Tag: Interest Payments

Corporate Ratification: When a Corporation Becomes Bound by Unauthorized Acts

The Supreme Court has affirmed that a corporation can be bound by the unauthorized actions of its officers if the corporation repeatedly acts in a manner that suggests approval or acceptance of those actions. This means that even if an officer doesn’t have explicit permission to enter into an agreement, the corporation’s subsequent conduct, like making payments under that agreement, can effectively ratify the officer’s actions. This ruling highlights the importance of corporate oversight and the potential consequences of inadvertently validating unauthorized commitments.

Unraveling Corporate Liability: Did Letters of Intent Translate to Binding Obligations?

This case, Terp Construction Corporation v. Banco Filipino Savings and Mortgage Bank, revolves around a dispute over interest payments on bonds purchased by Banco Filipino from Terp Construction. The central question is whether Terp Construction was obligated to pay additional interest beyond the initially agreed-upon rate, based on letters written by its Senior Vice President, Alberto Escalona. These letters indicated a commitment to pay a higher interest rate, but Terp Construction later argued that Escalona lacked the authority to make such commitments, and therefore, the corporation should not be bound by them. The court had to determine if Terp Construction’s actions, specifically the partial payment of the additional interest, constituted a ratification of Escalona’s allegedly unauthorized agreements.

The factual backdrop involves Terp Construction’s plan to develop housing and condominium projects, financed by issuing Margarita Bonds. Banco Filipino purchased these bonds, allegedly induced by Escalona’s letters promising higher interest rates. After an economic crisis, Terp Construction faced financial difficulties and couldn’t fully pay the bondholders when the bonds matured. Banco Filipino demanded the unpaid interest differentials from Terp Construction, leading to a legal battle. The trial court initially sided with Terp Construction, but the Court of Appeals reversed the decision, ordering Terp Construction to pay the interest differentials.

The core legal issue centered on the concept of **corporate ratification**. The Supreme Court pointed out that the power to exercise corporate powers lies in the board of directors.

SECTION 23. The board of directors or trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified.

However, this power can be delegated to officers, committees, or agencies. The key question is whether such delegation occurred and whether the corporation subsequently ratified the officer’s actions, even if initially unauthorized.

The Supreme Court addressed whether the Court of Appeals erred in ruling that Terp Construction had expressly agreed to be bound for additional interest on the bonds that Banco Filipino purchased. This hinged on the evidentiary value of Escalona’s letters and the effect of Terp Construction’s subsequent actions.

The court highlighted the principle that a party cannot merely claim that its case falls under the exceptions to the general rule that only questions of law may be raised in a petition for review on certiorari. In Pascual v. Burgos, the Supreme Court explained that the party claiming the exception “must demonstrate and prove” that a review of the factual findings is necessary. Here, Terp Construction argued that conflicting factual findings between the trial court and the Court of Appeals warranted a review, but the Supreme Court disagreed, holding that the Court of Appeals’ findings were supported by substantial evidence.

The Court of Appeals decision had reproduced letters from Escalona, which stated:

[February 3, 1997 letter]:
… We hereby commit a guaranteed floor rate of 16.5% as project proponent. This would commit us to pay the differential interest earnings to be paid by Planters Development Bank as Trustee every 182 days from purchase date of period of three (3) years until maturity date….

[April 8, 1997 letter]:
Terp Construction commit (sic) that the yield to you for this investment is 15.5%. The difference between the yield approved by the Project Governing Board will be paid for by, Terp Construction Corp.

Terp Construction disavowed this obligation and contended that it was merely an unauthorized offer made by one of its officers during the negotiation stage of a contract. However, the corporation did not deny paying Banco Filipino the additional interest during the Margarita Bonds’ holding period, not just once, but twice.

The court emphasized that a corporation acts through its board of directors, which can delegate authority. The delegation can be either actual or apparent. Actual authority can be express or implied, with implied authority stemming from prior acts ratified by the corporation or whose benefits have been accepted by the corporation. The Supreme Court found that Terp Construction’s subsequent act of twice paying the additional interest committed to by Escalona constituted a ratification of his acts. The defense of these being “erroneous payment[s]” since the corporation never obligated itself from the start, does not stand. Corporations are bound by errors of their own making.

