Legal library › Case digests › Commercial Law
Case digest · Ultra vires; corporate power vs. apparent authority
University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas, et al.
A university’s vice president for finance mortgaged school land to secure a thrift bank’s loans. Seventeen years later, the bank threatened to foreclose.
Facts
February to May 1982
The bank, then the Central Bank of the Philippines, extended a ₱1.9 million standby emergency credit to First Iligan Savings & Loan Association, Inc. (FISLAI), a thrift bank.
May 25, 1982
The university’s Vice President for Finance executed a real estate mortgage over the university’s property in Cagayan de Oro City as security for FISLAI’s loan. As proof of his authority, he showed a Secretary’s Certificate reciting a board resolution.
November 5, 1982
After an additional ₱620,700 loan to FISLAI, he executed a second mortgage, over two university properties in Iligan City, as additional security for FISLAI’s loans.
June 18, 1999
By then FISLAI had merged into another thrift bank, which was later liquidated. The bank told the university it would foreclose unless the outstanding obligation of ₱12,534,907.73 was paid. The university denied that its properties were mortgaged and denied receiving any loan proceeds.
July 16, 1999
The university sued to annul the mortgages in the trial courts of Cagayan de Oro City and Iligan City. It said it never authorized the officer, never ratified the mortgages, and as an educational institution could not mortgage its properties to secure another’s debts.
2001
Both trial courts ruled for the university and annulled the mortgages (in Iligan, also the foreclosure sale). The corporate secretary testified that the board issued no resolution to support her certificate, and the bank’s own witness admitted there was none.
December 17, 2009
The Court of Appeals reversed. It held that the notarized Secretary’s Certificate clothed the officer with apparent authority, and that the bank had relied on it in good faith.
Issue
Is the university bound by mortgages its officer executed over university land to secure the loans of another company?
Ruling
No. The petition was granted, the Court of Appeals was reversed, and the trial courts’ decisions were reinstated.
The Court ruled for the university on two grounds. First, the mortgages were ultra vires: an educational institution has no power to secure the loans of others, and securing a thrift bank’s loans had no connection to running a school. Whatever shares the university may have held in the thrift banks, as the bank argued, did not change this, because what is ultra vires before a corporation acquires shares in another is still ultra vires after. Second, the officer had no authority: the notarized Secretary’s Certificate was issued without a supporting board resolution, so it produced no effect, and apparent authority does not answer whether the corporation had the power at all. There was no ratification either: the university received no loan proceeds or other consideration and appears to have been unaware of the mortgages until the 1999 demand. Banks, held to a high standard of diligence, cannot rely on assumptions. The Court noted that acts merely beyond a corporation’s powers are not void ab initio, but these mortgages could not bind the university. The bank won on one issue only: its action on the mortgages had not prescribed.
“Petitioner does not have the power to mortgage its properties in order to secure loans of other persons. As an educational institution, it is limited to developing human capital through formal instruction. It is not a corporation engaged in the business of securing loans of others.”
Doctrine
Unlike natural persons, corporations “have no inherent powers.” As the Court put it: “Third persons dealing with corporations cannot assume that corporations have powers.” To test whether an act is within a corporation’s purposes, the Court quoted Montelibano, et al. vs. Bacolod-Murcia Milling Co., Inc., G.R. No. L-15092, May 18, 1962, which itself quotes Fletcher, an American treatise on corporations: “The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers and reasonably necessary to their exercise.” The decision applied Sec. 45 of the Corporation Code of 1980 (B.P. Blg. 68); the rule is now Sec. 44 of the Revised Corporation Code.
Compare: bound
In Republic of the Philippines vs. Acoje Mining Company, Inc., G.R. No. L-18062, February 28, 1963, a mining company was held to its board resolution because a post office at its remote camp was “a reasonable and proper adjunct to the conduct of the business of appellant company.”
Bar tip
Keep two questions apart: did the corporation have the power, and did the officer have the authority? Apparent authority speaks only to the second. A finding of apparent authority cannot give a corporation a power it does not have.
Hear it explained
Ultra Vires, Podcast Ep. 5, at 5:50
Follow Forlawssake
Get the next case explainer when it’s out.
New videos and episodes come out on YouTube, Spotify and TikTok. Follow there, and the app tells you when the next one is posted. It’s free.
This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.