Real Contracts
OBJECT OF THE CONTRACT; CASE AT BAR. — A loan
[G.R. No. 133632. February 15, 2002.]
BPI INVESTMENT CORPORATION, petitioner, vs.
HON. COURT OF APPEALS and ALS MANAGEMENT &
DEVELOPMENT CORPORATION, respondents.
SYNOPSIS
The appellate court affirmed the judgment of the
Regional Trial Court of Pasig City in a case for
foreclosure of mortgage by petitioner BPI Investment
Corporation (BPIIC for brevity) against private
respondents ALS Management and Development
Corporation and Antonio K. Litonjua, consolidated with
Civil Case No. 52093, for damages with prayer for the
issuance of a writ of preliminary injunction by the
private respondents against said petitioner. The trial
court held that private respondents were not in default
in the payment of their monthly amortization, hence, the
extrajudicial foreclosure conducted by BPIIC was
premature and made in bad faith. In the instant petition,
petitioner contended that the Court of Appeals erred in
ruling that because a simple loan is perfected upon the
delivery of the object of the contract, the loan contract in
this case was perfected only on September 13, 1982.
Petitioner claimed that a contract of loan is a consensual
contract, and a loan contract is perfected at the time the
contract of mortgage is executed conformably with the
Court's ruling in Bonnevie v. Court of Appeals. In the
present case, the loan contract was perfected on March
31, 1981, the date when the mortgage deed was
executed, hence, the amortization and interests on the
loan should be computed from said date. HaAISC
The Supreme Court affirmed the judgment of the Court
of Appeals with modification as to the damages. The
Court ruled that a loan contract is not a consensual
contract but a real contract. It is perfected only upon the
delivery of the object of the contract. Petitioner
misapplied Bonnevie. The contract in Bonnevie declared
by the Court as a perfected consensual contract falls
under the first clause of Article 1934, Civil Code. It is an
accepted promise to deliver something by way of simple
loan. In the present case, the loan contract between BPI,
on the one hand, and ALS and Litonjua, on the other,
was perfected only on September 13, 1982, the date of
the second release of the loan. Following the intentions
of the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private
respondents' obligation to pay commenced only on
October 13, 1982, a month after the perfection of the
contract.
SYLLABUS
1. CIVIL LAW; CONTRACTS; LOAN; NOT A
CONSENSUAL CONTRACT BUT A REAL CONTRACT; IT
IS PERFECTED ONLY UPON DELIVERY OF THE
contract is not a consensual contract but a real contract.
It is perfected only upon the delivery of the object of the
contract. Petitioner misapplied Bonnevie. The contract in
Bonnevie declared by this Court as a perfected
consensual contract falls under the first clause of Article
1934, Civil Code. It is an accepted promise to deliver
something by way of simple loan. In Saura Import and
Export Co. Inc. vs. Development Bank of the Philippines,
44 SCRA 445, petitioner applied for a loan of P500,000
with respondent bank. The latter approved the
application through a board resolution. Thereafter, the
corresponding mortgage was executed and registered.
However, because of acts attributable to petitioner, the
loan was not released. Later, petitioner instituted an
action for damages. We recognized in this case, a
perfected consensual contract which under normal
circumstances could have made the bank liable for not
releasing the loan. However, since the fault was
attributable to petitioner therein, the court did not
award it damages. A perfected consensual contract, as
shown above, can give rise to an action for damages.
However, said contract does not constitute the real
contract of loan which requires the delivery of the object
of the contract for its perfection and which gives rise to
obligations only on the part of the borrower. In the
present case, the loan contract between BPI, on the one
hand, and ALS and Litonjua, on the other, was perfected
only on September 13, 1982, the date of the second
release of the loan. Following the intentions of the
parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private
respondents' obligation to pay commenced only on
October 13, 1982, a month after the perfection of the
contract.
2. ID.; ID.; ID.; INVOLVES RECIPROCAL
OBLIGATION WHEREIN THE OBLIGATION OR PROMISE
OF EACH PARTY IS THE CONSIDERATION FOR THAT
OF THE OTHER. — We also agree with private
respondents that a contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each
party is the consideration for that of the other. As
averred by private respondents, the promise of BPIIC to
extend and deliver the loan is upon the consideration
that ALS and Litonjua shall pay the monthly
amortization commencing on May 1, 1981, one month
after the supposed release of the loan. It is a basic
principle in reciprocal obligations that neither party
incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is
incumbent upon him. Only when a party has performed
his part of the contract can he demand that the other
party also fulfills his own obligation and if the latter
fails, default sets in. Consequently, petitioner could only
demand for the payment of the monthly amortization
after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract.
