Tag: unauthorized acts

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

Attorney’s Breach of Authority: Unauthorized Compromise Agreements and Violations of the Code of Professional Responsibility

In Luzviminda S. Cerilla v. Atty. Samuel SM. Lezama, the Supreme Court of the Philippines addressed the ethical responsibilities of lawyers concerning their authority to enter into compromise agreements on behalf of their clients. The Court found Atty. Lezama guilty of violating the Code of Professional Responsibility by exceeding the scope of his authority under a Special Power of Attorney (SPA). Specifically, Atty. Lezama entered into a compromise agreement that included the sale of his client’s property without explicit authorization, leading to a two-year suspension from the practice of law. This ruling underscores the importance of clear and specific authorization when attorneys act on behalf of their clients and the severe consequences for overstepping those boundaries.

Exceeding Boundaries: When a Special Power of Attorney Doesn’t Mean ‘Carte Blanche’

The case revolves around Luzviminda S. Cerilla’s complaint against her attorney, Atty. Samuel SM. Lezama, for gross misconduct. Cerilla engaged Lezama to file an unlawful detainer case on her behalf as a co-owner of a property. Due to her location in Quezon City, she granted Lezama an SPA to represent her in the case, including the power to make stipulations and consider amicable settlements. However, Lezama entered into a compromise agreement to sell Cerilla’s property for P350,000 without her explicit consent or specific authority. This action prompted Cerilla to file an administrative complaint, alleging that Lezama’s actions constituted gross misconduct and prejudiced her interests as well as those of the other co-owners.

The central legal question is whether Atty. Lezama exceeded his authority by entering into a compromise agreement that included the sale of property when his SPA did not explicitly grant him such power. The resolution of this question delves into the scope of an attorney’s authority under an SPA and their ethical duties to act in the best interests of their clients.

Atty. Lezama defended his actions by arguing that the SPA authorized him to enter into an amicable settlement, and the price of P350,000 reflected what Cerilla had originally paid for the property. He also claimed that he attempted to contact Cerilla during the preliminary conference but was unsuccessful. Moreover, Lezama highlighted that he later filed a Manifestation and a Motion to Set Aside Order and to Annul Compromise Agreement when Cerilla objected to the agreement, although these actions were ultimately unsuccessful. He maintained that he acted in good faith, believing he was serving both his client’s interests and the broader policy of amicable dispute resolution. However, the Integrated Bar of the Philippines (IBP) and, subsequently, the Supreme Court disagreed with his assessment.

The IBP Commission on Bar Discipline found Atty. Lezama guilty of violating Canons 15 and 17 of the Code of Professional Responsibility, which require lawyers to observe candor, fairness, and loyalty in their dealings with clients and to be mindful of the trust and confidence reposed in them. The Investigating Commissioner emphasized that Lezama admitted during the mandatory conference that Cerilla did not give him any instruction to sell the property. Further, the Commissioner highlighted that Lezama was aware that the property was co-owned and that his actions potentially affected the interests of other parties beyond his client.

The Supreme Court’s decision hinged on the principle that a lawyer’s authority is strictly confined to the terms of their mandate. The Court emphasized that the SPA granted to Atty. Lezama authorized him to represent Cerilla in filing the ejectment case and to participate in preliminary conferences, including making stipulations for amicable settlement. However, the SPA did not expressly authorize him to compromise on the sale of the property. According to the Court, “Nowhere is it expressly stated in the SPA that respondent is authorized to compromise on the sale of the property or to sell the property of complainant.” This underscored the necessity for explicit authorization when dealing with significant transactions like the sale of property.

Moreover, the Court referenced Hernandez v. Atty. Padilla, highlighting the duty of lawyers to be well-informed of existing laws and to keep abreast with legal developments and jurisprudence. This duty ensures that lawyers can competently and diligently discharge their obligations as members of the bar. The Court emphasized that a lawyer’s primary duty is to obey the laws of the land and promote respect for the law and legal processes. Lawyers are expected to be in the forefront in the observance and maintenance of the rule of law. This duty carries with it the obligation to be well-informed of the existing laws and to keep abreast with legal developments, recent enactments and jurisprudence.

