When an Agent's Mortgage Signed in Own Name Does Not Bind the Principal

A mortgage executed by an authorized agent who signs in his or her own name, without indicating that the act was done for and on behalf of the principal, binds only the agent and not the principal. This is the rule reiterated by the Supreme Court in Bucton v. Rural Bank of El Salvador, Inc. (G.R. No. 179625, February 24, 2014), a case that clarifies an essential requirement for agency contracts involving real property.

The case is a useful reminder for property owners, lenders, and their counsel: even a valid special power of attorney (SPA) will not make a principal liable if the agent fails to sign in a representative capacity.

The Facts of the Case

Nicanora Bucton owned a parcel of land covered by Transfer Certificate of Title No. T-3838 in Cagayan de Oro City. In 1982, Erlinda Concepcion borrowed the title from Bucton, claiming she would show it to an interested buyer. Concepcion then obtained a P30,000.00 loan from the Rural Bank of El Salvador, Misamis Oriental, and mortgaged Bucton's house and lot as security.

Concepcion used a Special Power of Attorney allegedly executed by Bucton in her favor. Bucton later claimed the SPA was forged. She also pointed out that the Real Estate Mortgage and the Promissory Note were both signed by Concepcion in her own personal capacity, with no indication that she was acting as an agent.

When Concepcion failed to pay the loan, the property was foreclosed and sold to the bank. Bucton filed an action to annul the mortgage, the foreclosure, and the SPA.

The Conflicting Rulings Below

The Regional Trial Court ruled in favor of Bucton, declaring the SPA, the mortgage, and the foreclosure sale null and void. It found the SPA was forged and that the bank should have conducted a more thorough inquiry.

The Court of Appeals reversed, applying the principle of equitable estoppel. It held that Bucton was negligent in handing over her title to Concepcion, and since one of two innocent parties must suffer a loss, the one whose conduct made the loss possible should bear it. The CA also relied on the presumption of regularity of notarized documents.

The Supreme Court's Ruling

The Supreme Court reversed the Court of Appeals and reinstated the trial court's decision, with a modification.

The Court cited the long-standing rule from Philippine Sugar Estates Development Co. v. Poizat (48 Phil. 536 [1925]): to bind the principal by a deed executed by an agent, the deed must, on its face, purport to be made, signed, and sealed in the name of the principal. The mere fact that the agent was authorized to mortgage the property is not enough.

The Court applied this rule consistently with later cases, including Rural Bank of Bombon (Camarines Sur), Inc. v. Court of Appeals (G.R. No. 95703, August 3, 1992), Gozun v. Mercado (540 Phil. 323 [2006]), and Far East Bank and Trust Company v. Cayetano (G.R. No. 179909, January 25, 2010).

In this case, the Real Estate Mortgage was signed by Concepcion in her own name and in her own personal capacity. There was nothing in the document showing she was acting as an agent of Bucton. Therefore, even assuming the SPA was valid, the mortgage did not bind Bucton.

The Court also noted that the bank itself was negligent. It approved and released the loan in less than three days and failed to indicate in the mortgage that Concepcion was signing for and on behalf of the principal. The words "as attorney-in-fact of," "as agent of," or "for and on behalf of" are vital; without them, a mortgage signed by an agent is considered signed in a personal capacity.

The Court deleted the award of moral damages because the bank did not act in bad faith or with malice. However, it sustained the award of attorney's fees of P20,000.00 under Article 2208 of the Civil Code, since Bucton was compelled to litigate to protect her interest.

Concepcion, for her part, remained liable to the bank for her unpaid obligation under the Promissory Note, with interest, and for reimbursement of the damages and costs the bank was ordered to pay.

Practical Takeaways

• Signature format matters. An agent who signs a contract involving the principal's property must indicate a representative capacity, such as "as attorney-in-fact of" or "for and on behalf of" the principal. Otherwise, the principal is not bound.
• A valid SPA is not enough. Even a genuine and valid special power of attorney will not bind the principal if the subsequent contract is signed in the agent's personal capacity.
• Lenders must be diligent. Banks and other lenders should carefully review the mortgage documents they prepare. Failure to indicate the agent's representative capacity can render the mortgage unenforceable against the property owner.
• Estoppel has limits. The principle that the loss should fall on the party whose negligence made it possible does not override the clear requirement that an agent must sign in a representative capacity to bind the principal.
• The agent remains liable. An agent who signs in a personal capacity cannot escape liability on the loan and may be ordered to reimburse the lender for damages.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.