Can a University Be Bound by Unauthorized Mortgages? Corporate Authority Explained

The Supreme Court's 2016 decision in University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas (G.R. Nos. 194964-65) clarifies two important areas of Philippine law: when a corporation can be bound by the unauthorized acts of its officers, and when a corporation may be held liable for acts beyond its declared purposes. The case arose from a university's attempt to nullify mortgage contracts executed by its Vice President for Finance over its properties to secure the loans of a separate thrift bank.

The Facts of the Case

In 1982, the University of Mindanao's Vice President for Finance, Saturnino Petalcorin, executed real estate mortgage contracts over university properties in Cagayan de Oro City and Iligan City in favor of the Bangko Sentral ng Pilipinas (BSP). The mortgages served as security for loans obtained by First Iligan Savings & Loan Association, Inc. (FISLAI), a thrift bank chaired by Guillermo B. Torres, who was also the chairman of the university's Board of Trustees. His wife, Dolores P. Torres, served as the university's Assistant Treasurer.

Petalcorin presented a Secretary's Certificate, signed by the university's Corporate Secretary Aurora de Leon, purporting to show a board resolution authorizing him to execute the mortgages. However, de Leon later testified that no such board resolution existed and that she signed the certificate only upon Guillermo Torres' orders. Petalcorin himself testified that he had no actual authority and merely complied with Torres' request.

When BSP threatened foreclosure in 1999, the university filed complaints to nullify the mortgages. The trial courts ruled in favor of the university, but the Court of Appeals reversed, holding that the Secretary's Certificate clothed Petalcorin with apparent authority. The Supreme Court reversed the Court of Appeals.

The Issue of Prescription

The Court first addressed whether BSP's foreclosure action had prescribed. Under Article 1142 of the Civil Code, actions on mortgages prescribe after ten years. However, the prescriptive period does not run from the execution of the mortgage contract. It runs only when the obligation becomes due and demandable, and after demand for payment has been made.

The loans' maturity dates were repeatedly extended until they became due only in 1990. BSP sent its demand letter in 1999. Under Article 1155 of the Civil Code, prescription is interrupted by written extrajudicial demand. The Court held that BSP's action was filed well within the prescriptive period, whether counted from 1990 or from the 1999 demand.

The Doctrine of Ultra Vires Acts

The Court then addressed whether the university could be bound by the mortgages. Under Section 36 of the Corporation Code, a corporation has the power to mortgage property only as "the transaction of the lawful business of the corporation may reasonably and necessarily require." A corporation has no inherent powers; it may exercise only those powers expressly granted by law and its articles of incorporation.

Acts outside these express definitions are ultra vires. The Court applied the test from Montelibano v. Bacolod-Murcia Milling Co.: whether the act is in "direct and immediate furtherance of the corporation's business, fairly incident to the express powers and reasonably necessary to their exercise."

Securing the loans of a third-party thrift bank had no connection to the university's educational purposes. The Court rejected BSP's argument that the university benefited as a shareholder of FISLAI. Acquiring shares in another corporation does not expand a corporation's powers, and the separate personality of corporations means their assets cannot be used to secure the debts of others.

No Apparent Authority Without Board Action

The Court also rejected the Court of Appeals' reliance on apparent authority. While a Secretary's Certificate may ordinarily evidence board action, the presumption of regularity is disputable. Here, the Corporate Secretary herself testified that no board resolution existed, and BSP's own witness admitted the same. The presumption could not stand against this contrary evidence.

Practical Takeaways

• A corporation is bound by an officer's acts only if the board of directors or trustees authorized those acts, or if the corporation ratified them or held the officer out as having authority.
• A Secretary's Certificate is not conclusive proof of board authority. Its presumption of regularity can be overcome by contrary evidence, including testimony from the Corporate Secretary herself.
• Corporations may exercise only powers within their declared purposes under the Corporation Code and their articles of incorporation. Acts beyond those purposes are ultra vires and do not bind the corporation.
• A corporation's separate personality means its assets cannot be used to secure the obligations of its officers, shareholders, or affiliated corporations.
• The prescriptive period for actions on mortgages runs from default and demand, not from the execution of the mortgage contract.

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