PALMARES, Sheena Mae M.

JD-1A

SPS. NESTOR AND MA. NONA BORROMEO vs HONORABLE COURT OF

APPEALS and EQUITABLE SAVINGS BANK
G.R. No. 169846 March 28, 2008

FACTS:

At the time of the dispute, Equitable Savings Bank (ESB) was a subsidiary of
Equitable PCI Bank (EPCIB), a domestic universal banking corporation. Spouses
Nestor and Nona Borromeo (Nestor and Nona) were client-depositors of EPCIB for
more than twelve (12) years. They applied for a loan of P4,000,000.00, which was
approved sometime in October 1999. To secure the payment of loan, Nestor and Nora
executed a Real Estate Mortgage (REM) over their land. They asserted that even if the
loan documents were signed in blank, it was understood that they executed the REM in
favor of EPCIB.

From April 2001 to September 2002, ESB released a total amount of

P3,600,000.00 in four installments, while the balance of P400,000.00 was not drawn by
Nestor and Nora. On the other hand, Nestor and Nora started to pay their monthly
amortizations on 21 April 2001. Nestor and Nora made repeated verbal requests to
EPCIB to furnish them their copies of the loan documents. They further claimed that
they purposely did not draw the remaining balance of the loan in the amount of
P400,000.00 and stopped paying their loan amortizations to protest EPCIB’s continued
failure to provide them copies of the loan documents and its imposition of an interest
rate higher than that agreed upon. EPCIB clarified that since Nestor and Nora’s loan
had not been fully released, the original documents were not yet sent to them.

Finally, on 3 October 2003, petitioners received copies of the loan documents

which they had earlier signed in blank. According to petitioners, they were surprised to
find out that the Loan Agreement and REM designated respondent ESB as lender and
mortgagor, instead of EPCIB with whom they allegedly entered into the agreement.

When the Nestor and Nora failed to pay for the loan in full by 30 September
2003, ESB sought to extra-judicially foreclose the REM. On 20 November 2003, Nestor
and Nora filed with the Regional Trial Court (RTC) a Complaint for Injunction,
Annulment of Mortgage with Damages and with Prayer for Temporary Restraining Order
and Preliminary and Mandatory Injunction against EPCIB and ESB. They also sought to
prevent the Extrajudicial Sale from taking place on 26 November 2003.

On 3 March 2004, the RTC granted Nestor and Nora’s motion for reconsideration
and ordered the issuance of a preliminary injunction after declaring that the validity of
the REM was yet to be determined. It found that Nestor and Nora were bound to suffer
grave injustice if they were deprived of their property before the RTC could rule on the
validity of the REM constituted on the same. The Court of Appeals (CA), on the other
hand, reversed the order of the RTC.

ISSUE:

Whether or not ESB is the real party-in-interest.

RULING:

The Court ruled in the negative.

The Court explained that under Article 1311 of the Civil Code, contracts take
effect only between the parties who execute them. The civil law principle of relativity of
contracts provides that contracts can only bind the parties who entered into it, and it
cannot favor or prejudice a third person, even if he is aware of such contract and has
acted with knowledge thereof.

In the instant case, Nestor and Nora assert that their creditor-mortgagee is
EPCIB and not ESB. While ESB claims that Nestor and Nora have had transactions
with it, particularly the five check payments made in the name of ESB, it fails to
categorically state that ESB and not EPCIB is the real creditor-mortgagor in this loan
and mortgage transaction. Records also show that Nestor and Nora repeatedly dealt
with EPCIB.

ESB, although a wholly-owned subsidiary of EPCIB, has an independent and

separate juridical personality from its parent company. From a perusal of the records,
Nestor and Nora did not enter into a Loan Agreement and REM with ESB. ESB,
therefore, has no right to foreclose the subject property even after default, since this
right can only be claimed by the creditor-mortgagor, EPCIB; and, consequently, the
extrajudicial foreclosure of the REM by ESB would be in violation of Nestor and Nora’s
property rights.