The court also highlighted the concept of **apparent authority**. Escalona, as Senior Vice President, appeared to have the authority to promise interest payments above the guaranteed rate. This appearance was reinforced by Terp Construction’s actual payments of the promised additional interest. In Yao Ka Sin Trading v. Court of Appeals, the Supreme Court explained:

The rule is of course settled that “[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of its continuously and publicly, for a considerable time.”

The court considered these principles in arriving at its decision, taking into account that Escalona’s apparent authority was further demonstrated by Terp Construction paying Banco Filipino what Escalona promised during the Margarita Bonds’ term.

FAQs

What was the key issue in this case?	The key issue was whether Terp Construction Corporation was bound by the commitment made by its Senior Vice President, Alberto Escalona, to pay additional interest on bonds purchased by Banco Filipino, even if Escalona lacked express authority.
What is corporate ratification?	Corporate ratification occurs when a corporation approves or adopts an unauthorized act of its officer or agent, making the corporation liable as if the act was originally authorized. This can be shown through express approval or impliedly through conduct, such as accepting the benefits of the act or making payments under it.
What is apparent authority?	Apparent authority arises when a corporation leads third parties to believe that its officer or agent has the authority to act on its behalf, even if the officer lacks actual authority. This is determined by the corporation’s conduct and representations to the third party.
How did Terp Construction ratify Escalona’s actions?	Terp Construction ratified Escalona’s actions by making two payments of the additional interest promised in Escalona’s letters to Banco Filipino during the term of the Margarita Bonds. This conduct indicated the corporation’s approval of Escalona’s commitment.
Why did the Supreme Court side with Banco Filipino?	The Supreme Court sided with Banco Filipino because it found that Terp Construction had ratified Escalona’s commitment to pay additional interest through its subsequent actions. Also, Escalona had apparent authority to act on behalf of the corporation.
What was the significance of Escalona’s position in the company?	Escalona’s position as Senior Vice President was significant because it contributed to the appearance of authority to act on behalf of Terp Construction. This apparent authority allowed Banco Filipino to reasonably rely on Escalona’s commitments.
What is the implication of this ruling for corporations?	This ruling underscores the importance of corporate oversight and internal controls to prevent unauthorized actions by officers. Corporations must carefully monitor the actions of their officers and promptly address any unauthorized commitments to avoid being bound by them.
What amount was Terp Construction ordered to pay?	Terp Construction was ordered to pay Banco Filipino P18,104,431.33, with legal interest of twelve percent (12%) to be computed from January 31, 2001 until June 30, 2013 and six percent (6%) from July 1, 2013 until its full satisfaction.

In conclusion, the Terp Construction case serves as a reminder that corporations must exercise diligence in monitoring the actions of their officers and promptly address any unauthorized commitments. Repeated actions suggesting approval can lead to the ratification of unauthorized acts, binding the corporation to obligations it never explicitly agreed to. This case highlights the importance of clear internal controls and oversight to prevent unintended liability.

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: TERP CONSTRUCTION CORPORATION v. BANCO FILIPINO SAVINGS AND MORTGAGE BANK, G.R. No. 221771, September 18, 2019

September 18, 2019

Priority of Interest Payments: Examining Debt Settlement in Foreclosure Scenarios

In Spouses Juan Chuy Tan and Mary Tan v. China Banking Corporation, the Supreme Court addressed how payments should be applied when a debtor defaults on a loan secured by a mortgage. The Court clarified that proceeds from the sale of foreclosed properties should first cover accrued interest before being applied to the principal debt, as stipulated under Article 1253 of the Civil Code. This ruling reinforces the creditor’s right to prioritize interest payments and ensures that contractual obligations are honored, providing a clear framework for debt settlement in foreclosure cases.

Navigating Debt: How Foreclosure Proceeds Are Applied to Loans and Interest

The case revolves around Lorenze Realty and Development Corporation, which obtained several loans from China Banking Corporation (China Bank) totaling P71,050,000.00. As security for these loans, Lorenze Realty executed Real Estate Mortgages (REM) over eleven parcels of land. When Lorenze Realty defaulted on its payments, China Bank foreclosed on the REM and sold the properties at a public auction, emerging as the highest bidder for P85,000,000.00. After the sale, a dispute arose regarding the application of the proceeds, with Lorenze Realty arguing that the debt should be considered fully settled because the auction price exceeded the principal loan amount. China Bank, however, insisted on applying the proceeds first to cover interest, penalties, and expenses, leaving a remaining balance on the principal.