Therefore, in computing the amount due as of the date
when BPIIC extrajudicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 and not
May 1, 1981. HESCcA
3. ID.; DAMAGES; NO BASIS FOR AWARD OF
MORAL AND EXEMPLARY DAMAGES; NOMINAL
DAMAGES AWARDED TO RESPONDENTS BY REASON
OF PETITIONER'S NEGLIGENCE. — As admitted by
private respondents themselves, they were irregular in
their payment of monthly amortization. Conformably
with our ruling in SSS, we can not properly declare
BPIIC in bad faith. Consequently, we should rule out the
award of moral and exemplary damages. However, in our
view, BPIIC was negligent in relying merely on the
entries found in the deed of mortgage, without checking
and correspondingly adjusting its records on the amount
actually released to private respondents and the date
when it was released. Such negligence resulted in
damage to private respondents, for which an award of
nominal damages should be given in recognition of their
rights which were violated by BPIIC. For this purpose,
the amount of P25,000 is sufficient.
DECISION
QUISUMBING, J p:
This petition for certiorari assails the decision dated
February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No.
38887. The appellate court affirmed the judgment of the
Regional Trial Court of Pasig City, Branch 151, in (a)
Civil Case No. 11831, for foreclosure of mortgage by
petitioner BPI Investment Corporation (BPIIC for brevity)
against private respondents ALS Management and
Development Corporation and Antonio K. Litonjua, 1
consolidated with (b) Civil Case No. 52093, for damages
with prayer for the issuance of a writ of preliminary
injunction by the private respondents against said
petitioner. SAHaTc
The trial court had held that private respondents were
not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure
conducted by BPIIC was premature and made in bad
faith. It awarded private respondents the amount of
P300,000 for moral damages, P50,000 for exemplary
damages, and P50,000 for attorney's fees and expenses
for litigation. It likewise dismissed the foreclosure suit
for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16¼%
per annum from Ayala Investment and Development
Corporation (AIDC), the predecessor of petitioner BPIIC,
for the construction of a house on his lot in New Alabang
Village, Muntinlupa. Said house and lot were mortgaged
to AIDC to secure the loan. Sometime in 1980, Roa sold
the house and lot to private respondents ALS and
Antonio Litonjua for P850,000. They paid P350,000 in
cash and assumed the P500,000 balance of Roa's
indebtedness with AIDC. The latter, however, was not
willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of
P500,000 to be applied to Roa's debt and secured by the
same property, at an interest rate of 20% per annum
and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal
monthly amortization of P9,996.58 and penalty interest
at the rate of 21% per annum per day from the date the
amortization became due and payable.
Consequently, in March 1981, private respondents
executed a mortgage deed containing the above
stipulations with the provision that payment of the
monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roa's
arrearages by paying BPIIC the sum of P190,601.35.
This reduced Roa's principal balance to P457,204.90
which, in turn, was liquidated when BPIIC applied
thereto the proceeds of private respondents' loan of
P500,000.
On September 13, 1982, BPIIC released to private
respondents P7,146.87, purporting to be what was left of
their loan after full payment of Roa's loan.
In June 1984, BPIIC instituted foreclosure proceedings
against private respondents on the ground that they
failed to pay the mortgage indebtedness which from May
1, 1981 to June 30, 1984, amounted to Four Hundred
Seventy Five Thousand Five Hundred Eighty Five and
31/100 Pesos (P475,585.31). A notice of sheriff's sale
was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case
No. 52093 against BPIIC. They alleged, among others,
that they were not in arrears in their payment, but in
fact made an overpayment as of June 30, 1984. They
maintained that they should not be made to pay
amortization before the actual release of the P500,000
loan in August and September 1982. Further, out of the
P500,000 loan, only the total amount of P464,351.77
was released to private respondents. Hence, applying the
effects of legal compensation, the balance of P35,648.23
should be applied to the initial monthly amortization for
the loan.
