Act of Account Officer = Act of the Bank

Is the bank bound by the signature of a bank account officer who gave conformity to the assignment of a promissory note from the bank’s debtor to a third party?

In Westmont Bank (Formerly Associated Citizens Bank and now United Overseas Bank, Philis), et al. vs. Inland Construction and Devt. Corp. / Westmont Bank Vs. CA, et al. G.R. No. 123650/G.R. No. 123822,  March 23, 2009, the Supreme Court ruled in the affirmative.

Inland Construction and Development Corp. (Inland) obtained various loans and other credit accommodations from petitioner, then known as Associated Citizens Bank (the bank) which later became United Overseas Bank, Phils., and still later Westmost Bank) in 1977. 

To secure the payment of its obligations, Inland executed real estate mortgages over three real properties in Pasig City covered by Transfer Certificates of Title Nos. 4820, 4821 and 4822.  Inland likewise issued promissory notes in favor of the bank (including Promissory Note No. BD-2884-77  for PhP880,000.00).

It appears that by a Deed of Assignment, Conveyance and Release dated May 2, 1978, Felix Aranda, President of Inland, assigned and conveyed all his rights and interests at Hanil-Gonzales Construction & Development (Phils.) Corporation (Hanil-Gonzales Corporation) in favor of Horacio Abrantes (Abrantes), Executive Vice-President and General Manager of Hanil-Gonzales Corporation.  Under the same Deed of Assignment, it appears that Abrantes assumed, among other obligations of Inland and Aranda, Promissory Note No. BD-2884-77 in the amount of P800,000 as shown in the May 26, 1978 Deed of Assignment of Obligation in which Aranda and Inland, on one hand, and Abrantes and Hanil-Gonzales Corporation, on the other hand, executed.

 The bank’s Account Officer, Lionel Calo Jr. (Calo), signed a conformity to the deed.

On December 14, 1979, Inland was served a Notice of Sheriff’s Sale foreclosing the real estate mortgages over its real properties, prompting it to file a complaint for injunction against the bank and the Provincial Sheriff of Rizal at the Regional Trial Court (RTC) of Pasig City.  This complaint was later amended.

Answering the amended complaint, the bank underscored that it “had no knowledge, much less did it give its conformity to the alleged assignment of the obligation covered by PN# BD-2884 [-77].”

The trial court found that the bank ratified the act of its account officer Calo, thus:

x x x x.  Culled from the evidence on record, the Court finds that the defendant Bank ratified the act of Calo when its Executive Committee failed to repudiate the assignment within a reasonable time and even approved the request for a restructuring of Liberty Const. & Dev. Corp./Hanil-Gonzales Construction & Development Corp.’s obligations, which included the P880,000.00 loan (Exhibit “U” to “X”, and its submarkings).  Clearly, the assumption of the loan was very well known to the defendant Bank and the latter posed no objection to it.  In fact, the positive act on the part of the defendant in restructuring the loan of the assignee attest to its consent in the said transaction.  The evidence on record conveys the fact that the Hanil-Gonzales Const. and Development Corp. assumed the obligation of the plaintiff on the SECOND NOTE.  Later, it asked the defendant for a restructuring of its loan, including the P880,000.00 loan.  Thereafter, payments were made by the assignee to the defendant Bank.  The preponderance of evidence tilts heavily in favor of the plaintiff claiming that a case of delegacion occurs.  (Emphasis and italics supplied; Underscoring in the original)

It accordingly rendered judgment in favor of Inland by Decision of March 31, 1992, the dispositive portion of which reads:   

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, permanently, perpetually and forever restraining and enjoining the defendants Associated Citizens Bank and the Sheriff of this Court from proceeding with the foreclosure of and conducting an auction sale on the real estate covered by and embraced in Transfer Certificates of Title Nos. 4820, 4821 and 4822 of the Register of Deeds of Rizal (now Pasig, Metro Manila) and to refund to plaintiff the amount of P8,866.89, with legal interest thereon from the filing of the complaint until full payment, with costs

