WESTMONT BANK (FORMERLY ASSOCIATED CITIZENS BANK AND NOW UNITED OVERSEAS BANK, PHILS.) AND THE PROVINCIAL SHERIFF OF RIZAL, PETITIONERS, VS. INLAND CONSTRUCTION AND DEVELOPMENT …

Westmont Bank versus Inland Construction and Development

The Case

This is a petition for review brought by Westmont Bank, formerly Associated Citizens Bank and later United Overseas Bank, together with the Provincial Sheriff of Rizal, against Inland Construction and Development Corporation. Inland had borrowed from the bank and mortgaged three parcels of land in Pasig City as security. When the bank moved to foreclose, Inland sued for injunction, claiming that it had already been released from one of its promissory notes because a third party had assumed that obligation and the bank had given its conformity through an account officer. The case matters because it fixes the rules on a corporation's liability for the acts of its agents — apparent authority and ratification — and clarifies who carries the burden of proof when a corporate officer's authority is challenged.

Procedural History

Inland filed a complaint for injunction, later amended, against the bank and the Provincial Sheriff of Rizal before the Regional Trial Court of Pasig City. The trial court rendered judgment for Inland, permanently restraining the foreclosure and auction sale and ordering the bank to refund a small amount with legal interest. The bank appealed to the Court of Appeals, which modified the decision. The appellate court affirmed the finding that the bank had ratified the Deed of Assignment, but reversed the rest, ordering Inland to pay the bank the sum of 186,241 pesos and 86 centavos with legal interest from December 1979, representing the unpaid balance on the other two promissory notes. The bank moved for partial reconsideration on the ratification issue, and the appellate court denied it. The bank then came to the Supreme Court through petitions for review, which were consolidated and eventually given due course.

Facts

In 1977 Inland obtained various loans and credit accommodations from the bank, then known as Associated Citizens Bank. To secure payment, Inland executed real estate mortgages over three properties in Pasig City, and it issued three promissory notes: one for 155,000 pesos due in January 1978, one for 880,000 pesos due in February 1978, and one for 60,000 pesos due in March 1978. When the first two notes fell due, Inland defaulted, though it authorized the bank to debit 350,000 pesos from its savings account as partial payment.

By a Deed of Assignment dated May 2, 1978, Felix Aranda, president of Inland, assigned his rights and interests in Hanil-Gonzales Construction and Development Corporation to Horacio Abrantes. A subsequent Deed of Assignment of Obligation dated May 26, 1978 provided that Abrantes and Hanil-Gonzales would assume full and complete liability for the 880,000 peso promissory note, and that they would arrange with the bank for its full liquidation. The bank's account officer, Lionel Calo Jr., signed for the bank's conformity to that deed.

In December 1979, Inland was served a Notice of Sheriff's Sale foreclosing the mortgages, prompting its complaint for injunction. The bank answered that it had no knowledge of, and gave no conformity to, the alleged assignment. The trial court found that the bank had ratified Calo's act because its Executive Committee failed to repudiate the assignment within a reasonable time and even approved a restructuring of the assignee's obligations, which included the 880,000 peso loan. The Court of Appeals affirmed the ratification but reversed the permanent injunction, since Inland still owed the bank on the other two notes.

Issues

• Whether or not the bank ratified the Deed of Assignment signed for it by its account officer, Calo.
• Whether or not Calo had the authority to bind the bank in the Deed of Assignment, and who bears the burden of proving that authority.
• Whether or not the ruling on ratification bars the bank from foreclosing on the mortgaged properties for Inland's other unpaid obligations.

Applicable Provisions

The decision rests on the law of agency and corporations rather than on a single codal article, and it construes the doctrine of apparent authority as applied to corporate officers. The governing principle, as the Court states it, is that in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. But if a corporation consciously lets one of its officers or agents act within the scope of an apparent authority, it will be estopped from denying that officer's authority. This principle bears directly on whether Calo's signature bound the bank.

Ruling

On the first issue, the Court held that the bank ratified the Deed of Assignment. The records showed that Calo was the one assigned to transact on the bank's behalf respecting the loan transactions of Inland, Hanil-Gonzales, and Abrantes. The assignee Abrantes notified the bank of his assumption of Inland's obligation in a letter dated July 26, 1979, and the bank replied on November 29, 1982, advising that its Executive Committee had approved the request for restructuring of the outstanding obligations. As a banking institution expected to exercise the highest degree of diligence, the bank was obliged to scrutinize the loan account carefully, and its approval of the restructuring confirmed its knowledge and conformity.

On the second issue, the Court placed the primary burden on the bank. It distinguished the Yao Ka Sin Trading case, where the corporation first proved by clear evidence that its officer was not authorized, presenting its by-laws and a board resolution repudiating the contract, before the burden shifted to the other party. Here, the bank failed to discharge that primary burden: it presented no board resolution, charter, or by-laws showing that Calo lacked authority. The May 1985 inter-office memorandum stating that Calo had no signing authority remained self-serving and was never offered in evidence.

If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from denying such officer's authority.

On the third issue, the Court held that the ratification ruling did not bar foreclosure for the other obligations. The appellate court itself noted that Inland still owed the bank 186,241 pesos and 86 centavos on the other two promissory notes, and that the bank could foreclose if Inland defaulted on those. The lower courts' findings of fact, being rationally based on the evidence, are conclusive on the Court.

Doctrine

A corporation is bound by the acts of its agent when it clothes that agent with apparent authority and holds him out to the public as acting for it; it is then estopped from denying that authority. The party claiming that a corporate officer was unauthorized must first prove the lack of authority by clear evidence, such as a board resolution, the charter, or the by-laws; only then does the burden shift to the other party to prove apparent authority by prior specific acts. Ratification may be inferred from a corporation's failure to repudiate an unauthorized act within a reasonable time, and from its subsequent positive acts, such as approving a restructuring that expressly includes the assigned obligation.

Disposition

The Supreme Court denied the petitions and affirmed the decision of the Court of Appeals, with costs against the petitioner bank.

Remember This

The single line to memorize: a corporation that clothes its officer with apparent authority is estopped from denying that authority, and it must first prove by clear evidence that the officer was unauthorized before the burden shifts. Examiners use this case to test apparent authority, ratification by silence and subsequent acts, and the burden of proof in corporate agency disputes.