On August 31, 1988, the trial court rendered its
judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of
ALS Management and Development Corporation and
Antonio K. Litonjua and against BPI Investment
Corporation, holding that the amount of loan granted by
BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of
1% per annum, payable on equal monthly and
successive amortizations at P9,283.83 for ten (10) years
or one hundred twenty (120) months. The amortization
schedule attached as Annex "A" to the "Deed of
Mortgage" is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered
compensable damages when BPI caused their
publication in a newspaper of general circulation as
defaulting debtors, and therefore orders BPI to pay ALS
and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorney's fees and
expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby
DISMISSED for being premature.
Costs against BPI.
SO ORDERED. 2
Both parties appealed to the Court of Appeals. However,
private respondents' appeal was dismissed for non-
payment of docket fees.
On February 28, 1997, the Court of Appeals
promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision
the same is hereby AFFIRMED in toto.
SO ORDERED. 3
In its decision, the Court of Appeals reasoned that a
simple loan is perfected only upon the delivery of the
object of the contract. The contract of loan between
BPIIC and ALS & Litonjua was perfected only on
September 13, 1982, the date when BPIIC released the
purported balance of the P500,000 loan after deducting
therefrom the value of Roa's indebtedness. Thus,
payment of the monthly amortization should commence
only a month after the said date, as can be inferred from
the stipulations in the contract. This, despite the express
agreement of the parties that payment shall commence
on May 1, 1981. From October 1982 to June 1984, the
total amortization due was only P194,960.43. Evidence
showed that private respondents had an overpayment,
because as of June 1984, they already paid a total
amount of P201,791.96. Therefore, there was no basis
for BPIIC to extrajudicially foreclose the mortgage and
cause the publication in newspapers concerning private
respondents' delinquency in the payment of their loan.
This fact constituted sufficient ground for moral
damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC
was likewise denied, hence this petition, where BPIIC
submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A
CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE
LAID DOWN IN BONNEVIE VS. COURT OF APPEALS,
125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD
LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY'S FEES IN THE FACE OF IRREGULAR
PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS.
COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of
Appeals erred in ruling that because a simple loan is
perfected upon the delivery of the object of the contract,
the loan contract in this case was perfected only on
September 13, 1982. Petitioner claims that a contract of
loan is a consensual contract, and a loan contract is
perfected at the time the contract of mortgage is
executed conformably with our ruling in Bonnevie v.
Court of Appeals, 125 SCRA 122. In the present case,
the loan contract was perfected on March 31, 1981, the
date when the mortgage deed was executed, hence, the
amortization and interests on the loan should be
computed from said date.
Petitioner also argues that while the documents showed
that the loan was released only on August 1982, the loan
was actually released on March 31, 1981, when BPIIC
issued a cancellation of mortgage of Frank Roa's loan.
This finds support in the registration on March 31, 1981
of the Deed of Absolute Sale executed by Roa in favor of
ALS, transferring the title of the property to ALS, and
ALS executing the Mortgage Deed in favor of BPIIC.
Moreover, petitioner claims, the delay in the release of
the loan should be attributed to private respondents. As
BPIIC only agreed to extend a P500,000 loan, private
respondents were required to reduce Frank Roa's loan
below said amount. According to petitioner, private
respondents were only able to do so in August 1982.
In their comment, private respondents assert that based
on Article 1934 of the Civil Code, 4 a simple loan is
perfected upon the delivery of the object of the contract,
hence a real contract. In this case, even though the loan
contract was signed on March 31, 1981, it was perfected
only on September 13, 1982, when the full loan was
released to private respondents. They submit that
petitioner misread Bonnevie. To give meaning to Article
1934, according to private respondents, Bonnevie must
be construed to mean that the contract to extend the
loan was perfected on March 31, 1981 but the contract
of loan itself was only perfected upon the delivery of the
full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting,
arguendo, that the loan contract was perfected on March
31, 1981, and their payment did not start a month
thereafter, still no default took place. According to
private respondents, a perfected loan agreement imposes
reciprocal obligations, where the obligation or promise of
each party is the consideration of the other party. In this
case, the consideration for BPIIC in entering into the
loan contract is the promise of private respondents to
pay the monthly amortization. For the latter, it is the
promise of BPIIC to deliver the money. In reciprocal
obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. Therefore,
private respondents conclude, they did not incur in delay
when they did not commence paying the monthly
amortization on May 1, 1981, as it was only on
September 13, 1982 when petitioner fully complied with
its obligation under the loan contract.