 SO ORDERED.  (Emphasis and underscoring supplied)

The bank appealed the trial court’s decision to the Court of Appeals which, by Decision of May 31, 1995, modified the same, disposing as follows:

WHEREFORE, the decision appealed from is hereby AFFIRMED only insofar as it finds appellant Associated Bank to have ratified the Deed of Assignment (Exhibit “O”), but REVERSED in all other respects, and judgment is accordingly rendered ordering the plaintiff-appellee Inland Construction and Development Corporation to pay defendant-appellant Associated Bank the sum of One Hundred Eighty Six Thousand Two Hundred Forty One Pesos and Eighty Six Centavos (P186,241.86) with legal interest thereon computed from December 21, 1979 until the same is fully paid. . .

In affirming the observation of the trial court that the bank ratified the assignment of Inland’s Promissory Note No. BD-2884-77, the appellate court discoursed as follows:    

In the instant case, both the assignors (Aranda and Inland) and assignees (Abrantes and Hanil-Gonzales) in the subject deed of assignment have been major clients of Associated Bank for several years with accounts amounting to millions of pesos.  For several years, Associated Bank had, either intentionally or negligently, been habitually clothing Calo with the apparent powers to perform acts in behalf of the bank. . .  

Calo signed the subject deed of assignment on or about May 26, 1978.  The principal obligation covered by the deed involved a hefty sum of eight hundred eighty thousand pesos (P880,000.00).  Despite the enormity of the amount involved, Associated Bank never made any attempt to repudiate the act of Calo until almost seven (7) years later, when Mitos C. Olivares, Manager of the Cash Department of Associated Bank, issued an INTER-OFFICE MEMORANDUM dated May 20, 1985 which pertinently reads: 

“2) Conforme of Associated Bank signed by Lionel Calo Jr. has no bearing since he has no authority to sign for the bank as he was only an account officer with no signing authority. . .

5) I suggest, Mr. Calo be asked to be present at court hearings to explain why he signed for the bank, knowing his limitations”

The abovequoted inter-office memorandum is addressed internally to the other offices within Associated Bank.  It is not addressed to Inland or any outsider for that matter.  Worse, it was not even offered in evidence by Associated Bank to give Inland the opportunity to object to or comment on the said document, but was merely attached as one of the annexes to the bank’s MEMORANDUM FOR DEFENDANTS.  Obviously, no evidentiary weight may be attached to said inter-office memorandum, which is even self serving.  In fact, it ought not to be considered at all.   (Emphasis and underscoring supplied)

The appellate court, however, specifically mentioned that the “lower court erred when it rendered a decision which ‘permanently, perpetually and forever’ restrains the sheriff from proceeding with the threatened foreclosure auction sale of the subject mortgage properties.”

The bank moved for partial reconsideration of the appellate court’s decision on the aspect of its ratification of the Deed of Assignment but the same was denied by Resolution of January 24, 1996.

The bank maintains before the Supreme Court that Calo had no authority to bind it in the Deed of Assignment and that a single, isolated unauthorized act of its agent is not sufficient to establish that it clothed him with apparent authority.  Petitioner adds that the records fail to disclose evidence of similar acts of Calo executed either in its favor or in favor of other parties.  Moreover, petitioner reasserts that the unauthorized act of Calo never came to its knowledge, hence, it is not estopped from repudiating the Deed of Assignment.

The Supreme Court ruled that the the bank ratified the deed of assignment.  The Supreme Court held:

 The general rule remains that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation.  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.
 
The records show that Calo was the one assigned to transact on petitioner’s behalf respecting the loan transactions and arrangements of Inland as well as those of Hanil-Gonzales and Abrantes.  Since it conducted business through Calo, who is an Account Officer, it is presumed that he had authority to sign for the bank in the Deed of Assignment.
 
Petitioner cannot feign ignorance of the May 26, 1978 Deed of Assignment. . . Notably, assignee Abrantes notified petitioner about his assumption of Inland’s obligation.  
  
