Case Summary (G.R. No. 123793)
Key Dates
Merger agreement executed: September 16, 1975 (Associated Banking Corporation and CBTC).
Promissory note executed by respondent in favor of CBTC: September 7, 1977.
Promissory note maturity: March 6, 1978.
Complaint filed by petitioner: August 22, 1985.
RTC decision in favor of petitioner: October 17, 1986.
Court of Appeals decision reversing RTC: January 30, 1996.
Supreme Court decision reinstating RTC: June 29, 1998.
Applicable Law and Constitutional Basis
Primary statutes and rules applied: 1987 Philippine Constitution (applicable because decision date is after 1990); Corporation Code provisions governing merger and consolidation (notably Sections 76–80, and Section 79 on SEC approval and effectivity); Civil Code provisions on prescription (Article 1144), contract interpretation (Article 1370), and stipulation for the benefit of a third person (Article 1311[2]); Rules of Court (Rule 45 petition for review) and pertinent procedural rules cited in the record.
Factual Background
Associated Banking Corporation (ABC) and CBTC executed an agreement of merger on September 16, 1975 providing for a surviving corporation (ABC, later renamed Associated Citizens Bank and subsequently Associated Bank). In 1977 respondent executed promissory note No. TL‑2649‑77 in the amount of P2,500,000 nominally in favor of CBTC, payable March 6, 1978, with specified interest and penalties. Respondent defaulted; petitioner instituted suit in 1985 to collect. The trial court entered judgment for petitioner; the CA reversed, holding petitioner lacked privity and thus no cause of action, because the note was executed after the merger agreement’s execution date.
Procedural History
RTC admitted petitioner’s evidence (including the promissory note and account statements), declared respondent in default after his counsel failed to appear, and rendered judgment ordering respondent to pay principal, interest and attorney’s fees. On appeal the CA limited its review to whether petitioner established cause of action and held that the surviving bank could not enforce a promissory note executed in favor of CBTC after the merger agreement had been executed, thereby dismissing the complaint. Petitioner elevated the case to the Supreme Court via a Rule 45 petition for review.
Issue Presented
Whether the surviving corporation, under the merger agreement and applicable corporate law, may enforce a promissory note executed in favor of the absorbed corporation after the merger agreement was executed but prior to issuance of a certificate of merger by the SEC.
Court’s Ruling — General Holding
The Supreme Court granted the petition, holding that Associated Bank, as surviving corporation, had a valid cause of action and could enforce the promissory note executed in favor of CBTC. The CA decision was set aside and the RTC judgment reinstated.
Reasoning on Merger Effectivity and Contractual Stipulation
The Court emphasized that a merger ordinarily vests in the surviving corporation all rights, properties and liabilities of the absorbed corporations, and that statutory procedure (Corporation Code Section 79) requires SEC issuance of a certificate of merger for the merger to become effective. The merger agreement at issue expressly provided that upon the effective date of the merger all rights and interests of CBTC would vest in ABC and further stipulated that references to CBTC in instruments would be deemed references to ABC “for all intents and purposes.” The Court construed that clause literally and held that the agreement’s language was deliberate and unambiguous: contracts entered in the name of CBTC — irrespective of the date of their execution relative to the merger agreement — were to be understood as pertaining to the surviving bank. Under the agreement’s explicit terms, the promissory note naming CBTC as payee must be read as if it named the surviving bank, giving Associated Bank standing and privity to enforce the obligation.
Interpretation Principles Applied
The Court applied ordinary rules of contract and statutory construction: where contractual language is clear, plain and free of ambiguity it must be given its literal meaning (verba legis non est recedendum). The presence of an express clause treating references to the absorbed corporation as references to the surviving entity led the Court to reject the CA’s narrower reading that would deny enforcement simply because the note was executed after the merger agreement’s signing.
Prescription and Laches — Secondary Analysis
The Court rejected respondent’s prescription defense: the action for collection on a written contract prescribes after ten years under Article 1144 of the Civil Code, and petitioner’s complaint (filed August 22, 1985) was within that period (the obligation became demanda
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Case and Procedural Posture
- Petition for review under Rule 45 of the Rules of Court seeking to set aside the Court of Appeals Decision in CA-GR CV No. 26465 promulgated January 30, 1996.
- Trial court: Regional Trial Court of Manila, Branch 48, Civil Case No. 85-32243; trial court decision dated October 17, 1986 rendered judgment in favor of plaintiff Associated Bank.
- Court of Appeals reversed the RTC decision and dismissed the complaint by its January 30, 1996 decision; no pronouncement as to costs in the CA decision.
- Petition for review to the Supreme Court was filed by Associated Bank; matter deemed submitted upon receipt by the Supreme Court of private respondent’s Memorandum on October 10, 1997.
- Supreme Court decision (Panganiban, J.) issued June 29, 1998 (G.R. No. 123793), granting the petition, setting aside the Court of Appeals decision, and reinstating the RTC judgment.
Central Legal Question Presented
- Whether, in a merger, the surviving corporation has the right to enforce a contract entered into in the name of the absorbed corporation after the execution of the merger agreement but prior to the issuance of a certificate of merger by the Securities and Exchange Commission.