We agree with private respondents. A loan contract is
not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the
contract. 5 Petitioner misapplied Bonnevie. The contract
in Bonnevie declared by this Court as a perfected
consensual contract falls under the first clause of Article
1934, Civil Code. It is an accepted promise to deliver
something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development
Bank of the Philippines, 44 SCRA 445, petitioner applied
for a loan of P500,000 with respondent bank. The latter
approved the application through a board resolution.
Thereafter, the corresponding mortgage was executed
and registered. However, because of acts attributable to
petitioner, the loan was not released. Later, petitioner
instituted an action for damages. We recognized in this
case, a perfected consensual contract which under
normal circumstances could have made the bank liable
for not releasing the loan. However, since the fault was
attributable to petitioner therein, the court did not
award it damages.
A perfected consensual contract, as shown above, can
give rise to an action for damages. However, said
contract does not constitute the real contract of loan
which requires the delivery of the object of the contract
for its perfection and which gives rise to obligations only
on the part of the borrower. 6
In the present case, the loan contract between BPI, on
the one hand, and ALS and Litonjua, on the other, was
perfected only on September 13, 1982, the date of the
second release of the loan. Following the intentions of
the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private
respondents' obligation to pay commenced only on
October 13, 1982, a month after the perfection of the
contract. 7
We also agree with private respondents that a contract of
loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration
for that of the other. 8 As averred by private
respondents, the promise of BPIIC to extend and deliver
the loan is upon the consideration that ALS and Litonjua
shall pay the monthly amortization commencing on May
1, 1981, one month after the supposed release of the
loan. It is a basic principle in reciprocal obligations that
neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner
with what is incumbent upon him. 9 Only when a party
has performed his part of the contract can he demand
that the other party also fulfills his own obligation and if
the latter fails, default sets in. Consequently, petitioner
could only demand for the payment of the monthly
amortization after September 13, 1982 for it was only
then when it complied with its obligation under the loan
contract. Therefore, in computing the amount due as of
the date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date is October
13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the
first issue, such as the date of actual release of the loan
and whether private respondents were the cause of the
delay in the release of the loan, are factual. Since
petitioner has not shown that the instant case is one of
the exceptions to the basic rule that only questions of
law can be raised in a petition for review under Rule 45
of the Rules of Court, 10 factual matters need not tarry
us now. On these points we are bound by the findings of
the appellate and trial courts.
On the second issue, petitioner claims that it should not
be held liable for moral and exemplary damages for it did
not act maliciously when it initiated the foreclosure
proceedings. It merely exercised its right under the
mortgage contract because private respondents were
irregular in their monthly amortization. It invoked our
ruling in Social Security System vs. Court of Appeals,
120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate
damages. As concluded by the Court of Appeals "the
negligence of the appellant is not so gross as to warrant
moral and temperate damages," except that, said Court
reduced those damages by only P5,000.00 instead of
eliminating them. Neither can we agree with the findings
of both the Trial Court and respondent Court that the
SSS had acted maliciously or in bad faith. The SSS was
of the belief that it was acting in the legitimate exercise
of its right under the mortgage contract in the face of
irregular payments made by private respondents and
placed reliance on the automatic acceleration clause in
the contract. The filing alone of the foreclosure
application should not be a ground for an award of
moral damages in the same way that a clearly
unfounded civil action is not among the grounds for
moral damages.
Private respondents counter that BPIIC was guilty of bad
faith and should be liable for said damages because it
insisted on the payment of amortization on the loan even
before it was released. Further, it did not make the
corresponding deduction in the monthly amortization to
conform to the actual amount of loan released, and it
immediately initiated foreclosure proceedings when
private respondents failed to make timely payment.
But as admitted by private respondents themselves, they
were irregular in their payment of monthly amortization.
Conformably with our ruling in SSS, we can not properly
declare BPIIC in bad faith. Consequently, we should rule
out the award of moral and exemplary damages. 11
However, in our view, BPIIC was negligent in relying
merely on the entries found in the deed of mortgage,
without checking and correspondingly adjusting its
records on the amount actually released to private
respondents and the date when it was released. Such
negligence resulted in damage to private respondents, for
which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC.
12 For this purpose, the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorney's fees
because private respondents were compelled to litigate,
we sustain the award of P50,000 in favor of private
respondents as attorney's fees.
WHEREFORE, the decision dated February 28, 1997, of
the Court of Appeals and its resolution dated April 21,
1998, are AFFIRMED WITH MODIFICATION as to the
award of damages. The award of moral and exemplary
damages in favor of private respondents is DELETED,
but the award to them of attorney's fees in the amount of
P50,000 is UPHELD. Additionally, petitioner is
ORDERED to pay private respondents P25,000 as
nominal damages. Costs against petitioner. ACTIcS
SO ORDERED.