That petitioner sent a reply-letter, dated November 29, 1982, to the letter to it of assignee Abrantes indicates that it had full and complete knowledge of the assumption by Abrantes of Inland’s obligation.  
 
Respecting this reply-letter of the bank granting Hanil-Gonzales’ request to restructure its loans, petitioner, as a banking institution, is expected to have exercised the highest degree of diligence and meticulousness in the conduct of its business.   When it received the loan restructuring request, with specific mention of Inland’s Promissory Note No. BD-2884-77, petitioner-bank was under obligation to fastidiously scrutinize such loan account.  And since it clearly approved the request for restructuring, any “uncertainty” that its reply-letter approving such request may not thus work to prejudice Hanil-Gonzales or Inland.        
 
Petitioner relies heavily, however, on the Court’s pronouncement in Yao Ka Sin Trading that it was incumbent upon, in this case, Inland to prove that petitioner had clothed its account officer with apparent power to conform to the Deed of Assignment.
 
Petitioner’s simplistic reading of Yao Ka Sin Trading v. Court of Appeals does not impress.  In Yao Ka Sin Trading, the therein respondent cement company had shown by clear and convincing evidence that its president was not authorized to undertake a particular transaction.  It presented its by-laws stating that only its board of directors has the power to enter into an agreement or contract of any kind.   The company’s board of directors even forthwith issued a resolution to repudiate the contract.  Thus, it was only after the company successfully discharged its burden that the other party, the therein petitioner Yao Ka Sin Trading, had to prove that indeed the cement company had clothed its president with the apparent power to execute the contract by evidence of similar acts executed in its favor or in favor of other parties.  
 
Unmistakably, the Court’s directive in Yao Ka Sin Trading is that a corporation should first prove by clear evidence that its corporate officer is not in fact authorized to act on its behalf before the burden of evidence shifts to the other party to prove, by previous specific acts, that an officer was clothed by the corporation with apparent authority.   
 
It bears noting that in Westmont Bank v. Pronstroller, the therein petitioner Westmont Bank, through a management committee, proved that it rejected the letter-agreement entered into by its assistant vice-president.  Consequently, the therein respondent had to prove by citing other instances of the said officer’s apparent authority to bind the bank-therein petitioner.         
 
In the present petitions, petitioner-bank failed to discharge its primary burden of proving that Calo was not authorized to bind it, as it did not present proof that Calo was unauthorized.  It did not present, much less cite, any Resolution from its Board of Directors or its Charter or By-laws from which the Court could reasonably infer that he indeed had no authority to sign in its behalf or bind it in the Deed of Assignment.  The May 20, 1985 inter-office memorandum stating that Calo had “no signing authority” remains self-serving as it does not even form part of petitioner’s body of evidence
 
Thus, the assertion that the petitioner cannot be faulted for its delay in repudiating the apparent authority of Calo is similarly flawed, there being no evidence on record that it had actually repudiated such apparent authority.  It should be noted that it was the bank which pleaded that defense in the first place.  What is extant in the records is a reasonable certainty that the bank had ratified the Deed of Assignment.      
 
The assumption that a ruling on the issue of ratification would affect any and all foreclosure proceedings on the mortgaged properties remains unfounded.  For the challenged appellate court’s Decision still mentioned the possibility of foreclosing on the mortgaged properties as Inland was still indebted to the bank in the amount of P186, 241.86 covering the other two promissory notes (No. BD-2739-77 and No. BD-2997) and other obligations that Inland was not able to satisfy upon maturity.    

Justtice Brion dissented, stating:

I dissent based on three points.  First, the ponencia misappreciated the rule on burden of proof and burden of evidence by blaming the bank for the failure to prove that Calo had the authority to bind it.  Second, as the lower courts did, the ponencia glossed over evidence on record that would lead to a contrary conclusion.  Third, on very thin evidentiary support, the ponencia rushed to the conclusion that there was a novation that resulted in the substitution of debtor in the petitioner’s loan agreement with respondent. 

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