branch manager, Gregory Grey, to Planters Products, Inc. regarding a loan to Janet Layson.
Why did the Supreme Court rule in favor of UCPB?	The Court ruled that Grey’s guarantee appeared to be a personal undertaking, not an act on behalf of the bank, and that bank guarantees require specific authorization from the bank’s board of directors, which was lacking in this case.
What is a “pagare” in the context of this case?	In this case, a “pagare” refers to a document written on the back of UCPB promissory notes, where Layson assigned the proceeds of her loan to PPI as payment for fertilizers, with Grey guaranteeing the payment.
What is the significance of Grey signing the guarantee under his own name?	Grey signing under his own name, without indicating he was acting on behalf of UCPB, suggested that the guarantee was a personal undertaking and not an obligation of the bank.
What does it mean for Layson to be primarily liable to PPI?	It means that Layson is the first party responsible for paying PPI for the fertilizers she received, and PPI must first seek recovery from her before pursuing other parties.
What recourse does PPI have against Grey?	PPI has recourse to Grey in the event that it cannot recover the debt from Layson, making Grey subsidiarily liable for the unpaid amount.
Why was UCPB denied attorney’s fees in this case?	UCPB was denied attorney’s fees because PPI had legitimate reasons to implead the bank, given Grey’s involvement in the transaction, suggesting PPI did not act in bad faith.
What legal principle does this case illustrate regarding corporate liability?	This case illustrates that corporations are not automatically liable for the unauthorized acts of their employees, especially when those acts are beyond the scope of their authority and require specific corporate approval.

This case serves as a reminder of the importance of verifying the authority of individuals acting on behalf of financial institutions. It also underscores the regulatory oversight governing bank guarantees and the need for due diligence in commercial transactions. The Supreme Court’s decision reinforces the principle that companies are not automatically liable for the unauthorized actions of their employees, especially when those actions require explicit corporate authorization.

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: UNITED COCONUT PLANTERS BANK vs. PLANTERS PRODUCTS, INC., JANET LAYSON AND GREGORY GREY, G.R. No. 179015, June 13, 2012