[G.R. No. L-45710. October 3, 1985.]
CENTRAL BANK OF THE PHILIPPINES and ACTING
DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS
BANK, in his capacity as statutory receiver of Island
Savings Bank, petitioners, vs. THE HONORABLE
COURT OF APPEALS and SULPICIO M. TOLENTINO,
respondents.
DECISION
MAKASIAR, C.J p:
This is a petition for review on certiorari to set aside as
null and void the decision of the Court of Appeals, in
C.A.-G.R. No. 52253-R dated February 11, 1977,
modifying the decision dated February 15, 1972 of the
Court of First Instance of Agusan, which dismissed the
petition of respondent Sulpicio M. Tolentino for
injunction, specific performance or rescission, and
damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable
recommendation of its legal department, approved the
loan application for P80,000.00 of Sulpicio M. Tolentino,
who, as a security for the loan, executed on the same
day a real estate mortgage over his 100-hectare land
located in Cubo, Las Nieves, Agusan, and covered by
TCT No. T-305, and which mortgage was annotated on
the said title the next day. The approved loan application
called for a lump sum P80,000.00 loan, repayable in
semi-annual installments for a period of 3 years, with
12% annual interest. It was required that Sulpicio M.
Tolentino shall use the loan proceeds solely as an
additional capital to develop his other property into a
subdivision.
On May 22, 1965, a mere P17,000.00 partial release of
the P80,000.00 loan was made by the Bank; and
Sulpicio M. Tolentino and his wife Edita Tolentino signed
a promissory note for P17,000.00 at 12% annual
interest, payable within 3 years from the date of
execution of the contract at semi-annual installments of
P3,459.00 (p. 64, rec.), An advance interest for the
P80,000.00 loan covering a 6-month period amounting
to P4,800.00 was deducted from the partial release of
P17,000.00. But this pre-deducted interest was refunded
to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet
available for the release of the P63,000.00 balance (p.
47, rec.). The Bank, thru its vice-president and
treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central
Bank, after finding Island Savings Bank was suffering
liquidity problems, issued Resolution No. 1049, which
provides:
"In view of the chronic reserve deficiencies of the Island
Savings Bank against its deposit liabilities, the Board, by
unanimous vote, decided as follows:
"1) To prohibit the bank from making new loans and
investments [except investments in government
securities] excluding extensions or renewals of already
approved loans, provided that such extensions or
renewals shall be subject to review by the
Superintendent of Banks, who may impose such
limitations as may be necessary to insure correction of
the bank's deficiency as soon as possible;
. . ." (p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding
that Island Savings Bank failed to put up the required
capital to restore its solvency, issued Resolution No. 967
which prohibited Island Savings Bank from doing
business in the Philippines and instructed the Acting
Superintendent of Banks to take charge of the assets of
Island Savings Bank (pp. 48-49, rec.).
On August 1, 1968, Island Savings Bank, in view of non-
payment of the P17,000.00 covered by the promissory
note, filed an application for the extra-judicial
foreclosure of the real estate mortgage covering the 100-
hectare land of Sulpicio M. Tolentino; and the sheriff
scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a
petition with the Court of First Instance of Agusan for
injunction, specific performance or rescission and
damages with preliminary injunction, alleging that since
Island Savings Bank failed to deliver the P63,000.00
balance of the P80,000.00 loan, he is entitled to specific
performance by ordering Island Savings Bank to deliver
the P63,000.00 with interest of 12% per annum from
April 28, 1965, and if said balance cannot be delivered,
to rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a
P5,000.00 surety bond, issued a temporary restraining
order enjoining the Island Savings Bank from continuing
with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the
answer in intervention praying for the dismissal of the
petition of Sulpicio M. Tolentino and the setting aside of
the restraining order, filed by the Central Bank and by
the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the
merits, rendered its decision, finding unmeritorious the
petition of Sulpicio M. Tolentino, ordering him to pay
Island Savings Bank the amount of P17,000.00 plus
legal interest and legal charges due thereon, and lifting
the restraining order so that the sheriff may proceed
with the foreclosure (pp. 135-136, rec.).
