INTRODUCCIÓN

Ultra vires act

An ultra vires act refers to an act outside or beyond express, implied and incidental corporate powers.

The concept also includes those acts that may ostensibly be within such powers but are, by general or special laws, either proscribed or declared illegal (Rural Bank of Milaor v Ocefemia, G.R. No. 137686, February 8, 2000).

Types of UVA

1. Acts done beyond the powers of the corporation (through BOD)

2. Ultra vires acts by corporate officers

3. Acts or contracts which are per se illegal as being contrary to law.

Applicability of ultra vires doctrine

Ultra vires acts by reason of lack of authority v. Ultra vires acts by reason of illegality (illegal acts)

Instances when the act of the officers bind the corporation

1. If it is provided in the by-laws 2. If authorized by the board

3. Under the doctrine of apparent authority 4. When the act was ratified

Doctrine of apparent authority

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

Instance when the corporation is estopped to deny ratification of contracts or acts entered by its officers or agents

Generally, when the corporation has knowledge that its officers or agents exceed their power, it must promptly disaffirm the contract or act, and allow the other party or third person to act in the belief that it was authorized or has been ratified. Otherwise, if it acquiesces, with knowledge of the facts, or if it fails to disaffirm, ratification will be implied (Premiere Development Bank vs. CA, G.R. No. 159352, Apr. 14, 2004).

Q: Five (5) parcels of land subject of this case were originally owned by Juanita Arellano Ocfemia and Felicisimo Ocfemia. During their lifetime,the said five (5) parcels of land and two (2) others were mortgaged to Rural Bank of Milaor (RBM). The spouses Felicisimo and Juanita were not able to redeem the mortgaged properties and so the mortgage was foreclosed and thereafter ownership thereof was transferred to RBM. Out of the seven (7) parcels that were foreclosed, five (5) of them are in the possession of the the grandchildren of the spouses Felicisimo and Juanita because these five (5) parcels of land were sold by RBM bank to the children of the spoues. The five (5) parcels of land have not been, however transferred in the name of the children of the spouses after they were sold because according to the Assessor's Office the five (5) parcels of land, subject of the sale, cannot be transferred in the name of the buyers as there is a need to have the document of sale registered with the Register of Deeds (RD). In view of the foregoing, Marife, the grandchild of the spouses went to the RD with the Deed of Sale in order to have the same registered. The RD however, informed her that the document of sale cannot be registered without a board resolution of RBM. Marife went to the bank and requested the for a board resolution so that the property can be transferred to the name of Renato Ocfemia. RBM refused her request for a board resolution and made many alibis. After some time, she was told that the resolution of the board would not be released because the RBM had no records from the old manager. May the board of directors of BASIS ULTRA VIRES ACT ILLEGAL ACTS

Lawfulness

Not necessarily unlawful, but outside

the powers of the corporation

Unlawful; against law, morals, public

policy, and public order Ratification Can be ratified Cannot be ratified

Binding effect

Can bind the parties if wholly or partly

executed

Cannot bind the parties

a rural banking corporation be compelled to confirm a deed of absolute sale of real property owned by the corporation which deed of sale was executed by the bank manager without prior authority of the board of directors of the rural banking corporation?

A: Yes. The corporation may be compelled. A bank is liable to innocent third persons where representation is made in the course of its normal business by an agent like the bank manager, even though such agent is abusing her authority. Clearly, persons dealing with her could not be blamed for believing that she was authorized to transact business for and on behalf of the bank. The bank is estopped from questioning the authority of the bank manager to enter into the contract of sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority. Unquestionably, the bank has authorized its manager to enter into the Deed of Sale.

Accordingly, it has a clear legal duty to issue the board resolution sought by respondent's. Having authorized her to sell the property, it behooves the bank to confirm the Deed of Sale so that the buyers may enjoy its full use (Rural Bank of Milaor (Camarines Sur) v. Francisca Ocfemia, et al., G.R. No.

137686, February 8, 2000).

Q: The spouses Vaca executed REM in favor of Associated Bank over their parcel of residential land and the house constructed thereon. For failure of the spouses Vaca to pay their obligation, the subject property was sold at public auction with Associated Bank as the highest bidder. The Transfer Certificate of Title in the name of spouses Vaca, was cancelled and a new one was issued in the name of the Associated Bank. The spouses Vaca, however, commenced an action for the nullification of the real estate mortgage and the foreclosure sale. Associated Bank, on the other hand, filed a petition for the issuance of a writ of possession which was denied by the RTC. Associated Bank, thereafter, obtained a favorable judgment when the CA granted its petition but the spouses Vaca questioned the CA decision. During the pendency of the cases, Associated Bank advertised the property for sale to interested buyers. Rafael and Monaliza Pronstroller bought the same. In view of the pendency of the case between the spouses Vaca and Associated Bank involving the property, Spouses Pronstroller requested that the balance of the purchase price be made payable only upon service

on them of a final decision or resolution of this Court affirming Associated Bank’s right to possess the property. After they made the request and after the payment deadline had lapsed, Spouses Pronstroller and Atty. Soluta, acting for the Associated Bank, executed another Letter-Agreement allowing the former to pay the balance of the purchase price upon receipt of a final order from this Court (in the Vaca case) and/or the delivery of the property to them free from occupants. Is the Associated Bank bound by the Letter-Agreement signed by Atty. Soluta under the doctrine of apparent authority?