The central legal question before the Supreme Court was whether Lorenze Realty’s obligation was fully settled when the foreclosed properties were sold at public auction for P85,000,000.00. Lorenze Realty contended that since the proceeds exceeded the principal amount of the loan (P71,050,000.00), the debt should be deemed fully paid. They argued that the remaining amount of P13,950,000.00 should be more than sufficient to cover any penalties, interests, and surcharges. This argument hinged on the assumption that the excess from the sale should be directly applied to the principal, thereby extinguishing the debt.

China Bank, on the other hand, maintained that the proceeds should first be applied to the interest, penalties, and expenses related to the sale, in accordance with standard banking practices and legal provisions. The bank cited Article 1253 of the Civil Code, which explicitly states that “If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.” This position aligns with the principle that creditors have the right to recover interest earned on the debt before the principal amount is reduced.

In resolving the dispute, the Supreme Court relied on established principles of civil law concerning payment and obligations. It emphasized that obligations are extinguished by payment or performance, with payment meaning not only the delivery of money but also the performance of an obligation in any other manner, as defined in Article 1232 of the Civil Code. Furthermore, Article 1233 stipulates that a debt is not considered paid unless the thing or service in which the obligation consists has been completely delivered or rendered.

Building on this foundation, the Court examined the application of payment, particularly Article 1252 of the Civil Code, which grants the debtor the right to specify which debt a payment should be applied to when multiple debts exist. However, this right is not absolute. The Court cited Premiere Development Bank v. Central Surety & Insurance Company Inc., highlighting that the debtor’s right to apply payment is merely directory and must be promptly exercised. If the debtor fails to do so, the right passes to the creditor, who may then choose how to apply the payment. In this case, Lorenze Realty did not specify how the proceeds from the foreclosure sale should be applied, thus ceding the right to China Bank.

The Court underscored the importance of Article 1253 of the Civil Code. It upheld China Bank’s application of the proceeds first to the interest and penalties, with the remainder going to the principal. The Court reasoned that this approach is legally sound, as it respects the contractual agreement between the parties and the statutory provisions governing debt settlement. The Court stated, “That they assume that the obligation is fully satisfied by the sale of the securities does not hold any water. Nowhere in our statutes and jurisprudence do they provide that the sale of the collaterals constituted as security of the obligation results in the extinguishment of the obligation. The rights and obligations of parties are governed by the terms and conditions of the contract and not by assumptions and presuppositions of the parties.”

The Supreme Court affirmed the Court of Appeals’ decision, which had modified the Regional Trial Court’s ruling by reducing the penalty surcharge from 24% per annum to 12% per annum and the attorney’s fees from 5% to 2% of the total amount due. This adjustment reflects the Court’s authority to temper contractual stipulations that are deemed unconscionable. As the Court noted in Albos v. Embisan, MCMP Construction Corp. v. Monark Equipment Corp., Bognot v. RRI Lending Corporation, and Menchavez v. Bermudez, it has consistently reduced excessive interest rates to 12% per annum to ensure fairness and equity.

The practical implication of this decision is that debtors must be aware that proceeds from the sale of foreclosed properties will likely be applied first to outstanding interest and penalties before reducing the principal debt. This understanding is crucial for financial planning and risk assessment. Moreover, creditors are reinforced in their right to apply payments in a manner that protects their financial interests, particularly in recovering interest on loans.