On February 11, 1977, the Court of Appeals, on appeal
by Sulpicio M. Tolentino, modified the Court of First
Instance decision by affirming the dismissal of Sulpicio
M. Tolentino's petition for specific performance, but it
ruled that Island Savings Bank can neither foreclose the
real estate mortgage nor collect the P17,000.00 loan (pp.
30-31, rec.). prcd
Hence, this instant petition by the Central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for
specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the
P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the
P17,000.00 subsists, can his real estate mortgage be
foreclosed to satisfy said amount?.
When Island Savings Bank and Sulpicio M. Tolentino
entered into an P80,000.00 loan agreement on April 28,
1965, they undertook reciprocal obligations. In
reciprocal obligations, the obligation or promise of each
party is the consideration for that of the other (Penaco
vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs.
Pelarca, 29 SCRA 1 [1969]); and when one party has
performed or is ready and willing to perform his part of
the contract, the other party who has not performed or is
not ready and willing to perform incurs in delay (Art.
1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation
of Island Savings Bank to furnish the P80,000.00 loan.
When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness
to pay the P80,000.00 loan. From such date, the
obligation of Island Savings Bank to furnish the
P80,000.00 loan accrued. Thus, the Bank's delay in
furnishing the entire loan started on April 28, 1965, and
lasted for a period of 3 years or when the Monetary
Board of the Central Bank issued Resolution No. 967 on
June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it
legally impossible for Island Savings Bank to furnish the
P63,000.00 balance of the P80,000.00 loan. The power of
the Monetary Board to take over insolvent banks for the
protection of the public is recognized by Section 29 of
R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.
The Monetary Board Resolution No. 1049 issued on
August 13, 1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of
releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new
loans and investments, and nowhere did it prohibit
Island Savings Bank from releasing the balance of loan
agreements previously contracted. Besides, the mere
pecuniary inability to fulfill an engagement does not
discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific
performance (Gutierrez Repide vs. Afzelins and Afzelins,
39 Phil. 190 [1918]). And, the mere fact of insolvency of
a debtor is never an excuse for the non-fulfillment of an
obligation but instead it is taken as a breach of the
contract by him (Vol. 17A, 1974 ed., CJS p. 650). LexLib
The fact that Sulpicio M. Tolentino demanded and
accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00
loan covering a 6-month period cannot be taken as a
waiver of his right to collect the P63,000.00 balance. The
act of Island Savings Bank, in asking the advance
interest for 6 months on the supposed P80,000.00 loan,
was improper considering that only P17,000.00 out of
the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus,
the receipt by Sulpicio M. Tolentino of the pre-deducted
interest was an exercise of his right to it, which right
exist independently of his right to demand the
completion of the P80,000.00 loan. The exercise of one
right does not affect, much less neutralize, the exercise
of the other.
The alleged discovery by Island Savings Bank of the
over-valuation of the loan collateral cannot exempt it
from complying with its reciprocal obligation to furnish
the entire P80,000.00 loan. This Court previously ruled
that bank officials and employees are expected to
exercise caution and prudence in the discharge of their
functions (Rural Bank of Caloocan, Inc. vs. C.A., 104
SCRA 151 [1981]). It is the obligation of the bank's
officials and employees that before they approve the loan
application of their customers, they must investigate the
existence and valuation of the properties being offered as
a loan security. The recent rush of events where
collaterals for bank loans turn out to be non-existent or
grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and
employees on their customer's representation regarding
the loan collateral being offered as loan security is a
patent non-performance of this responsibility. If ever,
bank officials and employees totally rely on the
representation of their customers as to the valuation of
the loan collateral, the bank shall bear the risk in case
the collateral turn out to be over-valued. The
representation made by the customer is immaterial to
the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on
objections of Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-
valuation because of their failure to raise the same in
their pleadings (pp. 198-199, t.s.n., Sept. 15, 1971). The
lower court's action is sanctioned by the Rules of Court,
Section 2, Rule 9, which states that "defenses and
objections not pleaded either in a motion to dismiss or in
the answer are deemed waived." Petitioners, thus,
cannot raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its
reciprocal obligation under their loan agreement,
Sulpicio M. Tolentino, under Article 1191 of the Civil
Code, may choose between specific performance or
rescission with damages in either case. But since Island
Savings Bank is now prohibited from doing further
business by Monetary Board Resolution No. 967, WE
cannot grant specific performance in favor of Sulpicio M.
Tolentino.