The Court also addressed Atty. Lezama’s assertion that he acted in good faith and in accordance with the policy of amicable settlement. The Court found that his justification did not hold water, as his actions prejudiced his client by selling the property without her explicit consent at a price he determined on his own. The compromise agreement, entered into without proper authorization, led to further legal complications and the need for additional cases to recover the property. This underscored the importance of acting within the bounds of one’s authority, even when motivated by seemingly positive intentions.

In its ruling, the Supreme Court firmly stated that Atty. Lezama’s actions violated Canons 5, 15, and 17 of the Code of Professional Responsibility. These canons collectively emphasize the need for competence, diligence, candor, fairness, loyalty, and fidelity to the client’s cause. The Court sustained the IBP Board of Governors’ recommendation and suspended Atty. Lezama from the practice of law for two years. Additionally, the Court issued a stern warning that any repetition of similar offenses would be dealt with more severely.

The Court explicitly referenced the specific canons that Atty. Lezama violated:

CANON 5 – A lawyer shall keep abreast of legal developments, participate in continuing legal education programs, support efforts to achieve high standards in law schools as well as in the practical training of law students and assist in disseminating information regarding the law and jurisprudence.

CANON 15 – A lawyer shall observe candor, fairness and loyalty in all his dealings and transactions with his client.

CANON 17 – A lawyer owes fidelity to the cause of his client and he shall be mindful of the trust and confidence reposed in him.

This case serves as a critical reminder for attorneys to adhere strictly to the scope of their authority, especially when acting under an SPA. It reinforces the importance of obtaining explicit and informed consent from clients before making decisions that could significantly impact their rights and interests. Moreover, it emphasizes the ethical obligations of lawyers to act with candor, fairness, and loyalty, always prioritizing the client’s best interests within the bounds of the law.

FAQs

What was the key issue in this case?	The key issue was whether an attorney exceeded his authority by entering into a compromise agreement that included the sale of property when the Special Power of Attorney (SPA) did not explicitly grant him such power. This involved examining the scope of an attorney’s authority under an SPA and their ethical duties to clients.
What is a Special Power of Attorney (SPA)?	A Special Power of Attorney (SPA) is a legal document that authorizes a person (the agent or attorney-in-fact) to act on behalf of another person (the principal) in specific matters. The powers granted in an SPA are limited to those expressly stated in the document.
What did the attorney do that led to the complaint?	The attorney, Atty. Lezama, entered into a compromise agreement to sell his client’s property for P350,000 without her explicit consent or specific authority. This was done despite the SPA not expressly authorizing him to sell the property.
What Canons of the Code of Professional Responsibility did the attorney violate?	The attorney was found to have violated Canons 5, 15, and 17 of the Code of Professional Responsibility. These canons relate to competence, diligence, candor, fairness, loyalty to the client, and maintaining trust and confidence.
What was the punishment for the attorney’s misconduct?	The attorney was suspended from the practice of law for a period of two years. He also received a stern warning that any repetition of similar offenses would result in more severe penalties.
Why was the attorney’s good faith argument rejected by the Court?	The Court rejected the attorney’s good faith argument because his actions prejudiced his client by selling the property without her explicit consent at a price he determined on his own. This demonstrated a failure to prioritize the client’s best interests.
How does this case affect the responsibilities of lawyers acting under an SPA?	This case serves as a reminder for attorneys to adhere strictly to the scope of their authority when acting under an SPA. It emphasizes the importance of obtaining explicit and informed consent from clients before making decisions that significantly impact their rights and interests.
What should clients do to protect themselves when granting an SPA to an attorney?	Clients should ensure that the SPA clearly and specifically outlines the powers granted to the attorney, especially regarding significant transactions such as the sale of property. They should also maintain open communication with their attorney and seek clarification on any actions taken on their behalf.

