Execution by agent of mortgage agreement on behalf of principal

Several cases decided by the Supreme Court indicate that the agent should be very careful in the manner he or she signs a mortgage contract on behalf of the principal; otherwise, the mortgage may be binding upon the agent only.

In Far East Bank and Trust Company (Now Bank of the Philippine Islands) and Rolando Borja, Deputy Sherrif vs. Sps. Ernesto and Leonor C. Cayetano, G.R. No. 179909, January 25, 2010, the principal executed a special power of attorney in favor of her daughter authorizing her to contract a loan from a bank and to mortgage the principal’s two lots. The principal also executed an affidavit of non-tenancy for the approval of the loan. The bank granted a loan secured by two promissory notes and a real estate mortgage over the principal’s two lots. The mortgage document was signed by the agent and her husband as mortgagors in their individual capacities, without stating that the agent was executing the mortgage contract for and in behalf of the principal.

The bank foreclosed the mortgage due to non-payment of the loan. A notice of public auction sale was sent to principal. The latter’s lawyer responded with a letter to the bank requesting that the public auction be postponed. The letter went unheeded and the public auction was held as scheduled wherein the mortgaged properties were sold to the bank. Subsequently, the bank consolidated its title and obtained new titles in its name after the redemption period lapsed without the principal taking any action.

Around five years later, the principal filed a complaint for annulment of mortgage and extrajudicial foreclosure of the properties with damages with the regional trial court (RTC) of Naga City. The principal sought nullification of the real estate mortgage and extrajudicial foreclosure sale, as well as the cancellation of the bank’s title over the properties.

The RTC rendered judgment in favor of the principal, holding that the principal cannot be bound by the real estate mortgage executed by the agent unless it is shown that the same was made and signed in the name of the principal; hence, the mortgage will bind the agent only.

The Court of Appeals (CA) affirmed the RTC’s ruling. It held that it must be shown that the real estate mortgage was executed by the agent on behalf of the principal, otherwise the agent may be deemed to have acted on his own and the mortgage is void. However, the CA further declared that the principal loan agreement was not affected, which had become an unsecured credit.

The Supreme Court held that the principal is not bound by the real estate mortgage executed by the authorized agent in her own name without indicating the principal. It is not sufficient for the principal to have authorized the agent through a special power of attorney to execute the mortgage on behalf of the principal; the mortgage contract itself must clealy state that the agent was executing the mortgage contract for and on behalf of the principal.

The Supreme Court cited three earlier rulings in support of its finding:

(1) The Philippine Sugar Estates Development Co., Ltd., Inc. vs. Poizat, et al, 48 Phil. 536 (1925), where Gabriela Andrea de Coster (Coster) executed a general power of attorney authorizing her husband, Juan Poizat (Poizat), to obtain a loan and to secure the same with mortgage, pledge or personal securities. Although the real estate mortgage mentioned that it was entered also in Poizat’s capacity as attorney-in-fact of Coster, Poizat signed the contract in his own name without any indication that he also signed it as the attorney-in-fact of his wife. The Supreme Court ruled that while Poizat may have had the authority to borrow money and mortgage the real property of his wife, the law specifies how and in what manner it must be done, and the stubborn fact remains that, as to the transaction in question, that power was never exercised;

(2) Rural Bank of Bombon (Camarines Sur), Inc. vs. Court of Appeals, 212 SCRA 25 (1992), where the Supreme Court held that “Aquino’s act of signing the Deed of Real Estate Mortgage in his name alone as mortgagor, without any indication that he was signing for and in behalf of the property owner, Ederlinda M. Gallardo, bound himself alone in his personal capacity as a debtor of the petitioner Bank and not as the agent or attorney-in-fact of Gallardo”;

(3) Gozun vs. Mercado, 511 SCRA 305 (2006), where the Supreme Court held that the principal was not liable for the “cash advance” given to the agent who signed the receipt in her name alone, without indicating therein that she was acting for and in behalf of respondent. Thus, the Supreme Court ruled that the agent bound herself in her personal capacity and not as an agent of the principal or anyone for that matter.

From the foregoing, it is not sufficient that the principal executed a power of attorney authorizing the agent to execute the mortgage contract or that the mortgage contract mention that it was entered into by the agent as attorney-in-fact of the principal. It is essential that the agent must sign the contract on behalf of the principal.

While the Supreme Court held in Cayetano that the principal is not bound by the real estate mortgage executed by the agent, the Supreme Court ruled that laches prevent the principal from questioning the validity of the mortgage:

Notwithstanding the nullity of the real estate mortgage executed by Tabing and her husband, we find that the equity principle of laches is applicable in the instant case. Laches is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. Its essential elements are: (1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation complained of; (2) delay in asserting complainant’s right after he had knowledge of the defendant’s conduct and after he has an opportunity to sue; (3) lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is accorded to the complainant.

There is no absolute rule on what constitutes laches. It is a creation of equity and applied not really to penalize neglect or sleeping upon one’s rights but rather to avoid recognizing a right when to do so would result in a clearly inequitable situation. The question of laches, we said, is addressed to the sound discretion of the court and each case must be decided according to its particular circumstances. Verily, in a number of cases, it had been held that laches, the essence of which is the neglect to assert a right over a long period of time, may prevent recovery of a titled property.

In the present case, records clearly show that respondents could have filed an action to annul the mortgage on their properties, but for unexplained reasons, they failed to do so. They only questioned the loan and mortgage transactions in December 1996, or after the lapse of more than five (5) years from the date of the foreclosure sale. It bears noting that the real estate mortgage was registered and annotated on the titles of respondents, and the latter were even informed of the extrajudicial foreclosure and the scheduled auction. Instead of impugning the real estate mortgage and opposing the scheduled public auction, respondents’ lawyer wrote a letter to petitioner and merely asked that the scheduled auction be postponed to a later date. Even after five (5) years, respondents still failed to oppose the foreclosure and the subsequent transfer of titles to petitioner when their agent, Tabing, acting in behalf of Cayetano, sent a letter proposing to buy back the properties. It was only when the negotiations failed that respondents filed the instant case. Clearly, respondents slept on their rights.