VIOLETA TUDTUD BANATE, MARY MELGRID M. CORTEL, BONIFACIO CORTEL, ROSENDO MAGLASANG, and PATROCINIA MONILAR, vs PHILIPPINE COUNTRYSIDE RURAL BANK (LILOAN, CEBU), INC. and TEOFILO SOON, JR.

G.R. 163825 July 12, 2010

Corporate Officers 

Facts: On July 22, 1997, petitioner spouses Rosendo Maglasang and Patrocinia Monilar obtained a loan from PCRB for P1,070,000.00 secured by a real estate mortgage.

Sometime in November 1997, the spouses Maglasang and the spouses Cortel asked PCRBs permission to sell the subject properties and be released from the mortgage since their two other loans were adequately secured by the other mortgages. The spouses Maglasang and the spouses Cortel claimed that the PCRB, acting through its Branch Manager, Pancrasio Mondigo, verbally agreed to their request but required first the full payment of the subject loan. 

After settling the subject loan, PCRB gave the owners duplicate certificate of title to the buyer, Banate, who was able to secure a new title in her name. However, the title still carried the mortgage lien in favor of PCRB, prompting the petitioners to request from PCRB a Deed of Release of Mortgage. PCRB refused to comply with the petitioners request so the petitioners instituted an action for specific performance before the RTC to compel PCRB to execute the release deed. PCRB considered Banate as a buyer in bad faith as she was fully aware of the existing mortgage in its favor when she purchased the subject properties from the spouses Maglasang and the spouses Cortel. 

The RTC ruled that the petitioners are rightfully entitled to a deed of release of mortgage, pursuant to the verbal agreement that the petitioners made with PCRBs branch manager, Mondigo. 

On appeal, the CA reversed the RTCs decision. The CA did not consider as valid the petitioners new agreement with Mondigo, which would novate the original mortgage contract containing the cross-collateral stipulation. It ruled that Mondigo cannot orally amend the mortgage contract between PCRB, and the spouses Maglasang and the spouses Cortel; therefore, the claimed commitment allowing the release of the mortgage on the subject properties cannot bind PCRB. 

Issue: Whether the purported agreement between the petitioners and PCRB’s branch manager novated the mortgage contract over the subject properties and is thus binding upon PCRB. 

Held: No. Novation presupposes not only the extinguishment or modification of an existing obligation but, more importantly, the creation of a valid new obligation. For the consequent creation of a new contractual obligation, consent of both parties is, thus, required. As a general rule, no form of words or writing is necessary to give effect to a novation. Nevertheless, where either or both parties involved are juridical entities, proof that the second contract was executed by persons with the proper authority to bind their respective principals is necessary. 

Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. The power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. In the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. 

However, just as a natural person 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 its officers, committees or agents. The authority of these 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. 

In the present case, the decision of the trial court was utterly silent on the manner by which PCRB, as supposed principal, has clothed or held out its branch manager as having the power to enter into an agreement, as claimed by petitioners. No proof of the course of business, usages and practices of the bank about, or knowledge that the board had or is presumed to have of, its responsible officers acts regarding bank branch affairs, was ever adduced to establish the branch managers apparent authority to verbally alter the terms of mortgage contracts. Neither was there any allegation, much less proof, that PCRB ratified Mondigos act or is estopped to make a contrary claim. 

Further, we would be unduly stretching the doctrine of apparent authority were we to consider the power to undo or nullify solemn agreements validly entered into as within the doctrines ambit. Although a branch manager, within his field and as to third persons, is the general agent and is in general charge of the corporation, with apparent authority commensurate with the ordinary business entrusted him and the usual course and conduct thereof, yet the power to modify or nullify corporate contracts remains generally in the board of directors. Being a mere branch manager alone is insufficient to support the conclusion that Mondigo has been clothed with apparent authority to verbally alter terms of written contracts, especially when viewed against the telling circumstances of this case: the unequivocal provision in the mortgage contract; PCRBs vigorous denial that any agreement to release the mortgage was ever entered into by it; and, the fact that the purported agreement was not even reduced into writing considering its legal effects on the parties interests. To put it simply, the burden of proving the authority of Mondigo to alter or novate the mortgage contract has not been established.