G.R. No. 74834 - Insular Bank of Asia and America vs. Intermediate Appellate Court

In 1976 and 1977, respondent spouses Ben S. Mendoza and Juanita M. Mendoza (the Mendozas) obtained two loans totaling P600,000.00 from Philippine American Life Insurance Company (Philam Life) to finance the construction of their residential house in Mandaue City.
The loans carried a 14% nominal interest rate and were to be amortized equally over five years (from March 1977 to March 1982).

To secure the payments, Philam Life required the loans to be guaranteed by an irrevocable standby letter of credit issued by a commercial bank.
The Mendozas contracted with petitioner Insular Bank of Asia and America (IBAA) (now Philippine Commercial International Bank) for the issuance of two standby Letters of Credit (L/Cs) in favor of Philam Life:

These L/Cs were secured by a real estate mortgage on the property of the respondent spouses.

On May 11, 1977, the Mendozas executed Promissory Note No. 562/77 in favor of IBAA, promising to pay P100,000.00 plus 19% per annum interest on May 31, 1979.
On June 3, 1977, they executed Promissory Note No. 564/77 obligating them to pay another P100,000.00 plus 19% per annum interest on June 23, 1979.
Both notes included a provision authorizing IBAA to sell the securities or collateral to apply the proceeds to their obligations.

When the Mendozas failed to pay the due amortization on June 1, 1978, Philam Life informed IBAA that the loans were “entirely due and demandable” and demanded payment of P492,996.30.
IBAA contested the propriety of accelerating the full payment, prompting Philam Life to continue drawing on the standby L/Cs for five more amortizations.
On September 7, 1979, following another default on the amortization due on September 1, 1979, Philam Life again declared the entire outstanding balance payable, demanding P274,779.56 from IBAA.

IBAA argued that its obligation under the standby L/Cs was limited and, after accounting for payments—P280,293.11 by the Mendozas and an initially calculated P372,227.65 (later corrected to reflect an overpayment of P52,520.76)—the remaining balance was minimal (first computed as P30,100.60, then altered).
Conversely, Philam Life maintained that IBAA’s liability was primary and independent of the Mendozas’ payments.

On April 21, 1980, the real estate mortgage securing the L/Cs was foreclosed extrajudicially and sold at public auction for P775,000.00, with IBAA emerging as the highest bidder.
Eventually, Philam Life filed suit against the Mendozas and IBAA before the Regional Trial Court of Manila, Branch XXXXI, seeking recovery of the remaining outstanding balance.
The Trial Court computed the overpayments differently from IBAA, deducting a stale manager’s check, and ruled that IBAA, as surety, was discharged to the extent of the Mendozas’ payments.

Both Philam Life and the Mendozas appealed the Trial Court’s decision.
The Intermediate Appellate Court reversed the Trial Court’s position, holding that IBAA’s obligation was not reduced by the Mendozas’ payments.
IBAA then elevated the matter by certiorari under Rule 45, positing several issues regarding the effect of partial payments, documentary evidence, and other technical aspects of the transaction.

Whether the partial payments made by the principal obligors (the Mendozas) reduce IBAA’s liability as a guarantor or surety under the terms of the standby L/Cs.

Whether the Intermediate Appellate Court erred in disregarding documentary evidence (O.R. No. 74323, Exhibit 28-IBAA) which showed the actual amount paid by IBAA and was admitted as evidence without objection by Philam Life’s counsel.

Whether it was proper for the Intermediate Appellate Court to pass sub silentio on additional issues raised by IBAA, namely:

If the effective rate of interest imposed by Philam Life exceeded the allowable ceiling.
Whether Philam Life had the right to call in both standby L/Cs simultaneously.
Whether Philam Life failed to strictly comply with the conditions stipulated in the standby L/Cs.

Whether the award of attorney’s fees (P25,000.00) to Philam Life was proper insofar as IBAA was affected.