Rescission is the only alternative remedy left. WE rule,
however, that rescission is only for the P63,000.00
balance of the P80,000.00 loan, because the bank is in
default only insofar as such amount is concerned, as
there is no doubt that the bank failed to give the
P63,000.00. As far as the partial release of P17,000.00,
which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to
have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to
Sulpicio M. Tolentino's reciprocal obligation to pay the
P17,000.00 loan when it falls due. His failure to pay the
overdue amortizations under the promissory note made
him a party in default, hence not entitled to rescission
(Article 1191 of the Civil Code). If there is a right to
rescind the promissory note, it shall belong to the
aggrieved party, that is, Island Savings Bank. If
Tolentino had not signed a promissory note setting the
date for payment of P17,000.00 within 3 years, he would
be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no
date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of
their respective reciprocal obligations, that is, Island
Savings Bank failed to comply with its obligation to
furnish the entire loan and Sulpicio M. Tolentino failed
to comply with his obligation to pay his P17,000.00 debt
within 3 years as stipulated, they are both liable for
damages. Cdpr
Article 1192 of the Civil Code provides that in case both
parties have committed a breach of their reciprocal
obligations, the liability of the first infractor shall be
equitably tempered by the courts. WE rule that the
liability of Island Savings Bank for damages in not
furnishing the entire loan is offset by the liability of
Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino for
interest on his P17,000.00 debt shall not be included in
offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the
P17,000.00, it is just that he should account for the
interest thereon.
WE hold, however, that the real estate mortgage of "Therefore, the debtor's heirs who has paid a part of the
Sulpicio M. Tolentino cannot be entirely foreclosed to debt can not ask for the proportionate extinguishment of
satisfy his P17,000.00 debt. the pledge or mortgage as long as the debt is not
completely satisfied.
The consideration of the accessory contract of real estate
mortgage is the same as that of the principal contract "Neither can the creditor's heir who have received his
(Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the share of the debt return the pledge or cancel the
debtor, the consideration of his obligation to pay is the mortgage, to the prejudice of other heirs who have not
existence of a debt. Thus, in the accessory contract of been paid."
real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, The rule of indivisibility of the mortgage as outlined by
voidable, or unenforceable debt (Art. 2086, in relation to Article 2089 above-quoted presupposes several heirs of
Art. 2052, of the Civil Code). the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot
The fact that when Sulpicio M. Tolentino executed his apply.
real estate mortgage, no consideration was then in
existence, as there was no debt yet because Island WHEREFORE, THE DECISION OF THE COURT OF
Savings Bank had not made any release on the loan, APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
does not make the real estate mortgage void for lack of MODIFIED, AND
consideration. It is not necessary that any consideration
should pass at the time of the execution of the contract 1. SULPICIO M. TOLENTINO IS HEREBY
of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS
[1983]). It may either be a prior or subsequent matter. THE SUM OF P17,000.00, PLUS P41,210.00
But when the consideration is subsequent to the REPRESENTING 12% INTEREST PER ANNUM
mortgage, the mortgage can take effect only when the COVERING THE PERIOD FROM MAY 22, 1965 TO
debt secured by it is created as a binding contract to pay AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL
(Parks vs. Sherman, Vol. 176 N.W. p. 583, cited in the AMOUNT COUNTED' FROM AUGUST 22, 1985 UNTIL
8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when PAID;
there is partial failure of consideration, the mortgage
2. IN CASE SULPICIO M. TOLENTINO FAILS TO
becomes unenforceable to the extent of such failure
PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25
(Dow, et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol.
HECTARES SHALL BE FORECLOSED TO SATISFY HIS
59, 1974 ed. CJS, p. 138). Where the indebtedness
TOTAL INDEBTEDNESS; AND
actually owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage cannot be 3. THE REAL ESTATE MORTGAGE COVERING
enforced for more than the actual sum due (Metropolitan 78.75 HECTARES IS HEREBY DECLARED
Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in UNENFORCEABLE AND IS HEREBY ORDERED
6th ed., Wiltsie on Mortgage, Vol. 1, p. 180). LLpr RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

Since Island Savings Bank failed to furnish the NO COSTS. SO ORDERED.

P63,000.00 balance of the P80,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75
hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00 debt.
21.25 hectares is more than sufficient to secure a
P17,000.00 debt.

The rule of indivisibility of a real estate mortgage

provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

"A pledge or mortgage is indivisible even though the debt

may be divided among the successors in interest of the
debtor or creditor.