FAQs

What was the key issue in this case?	The central issue was whether the proceeds from the foreclosure sale of properties should be applied to the principal loan amount before covering accrued interest and penalties.
What did the Supreme Court rule?	The Supreme Court ruled that the proceeds from the foreclosure sale should first be applied to cover accrued interest and penalties before reducing the principal debt. This decision affirmed the creditor’s right to prioritize interest payments.
What is Article 1253 of the Civil Code?	Article 1253 of the Civil Code states that if a debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.
Can a debtor specify how payments should be applied?	Yes, under Article 1252 of the Civil Code, a debtor can specify which debt a payment should be applied to. However, this right must be promptly exercised; otherwise, it passes to the creditor.
What happens if the foreclosure sale proceeds exceed the total debt?	If the foreclosure sale proceeds exceed the total debt, the excess should be returned to the debtor. However, the order of payment (interest, penalties, then principal) must still be followed.
What was the original interest rate in this case?	The original penalty surcharge was 24% per annum. The Court of Appeals reduced this rate to 12% per annum, which the Supreme Court affirmed.
Why was the interest rate reduced?	The interest rate was reduced because the appellate court deemed the original rate unconscionable, considering that the obligation was partially satisfied by the sale of the securities.
What is a Real Estate Mortgage (REM)?	A Real Estate Mortgage (REM) is a legal agreement where a borrower pledges real property as security for a loan. If the borrower defaults, the lender can foreclose on the property to recover the debt.

The Supreme Court’s decision in Spouses Juan Chuy Tan and Mary Tan v. China Banking Corporation reinforces the importance of adhering to contractual agreements and statutory provisions in debt settlement scenarios. It provides clarity on the application of proceeds from foreclosure sales and underscores the creditor’s right to prioritize interest payments. This ruling serves as a reminder for both debtors and creditors to understand their rights and obligations when entering into loan agreements secured by mortgages.

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: Spouses Juan Chuy Tan and Mary Tan v. China Banking Corporation, G.R. No. 200299, August 17, 2016

August 17, 2016

Contractual Obligations: Upholding Interest Payments in Real Estate Agreements

The Supreme Court ruled that parties entering into a contract to sell are bound by its terms, including the obligation to pay interest on the outstanding balance, as long as the terms are clear and unambiguous. This ruling underscores the principle that contracts have the force of law between the parties and must be complied with in good faith. Even if a loan intended to cover the payment is released directly to the seller, the buyer remains responsible for fulfilling the agreed-upon interest payments. This decision highlights the importance of carefully reviewing and understanding contractual obligations before signing any agreement, especially in real estate transactions. Failure to comply with these obligations can lead to legal consequences and financial liabilities.

The Case of the Unpaid Interest: When a Promise Becomes a Debt

In Spouses Elvira and Cesar Dumlao v. Marlon Realty Corporation, the central issue revolves around whether the Dumlao spouses were obligated to pay interest on the balance of a purchase price for a property they acquired from Marlon Realty Corporation. The dispute arose from a Contract to Sell where the Dumlaos agreed to purchase a lot, paying a downpayment and financing the balance with a loan. The contract stipulated that the balance would incur interest at 24% per annum. Subsequently, a Compromise Agreement was made where the Dumlaos agreed to pay accrued interest, but they later refused to honor this commitment, leading to legal action by Marlon Realty.

The core of the legal battle centered on the interpretation and enforcement of the Contract to Sell. The respondent, Marlon Realty Corporation, argued that the Dumlaos were bound by the explicit terms of the contract, which included the payment of interest on the outstanding balance. The petitioners, the Dumlao spouses, contended that they should not be liable for interest because the loan intended to cover the payment was released directly to Marlon Realty, not to them. They also argued that interest should not accrue pending the loan’s release. However, the Supreme Court sided with Marlon Realty, emphasizing the binding nature of contractual obligations. The court invoked Article 1159 of the New Civil Code, stating:

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

This principle underscores the sanctity of contracts and the duty of parties to adhere to their agreed terms. Building on this principle, the Court emphasized that the terms of the contract were clear and left no room for interpretation. Article 1370 of the New Civil Code provides guidance on contract interpretation:

If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

The Contract to Sell explicitly stated that the balance of P157,000.00 would be paid with interest at 24% per annum. The Dumlaos, by signing the contract, demonstrated their agreement to these terms. The court noted that Marlon Realty had fulfilled its part of the agreement by executing a deed of sale in favor of the Dumlaos, and a Transfer Certificate of Title was issued in their names. Therefore, fairness dictated that the Dumlaos also fulfill their obligation to pay the agreed-upon interest. The court emphasized that the contract is the law between the parties, and they are bound to comply with its terms and conditions in good faith.