In conclusion, Cerilla v. Lezama stands as a landmark case, emphasizing the stringent ethical and legal obligations of attorneys acting under a Special Power of Attorney. The ruling reinforces that attorneys must act within the bounds of their explicit authority, prioritizing their client’s informed consent and best interests, to uphold the integrity of the legal profession. A failure to do so can lead to severe consequences, including suspension from the practice of law.

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: Luzviminda S. Cerilla, G.R No. 63474, October 03, 2017

October 3, 2017

Corporate Authority vs. Apparent Conduct: Who Bears the Risk in Unauthorized Transactions?

The Supreme Court, in this case, ruled that a corporation can be held liable for the unauthorized loans secured by its officers if it had created an appearance that these officers had the authority to act on its behalf. This decision highlights the principle of apparent authority, which dictates that a corporation is bound by the actions of its agents if it leads third parties to reasonably believe that the agent has the power to act for the corporation. This protects third parties who deal in good faith with corporate agents, relying on the corporation’s conduct.

When Trust Becomes a Debt: Can a Corporation Deny Loans Approved by Its Executives?

The case revolves around Advance Paper Corporation (Advance Paper) seeking to collect a substantial sum from Arma Traders Corporation (Arma Traders), representing unpaid purchases and loans. Advance Paper claimed that Arma Traders, through its officers Antonio Tan and Uy Seng Kee Willy, secured loans and made purchases on credit, issuing postdated checks that were later dishonored. Arma Traders, however, argued that Tan and Uy acted without proper authorization, making the loans their personal obligations, and that the purchases were fabricated. The central legal question is whether Arma Traders is bound by the actions of its officers, despite the lack of formal authorization, based on the principle of apparent authority.

The factual backdrop reveals a long-standing business relationship between Advance Paper and Arma Traders, spanning approximately 14 years. During this period, Tan and Uy represented Arma Traders in dealings with Advance Paper. In 1994, Arma Traders acquired goods and loans from Advance Paper, issuing postdated checks amounting to P15,130,636.87. These checks, signed by Tan and Uy, were subsequently dishonored due to insufficient funds or closed accounts. Advance Paper then filed a collection suit against Arma Traders and its officers.

The Regional Trial Court (RTC) initially ruled in favor of Advance Paper, ordering Arma Traders to pay the outstanding amount. However, the Court of Appeals (CA) reversed this decision, arguing that the loans were not authorized by a board resolution and that the evidence for the purchases was inadmissible. The CA emphasized that the authority to sign checks did not equate to the authority to contract loans. Furthermore, the CA questioned the validity of the sales invoices, deeming them hearsay evidence.

The Supreme Court, however, disagreed with the CA’s assessment. The Court highlighted the doctrine of apparent authority, stating that a corporation is estopped from denying an agent’s authority if it knowingly permits the agent to act within an apparent scope of authority. The Supreme Court cited Inter-Asia Investment Industries v. Court of Appeals, explaining the principle of apparent authority:

Under this provision [referring to Sec. 23 of the Corporation Code], the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural person who may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business.

Building on this principle, the Supreme Court noted that Arma Traders’ Articles of Incorporation allowed the corporation to borrow money and issue evidence of indebtedness. Moreover, the Court emphasized that Tan and Uy were not merely officers but also incorporators of Arma Traders. The Court further noted the testimony of respondent Ng, Arma Traders’ corporate secretary, admitting that Tan and Uy were solely managing Arma Traders’ business for 14 years, and that the stockholders and board of directors never conducted a meeting during that period. Because of this, Arma Traders was held to have vested broad powers in Tan and Uy.