A: Yes. The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. Apparent authority is derived not merely from practice. Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him;

or 2)the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was exercised without any objection from its board or shareholders. Undoubtedly, Associated Bank had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation (Associated Bank v. Spouses Rafael and Monaliza Pronstroller, G.R. No. 148444, July 14, 2008).

Spouses Maglasang obtained a loan from PCRB. To secure the payment of the subject loan, a REM was executed. Before the subject loan became due, the spouses Maglasang asked PCRB’s permission to sell the subject properties. They likewise requested that the subject properties be released from the mortgage since the two other loans were adequately secured by other mortgages. The spouses Maglasang claimed that the PCRB, acting through its Branch Manager, Pancrasio Mondigo, verbally agreed to their request, hence, spouses Maglasang sold to Violeta Banate the subject properties. The spouses Magsalangused the amount to pay the subject loan with PCRB. After settling the subject loan, PCRB gave the owner’s duplicate

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a new title in her name. The title, however, carried the mortgage lien in favor of PCRB, prompting the Banate to request from PCRB a Deed of Release of Mortgage. As PCRB refused to comply with the Banate’s request, Banate instituted an action for specific performance to compel PCRB to execute the release deed. Since the subject loan had been fully paid, the RTC considered the petitioners as rightfully entitled to a deed of release of mortgage, pursuant to the verbal agreement that Banate made with PCRB’s branch manager, Mondigo. The CA reversed.

It ruled that Mondigo cannot orally amend the mortgage contract between PCRB, and the spouses Maglasang therefore, the claimed commitment allowing the release of the mortgage on the subject properties cannot bind PCRB. Did the purported agreement between Banate and Mondigo novate the mortgage contract over the subject properties and is thus binding upon PCRB?

A: No. The Court would be unduly stretching the doctrine of apparent authority if the Court would consider the power to undo or nullify solemn agreements validly entered into as within the doctrine’s 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; PCRB’s 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 (Violeta Tudtud Banate, et al., v.

Philippine Countryside Rural Bank, Inc., et al., G.R.

No. 163825, July 13, 2010).

Q: PPI, a fertilizer manufacturer, entered into an arrangement with Janet Layson for the delivery of fertilizers to her, payable from the proceeds of the loan that UCPB extended to her. Layson executed a document called “pagares,” written on the dorsal side of a UCPB promissory note. The pagares stated that Layson had an approved loan with UCPB-Iloilo

Branch. The second portion of the pagares, signed by that branch’s manager Gregory Grey, stated that the assignment has been duly accepted and payment duly guaranteed within 60 days from PPI’s Invoice. But contrary to her undertakings, Layson withdrew with branch manager Grey’s connivance, the loan that UCPB granted her. On the strength of the three documents, PPI delivered quantities of fertilizers to Layson. When PPI presented the documents of the financed transactions to UCPB for collection, the bank denied the claim on the ground that it neither authorized the transactions nor the execution of the documents which were not part of its usual banking transactions. UCPB claimed that branch manager Grey exceeded his authority in guaranteeing payment of Layson’s purchases on credit. UCPB contends that the pagares were illegal and void since banking laws prohibit bank officers from guaranteeing loans of bank clients. Is UCPB bound by Grey’s undertaking on its behalf to deliver to PPI the proceeds of the bank’s loan in payment of the fertilizers Layson bought?

A: No. UCPB is not bound. A corporation like UCPB is liable to innocent third persons where it knowingly permits its officer, or any other agent, to perform acts within the scope of his general or apparent authority, holding him out to the public as possessing power to do those acts. But, here, it is plain from the guarantee Grey executed that he was acting for himself, not in representation of UCPB. UCPB cannot be bound by Grey’s above undertaking since he appears to have made it in his personal capacity. He signed it under his own name, not in UCPB’s name or as its branch manager. Indeed, the wordings of the undertaking do not at all make any allusion to UCPB (United Coconut Planters Bank v. Planters Products, Inc., et al., G.R. No. 179015, June 13, 2012).

Consequences of ultra vires acts

Effects of an ultra vires act

Ultra vires acts entered into by the board of directors binds the corporation and the courts will not interfere unless terms are oppressive and unconscionable (Gamboa vs. Victoriano, G.R. No.

L-43324. May 5, 1979).

These are the effects for the specific acts:

1. Executed contract – courts will not set aside or interfere with such contracts;

2. Executory contracts – no enforcement even at the suit of either party (void and unenforceable);

3. Partly executed and partly executory – principle of

“no unjust enrichment at expense of another”

shall apply;

4. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.

Remedies in case of ultra vires act 1. State

a. Obtain a judgment of forfeiture; or

b. The SEC may suspend or revoke the certificate of registration

2. Stockholders a. Injunction; or b. Derivative suit

3. Creditors - Nullification of contract in fraud of creditors.

Q: X Corp., whose business purpose is to manufacture and sell vehicles, invested its funds in Y Corp., an investment firm, through a resolution of its Board of Directors. The investment grew tremendously on account of Y Corp.'s excellent business judgment. But a minority stockholder in X Corp. assails the investment as ultra vires. Is he right and, if so, what is the status of the investment?

(2011 Bar Question)

A: Yes, it is an ultra vires act of its Board of Directors but voidable only, subject to stockholders’

ratification.