Facts (Undisputed and As Narrated by the Trial Court and Adopted by the Court of Appeals)
- On or about September 16, 1975 Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) executed an Agreement of Merger to form a single banking corporation with ABC as the surviving bank, to be called Associated Citizens Bank; Associated Citizens Bank later changed its corporate name to Associated Bank by Amended Articles of Incorporation on March 10, 1981.
- On September 7, 1977 respondent Lorenzo Sarmiento, Jr. executed Promissory Note No. TL-2649-77 in favor of CBTC for the amount of P2,500,000.00, payable on or before March 6, 1978.
- The promissory note stipulated interest at 14% per annum, 3% per annum in the form of liquidated damages, compounded interest, and attorney’s fees in case of litigation equivalent to 10% of the amount due.
- As of the time of trial, partial payments had been made but defendant remained indebted; according to the bank’s statement of account (Exhibit B) the outstanding obligation reached P5,689,413.63 from which a payment of P1,000,000.00 produced a remaining balance of P4,689,413.63 (Exh. B, B-1).
- Demand letter dated June 6, 1985 was sent by the bank through counsel and was received by the defendant on November 12, 1985; defendant paid only P1,000,000 reflected in the exhibits.
- On May 22, 1986 defendant was declared as if in default for failure to appear at Pre-Trial despite due notice; motion to lift declared default was denied September 16, 1986; plaintiff was permitted to present evidence ex parte on October 16, 1986.
- At the ex parte hearing, Esteban C. Ocampo, accountant of the Loans and Discount Department, testified regarding the promissory note, the merger history, the partial payments, the outstanding balance, and the demand letter; Exhibits A (promissory note), B (statement of account) and C (demand letter) were introduced.
Trial Court Findings and Judgment (RTC, Branch 48)
- The RTC, after ex parte presentation of evidence, found for plaintiff Associated Bank and rendered judgment ordering defendant Lorenzo Sarmiento, Jr. to pay:
- P4,689,413.63 with interest at 14% per annum until fully paid;
- P200,000.00 as attorney’s fees;
- Costs of suit.
- The RTC accepted the bank’s evidence including Promissory Note (Exh. A), Statement of Account (Exh. B), and Demand Letter (Exh. C), and credited the testimony of the bank’s accountant, Esteban C. Ocampo.
Appellant’s (Defendant’s) Assigned Errors on Appeal to the Court of Appeals
- The defendant assigned multiple errors to the trial court, summarized as:
- (I) Denial of motion to dismiss for lack of cause of action and bar by prescription and laches.
- (II) Admission of an amended complaint and alleged misuse of the merger agreement and Section 80 of BP Blg. 68 (Corporation Code).
- (III) Grave abuse of discretion in rendering the orders declaring defendant as if in default (May 22, 1986 and September 16, 1986).
- (IV) Error in declaring defendant as if in default when his counsel had resigned and negotiations for settlement were ongoing and a P1,000,000 payment had been made on February 18, 1986.
- (V) Error in according credence to Exhibit B (statement of account) dated September 30, 1986.
- (VI) Error in accepting and giving credence to a 27-year-old witness who would have been 18 at the time the promissory note was executed.
- (VII) Error in the RTC’s adoption of Exhibit B which purportedly exacted 18% per annum when the promissory note stipulated 14% per annum.
- (VIII) Failure to consider affirmative defenses that the promissory note was an accommodation pour autrui and that it was a contract of adhesion needing strict construction against the bank.
- (IX) The trial court should have allowed the defendant the opportunity to present countervailing evidence given the large sums and his affirmative defenses.
Court of Appeals Disposition and Rationale
- The Court of Appeals reversed the trial court and dismissed the complaint, holding that Associated Bank had no cause of action against Lorenzo Sarmiento, Jr.
- The CA reasoned that the promissory note was executed in favor of CBTC and that, because the promissory note was executed two years after the merger agreement (i.e., after September 16, 1975), Associated Bank, as the surviving bank, was not privy to that promissory note and thus could not enforce it.
- CA’s resolution focused on whether petitioner had established or proven a cause of action against respondent and found in the negative.
Issues Presented to the Supreme Court (as Alleged by Petitioner)
- Whether the Court of Appeals erred in reversing the trial court decision and declaring petitioner had no cause of action to enforce the promissory note.
- Whether the CA erred in ruling that, because the promissory note was executed in favor of CBTC two years after the merger agreement, respondent is not liable to petitioner due to lack of privity of contract.
- Whether the CA erred in ruling that petitioner, despite the merger, is not a real party in interest insofar as the promissory note executed in favor of CBTC is concerned.
- In essence, whether the surviving corporation (Associated Bank) may enforce a promissory note made in favor of the absorbed corporation (CBTC) after the merger agreement had been signed.
Applicable Statutory Framework and Corporate Law Principles (as Incorporated in the Decision)
- Merger process and requirements are governed by the Corporation Code provisions included in the record:
- Section 76 (Plan of merger or consolidation): requirements of the plan of merger or consolidation.
- Section 77 (Stockholders’ or members’ approval): board and stockholders’ approvals and voting thresholds, notice requirements.
- Section 78 (Articles of merger or consolidation): execution and required contents of articles of merger.
- Section 79 (SEC approval and effectivity): articles of me