Furthermore, the Court addressed the admissibility of the sales invoices, explaining that while Haw’s testimony was considered hearsay, the respondents failed to object to the invoices’ admissibility on those grounds during the trial. As such, the sales invoices formed part of the evidence. The Court stated that,

The rule is that failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such evidence. When a party desires the court to reject the evidence offered, it must so state in the form of a timely objection and it cannot raise the objection to the evidence for the first time on appeal. Because of a party’s failure to timely object, the evidence becomes part of the evidence in the case.

Additionally, the Supreme Court gave weight to the fact that Uy admitted that the checks issued were in payment of the contractual obligations of Arma Traders with Advance Paper. The Court found no proof of conspiracy between Advance Paper and Arma Traders’ officers, thereby undermining the defense’s primary argument. It emphasized that the respondents failed to provide sufficient evidence to prove any such conspiracy.

The Supreme Court’s ruling underscores the importance of corporations carefully managing the authority granted to their officers and agents. Corporations must ensure that third parties are not misled into believing that an officer has the power to act on the corporation’s behalf when such authority has not been formally granted. This can be achieved through clear internal policies, regular board meetings, and transparent communication with external parties. Failure to do so can result in the corporation being bound by unauthorized actions, as illustrated in this case. Ultimately, the Supreme Court sided with Advance Paper, reversing the CA’s decision and reinstating the RTC’s order for Arma Traders to pay the outstanding debt.

FAQs

What was the key issue in this case?	The central issue was whether Arma Traders was liable for loans and purchases made by its officers, Tan and Uy, without formal board approval, based on the doctrine of apparent authority. The Court had to determine if Arma Traders had created the impression that Tan and Uy had the authority to act on its behalf.
What is the doctrine of apparent authority?	The doctrine of apparent authority states that a corporation can be held liable for the actions of its agents if it leads third parties to reasonably believe that the agent has the authority to act for the corporation. This applies even if the agent does not have express authority.
Why did the Court of Appeals initially rule against Advance Paper?	The Court of Appeals ruled that Arma Traders was not liable because there was no board resolution authorizing Tan and Uy to obtain the loans. They also deemed the sales invoices inadmissible as evidence, considering them hearsay.
How did the Supreme Court justify its ruling in favor of Advance Paper?	The Supreme Court emphasized that Arma Traders had allowed Tan and Uy to manage the company without oversight for 14 years, creating an appearance of authority. The Court also noted that the respondents failed to object to the admissibility of the sales invoices on the grounds that they were hearsay during the trial.
What evidence supported Advance Paper’s claim that the purchases were valid?	Uy himself admitted that the checks issued were in payment of the contractual obligations of Arma Traders with Advance Paper. Additionally, the respondents failed to object on the sales invoices’ admissibility on the grounds that they were hearsay during the trial.
Was there evidence of collusion between Advance Paper and the officers of Arma Traders?	The Court found no credible evidence of collusion between Advance Paper and Tan and Uy to defraud Arma Traders. The respondents had intended to call a witness to testify about the conspiracy, but did not.
What is the practical implication of this ruling for corporations?	This ruling underscores the importance of corporations managing the authority of their officers and agents carefully. Corporations should implement clear internal policies and procedures to prevent unauthorized actions.
How does this case relate to Section 23 of the Corporation Code?	Section 23 of the Corporation Code vests the power to enter into contracts with the board of directors. However, the court clarifies that this power can be delegated to corporate officers, explicitly or implicitly, through a pattern of conduct known as apparent authority.

This case serves as a reminder that corporations must be vigilant in overseeing the actions of their officers and agents. The principle of apparent authority can hold corporations liable for unauthorized actions if they create the impression that their agents have the power to act on their behalf. Therefore, companies must implement robust internal controls and communication strategies to protect themselves from potential 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: Advance Paper Corporation vs. Arma Traders Corporation, G.R. No. 176897, December 11, 2013

December 11, 2013

Corporate Liability: When is a Bank Responsible for its Manager’s Unauthorized Acts?

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

June 13, 2012