Title
Central Bank of the Philippines vs. Court of Appeals
Case
G.R. No. L-45710
Decision Date
Oct 3, 1985
Tolentino partially liable for P17K loan after bank failed to release P63K balance; mortgage enforceable on 21.25 hectares, rescission for 78.75 hectares.
debt
real estate mortgage
foreclosure
A

Case Summary (G.R. No. L-45710)

Petitioner, Respondent, and Relief Sought

Tolentino filed a suit in the Court of First Instance seeking injunction, specific performance or rescission, and damages, with a preliminary injunction to enjoin extrajudicial foreclosure of the mortgage. The Central Bank petitioned to review and set aside the Court of Appeals’ modification of the trial court decision that had dismissed Tolentino’s petition.

Relevant Dates and Transactional Facts

  • April 28, 1965: Island Savings Bank approved an P80,000 loan to Tolentino; Tolentino executed a real estate mortgage over 100 hectares (TCT No. T-305) as security. The approved loan was payable in semi-annual installments over three years at 12% per annum; the proceeds were to be used to develop other property.
  • May 22, 1965: Bank made a partial disbursement of P17,000; Tolentino and his wife signed a promissory note for P17,000 at 12% per annum, payable within three years in semi-annual installments of P3,459. The bank initially deducted P4,800 as advance interest for six months (for the full P80,000) but refunded that amount on July 23, 1965 after informing Tolentino the balance was not available.
  • August 13, 1965: Monetary Board Resolution No. 1049 prohibited Island Savings Bank from making new loans and investments (except government securities), subject to supervision.
  • June 14, 1968: Monetary Board Resolution No. 967 prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of its assets.
  • August 1, 1968: Island Savings Bank filed for extrajudicial foreclosure due to nonpayment under the promissory note; sheriff scheduled auction for January 22, 1969.
  • January 20–21, 1969: Tolentino filed suit in CFI; the trial court issued a temporary restraining order upon posting of a P5,000 surety bond.
  • February 15, 1972: Trial court dismissed Tolentino’s petition, ordered him to pay P17,000 plus legal interest, and lifted the restraining order.
  • February 11, 1977: Court of Appeals modified the trial court decision — dismissed Tolentino’s petition for specific performance, but ruled Island Savings Bank could neither foreclose the mortgage nor collect the P17,000.
  • October 3, 1985: Supreme Court decision (at issue) modified the Court of Appeals ruling and issued the dispositions detailed below.

Applicable Law and Authorities

Applicable constitutional framework: the 1973 Philippine Constitution was in force at the time of decision. Statutory and doctrinal authorities relied upon in the decision include R.A. No. 265 (Section 29) governing the Monetary Board’s powers, Civil Code provisions on reciprocal obligations and remedies (Arts. 1169, 1191, 1192, 2052, 2086, 2089), Rules of Court (Section 2, Rule 9 on waiver of defenses and objections), and multiple precedents cited in the decision (e.g., Penaco v. Ruaya; Vda. de Quirino v. Pelarca; Gutierrez Repide v. Afzelius; Rural Bank of Caloocan v. C.A.; Banco de Oro v. Bayuga; Bonnevie v. C.A.; Parks v. Sherman; Dow v. Poore; Metropolitan Life Ins. Co. v. Peterson).

Procedural History

Tolentino sought preliminary injunctive relief which was initially granted by the trial court. The trial court, after trial on the merits, dismissed Tolentino’s petition and ordered him to pay the P17,000 promissory note, lifting the TRO. On appeal, the Court of Appeals affirmed dismissal of the petition for specific performance but held that Island Savings Bank could neither foreclose nor collect the P17,000. The Central Bank petitioned to the Supreme Court to set aside the Court of Appeals’ modification.

Issues Presented

The Supreme Court framed the issues as: (1) Whether Tolentino’s action for specific performance can prosper; (2) Whether Tolentino is liable to pay the P17,000 promissory note; and (3) If liability for the P17,000 subsists, whether the real estate mortgage can be foreclosed to satisfy that amount.

Legal Analysis — Reciprocal Obligations and Default

The Court treated the loan contract as creating reciprocal obligations: Tolentino’s promise to pay was the consideration for the bank’s obligation to disburse the P80,000. Under Art. 1169, when one party is ready and willing to perform and the other is not, the latter is in delay. Because Tolentino executed the mortgage and thereby manifested willingness to perform on April 28, 1965, the bank’s obligation to disburse accrued on that date. The bank’s failure to deliver the P63,000 balance commenced on that date and continued until the Monetary Board’s June 14, 1968 resolution (No. 967) which prohibited the bank from doing business, making performance legally impossible thereafter.

Effect of Monetary Board Resolutions

The Court distinguished the two Monetary Board resolutions. Resolution No. 1049 (Aug. 13, 1965), which prohibited new loans and investments, did not bar the release of balances on previously contracted loans and therefore did not interrupt the bank’s default. By contrast, Resolution No. 967 (June 14, 1968) expressly prohibited Island Savings Bank from doing business and required the Acting Superintendent of Banks to take charge of its assets; that prohibition rendered further specific performance legally impossible.

Waiver, Acceptance of Refund, and Overvaluation Defense

Tolentino’s acceptance of the refunded advance interest (P4,800) was held not to constitute waiver of his right to demand the P63,000 balance. The Court reasoned that the bank’s demand for advance interest on a sum not actually disbursed was improper and that Tolentino’s recovery of that interest did not extinguish his right to the undelivered balance. Regarding the bank’s allegation of overvaluation of the collateral, the Court emphasized the bank’s duty to investigate collateral valuation before loan approval. Moreover, the trial court had prevented the bank from offering evidence of overvaluation because the bank failed to plead it; under Section 2, Rule 9 of the Rules of Court, defenses not pleaded are deemed waived. Consequently, the bank could not raise overvaluation on appeal to defeat Tolentino’s claim.

Remedies — Specific Performance versus Rescission

Because the Monetary Board’s June 1968 resolution made it impossible for the bank to deliver the P63,000 balance, specific performance could not be granted as to that portion. Under Art. 1191, Tolentino could elect rescission with damages as an alternative remedy for the bank’s default. Rescission, however, applies only to the undelivered P63,000 portion because the P17,000 had been actually released and was evidenced by a promissory note. Acceptance of the P17,000 and execution of the promissory note created a binding reciprocal obligation on Tolentino to repay that amount; his failure to pay the amortizations under the note constituted his own default and precluded his rescission as to the P17,000.

Liability

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