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BANATE vs.
PHILIPPINE COUNTRYSIDE RURAL BANK
FACTS:
 spouses Rosendo Maglasang and Patrocinia Monilar (spouses Maglasang) obtained a

loan (subject loan) from PCRB for P1,070,000.00. This was evidenced by a promissory
note.
 To secure the payment of the subject loan, the spouses Maglasang executed, in favor of
PCRB a real estate mortgage over their property including the house constructed
thereon owned by Sps. Cortel (Sps. Maglasang)
 spouses Maglasang obtained two other loans from PCRB which were covered by
separate promissory notes 7 and secured by mortgages on their other properties
 Before the subject loan became due, the spouses Maglasang and the spouses Cortel
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 the other mortgages
 The sps. Maglasang and 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, so they sold to petitioner Violeta Banate the subject
properties for P1,750,000.00
 The spouses Magsalang and the spouses Cortel used the amount to pay the subject loan
with PCRB and an owner’s duplicate Certificate of Title was given to Banate but the title
carries the mortgage lien in favor of PCRB, which they refused to release.
 petitioners instituted an action for specific performance before the RTC to compel PCRB
to execute the release deed.
 PCRB countered the petitioners' allegations by invoking the crosscollateral stipulation in
the mortgage deed and claimed that full payment of the three loans, obtained by the
spouses Maglasang, was necessary before any of the mortgages could be released.
 RTC ruled in favor of the petitioners. It noted that the petitioners, as "necessitous men,"
could not have bargained on equal footing with PCRB in executing the mortgage, and
concluded that it was a contract of adhesion. Therefore, any obscurity in the mortgage
contract should not benefit PCRB.
 On appeal, the CA reversed the RTC's decision. On appeal, the CA reversed the RTC's
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.
 Hence, the present appeal by certiorari before the SC
ISSUE: Whether the purported agreement between the petitioners and Mondigo novated the
mortgage contract over the subject properties and is thus binding upon PCRB.
RULING: NO.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement. An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the debtor
or subrogating a third person in the rights of the creditor (subjective or personal). Under this
mode, novation would have dual functions — one to extinguish an existing obligation, the other
to substitute a new one in its place — requiring a conflux of four essential requisites: (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation.
The second requisite is lacking in this case. Novation presupposes not only the extinguishment
or modification of an existing obligation but, more importantly, the creation of a valid new
obligation. 14 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.
CORP CODE ISSUE: W/N PCRB should be held liable for Mondigo's commitment, on the
basis of the latter's apparent authority.
NO.
Under the doctrine of apparent authority, acts and contracts of the agent, as are within
the apparent scope of the authority conferred on him, although no actual authority to
do such acts or to make such contracts has been conferred, bind the principal. The
principal's liability, however, is limited only to third persons who have been led
reasonably to believe by the conduct of the principal that such actual authority exists,
although none was given. In other words, apparent authority is determined only by the
acts of the principal and not by the acts of the agent. There can be no apparent
authority of an agent without acts or conduct on the part of the principal; such acts or
conduct must have been known and relied upon in good faith as a result of the exercise
of reasonable prudence by a third party as claimant, and such acts or conduct must have
produced a change of position to the third party's detriment.
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 manager's apparent authority to verbally alter
the terms of mortgage contracts. Neither was there any allegation, much less proof, that
PCRB ratified Mondigo's act or is estopped to make a contrary claim.
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.
NOTE: What is a dragnet clause?
As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract.
However, the amounts named as consideration in a contract of mortgage do not limit the
amount for which the mortgage may stand as security if, from the four corners of the
instrument, the intent to secure future and other indebtedness can be gathered. This stipulation
is valid and binding between the parties and is known as the "blanket mortgage clause" (also
known as the "dragnet clause)."
In the present case, the mortgage contract indisputably provides that the subject properties
serve as security, not only for the payment of the subject loan, but also for "such other loans or
advances already obtained, or still to be obtained." The cross-collateral stipulation in the
mortgage contract between the parties is thus simply a variety of a dragnet clause. After
agreeing to such stipulation, the petitioners cannot insist that the subject properties be released
from mortgage since the security covers not only the subject loan but the two other loans as
well.

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BANATE vs.

PHILIPPINE COUNTRYSIDE RURAL BANK

 spouses Rosendo Maglasang and Patrocinia Monilar (spouses Maglasang) obtained a

NOTE: What is a dragnet clause?

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