The Supreme Court’s decision affirmed the Court of Appeals’ ruling, which had reversed the lower courts’ decisions. The Metropolitan Trial Court (MTC) initially dismissed Marlon Realty’s complaint, holding that it was for specific performance and thus beyond its jurisdiction. The Regional Trial Court (RTC) affirmed the MTC’s judgment but on the ground of lack of cause of action, not lack of jurisdiction. However, the Court of Appeals correctly determined that Marlon Realty’s complaint was for a sum of money based on a clear contractual obligation, making it fall within the MTC’s jurisdiction. This approach contrasts with the lower courts’ misinterpretations of the nature of the complaint, underscoring the importance of properly classifying legal actions to ensure they are heard in the appropriate venue.

The implications of this decision are significant for real estate transactions and contractual agreements in general. It reinforces the principle that parties are bound by the terms of their contracts, and courts will uphold these terms as long as they are clear and unambiguous. This includes obligations to pay interest, even if the mechanics of payment involve third parties, such as banks providing loans. Buyers must be diligent in understanding their obligations before signing contracts to sell, as failure to do so can result in significant financial liabilities. The ruling serves as a reminder of the importance of reading and comprehending contractual terms, as well as seeking legal advice when necessary.

Furthermore, the decision highlights the importance of good faith in contractual dealings. Marlon Realty fulfilled its obligations by executing the deed of sale, and the Dumlaos were expected to reciprocate by honoring their commitment to pay interest. This underscores the reciprocal nature of contractual obligations, where each party’s performance is contingent on the other’s. The ruling also clarifies that parties cannot evade their contractual obligations by citing external factors, such as the method of loan disbursement, if the underlying agreement clearly stipulates their responsibility. By enforcing the interest payment obligation, the Supreme Court reaffirmed the principle that contracts are not mere scraps of paper but legally binding agreements that must be honored in good faith.

FAQs

What was the key issue in this case?	The key issue was whether the Dumlao spouses were liable to pay interest on the balance of the purchase price for a property, as stipulated in their Contract to Sell with Marlon Realty Corporation. The dispute centered on the interpretation and enforcement of the contractual terms.
*What did the Contract to Sell* stipulate regarding interest?**	The Contract to Sell explicitly stated that the balance of P157,000.00 would be paid with interest at 24% per annum. This was a key factor in the Court’s decision.
Why did the Dumlaos argue they shouldn’t pay interest?	The Dumlaos argued that they should not be liable for interest because the loan intended to cover the payment was released directly to Marlon Realty, and no interest should accrue pending the loan’s release.
What was the Supreme Court’s ruling?	The Supreme Court ruled in favor of Marlon Realty Corporation, holding that the Dumlaos were obligated to pay the interest as stipulated in the Contract to Sell. The Court emphasized the binding nature of contractual obligations.
What legal principle did the Supreme Court invoke?	The Supreme Court invoked Article 1159 of the New Civil Code, which states that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.
What is the significance of Article 1370 of the New Civil Code in this case?	Article 1370 of the New Civil Code emphasizes that if the terms of a contract are clear, the literal meaning of its stipulations shall control. This guided the Court’s interpretation of the Contract to Sell.
How did the lower courts rule on this case?	The Metropolitan Trial Court (MTC) initially dismissed the complaint for lack of jurisdiction, and the Regional Trial Court (RTC) affirmed the dismissal based on lack of cause of action. These rulings were later reversed by the Court of Appeals.
What is the practical implication of this ruling?	The practical implication is that parties entering into contracts must carefully review and understand their obligations, as courts will enforce clear and unambiguous contractual terms, including interest payments.
Did Marlon Realty fulfill its obligations under the contract?	Yes, Marlon Realty fulfilled its obligations by executing a deed of sale in favor of the Dumlaos, which led to the issuance of a Transfer Certificate of Title in their names.

The Dumlao v. Marlon Realty case serves as a crucial reminder of the importance of contractual compliance and the binding nature of agreements. It underscores the necessity for parties to thoroughly understand the terms of their contracts, particularly those involving financial obligations. This decision reaffirms the principle that contracts, freely entered into, are the law between the parties and will be upheld by the courts.

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: Spouses Elvira and Cesar Dumlao, vs. Marlon Realty Corporation, G.R. No. 131491, August 17, 2007

August 17, 2007