G.R. No. 181426 - Games and Garments Developers, Inc. vs. Allied Banking Corp.

Case Summary (G.R. No. 181426)

Memorandum of Agreement (MOA) and Letters of Guaranty

On August 22, 1996, a MOA was entered into involving GGDI, the Cosay Family (previous owners), and attorney Atty. Cesar M. Lao, specifying the purchase price payable by Bienvenida Pantaleon for a parcel of land owned by GGDI. The payment was to be made in installment form with portions secured by Allied Bank's guaranty, evidenced by two letters dated August 22, 1996, and January 27, 1997, signed by Branch Manager Ernesto Mercado on Allied Bank letterhead. These letters assured payment by way of loan proceeds to be released directly to GGDI, with the bank’s guaranty conditioned on the transfer of the property title to Bienvenida.

Execution of Deed of Sale and Related Transactions

Based on Mercado’s letters, GGDI executed a Deed of Sale dated August 23, 1996, selling the property to the spouses Pantaleon for a reduced price of P11,000,000.00. Simultaneously, the Register of Deeds canceled the original title in favor of GGDI and issued a new title to Bienvenida, who likewise executed a mortgage in favor of Allied Bank to secure a loan of P14,000,000.00. Allegedly unbeknownst to GGDI, the loan proceeds were disbursed immediately to the spouses Pantaleon instead of directly to GGDI, contrary to the guarantee in Mercado’s letters.

Litigation and Claims Before the RTC

GGDI filed a Complaint for Breach of Contract and Damages against the spouses Pantaleon, Mercado, and Allied Bank. The RTC ruled in favor of GGDI, holding that GGDI had fulfilled its obligations, while the spouses Pantaleon and Allied Bank failed to pay the balance of the purchase price. The court declared Mercado’s letters as valid undertakings binding Allied Bank, ordering payment of monetary damages, rescission of the Deed of Sale and related documents, and reconveyance of the property to GGDI. The RTC also issued a writ of preliminary attachment on the spouses Pantaleon’s properties.

Defense and Counterclaims of Allied Bank and Spouses Pantaleon

Allied Bank denied liability, asserting it was not a party to the MOA or Deed of Sale and challenged Mercado’s authority to issue the letters of guaranty, citing Section 74 of the General Banking Act which prohibits banks from entering into contracts of guaranty or surety. The spouses Pantaleon claimed partial payment was already made, contested the validity of the purchase price, and accused Allied Bank of acting in bad faith by failing to release loan proceeds fully and foreclosing the mortgage prematurely. Allied Bank counterclaimed for moral and exemplary damages and sought indemnity from Mercado and the spouses Pantaleon.

Court of Appeals Decision

The Court of Appeals partially modified the RTC decision by dismissing GGDI’s complaint against Allied Bank, ruling that the bank was not liable because it was not a party to the MOA or Deed of Sale, and that the letters issued by Mercado constituted contracts of guaranty prohibited by law and unenforceable. It held that Mercado exceeded his authority in issuing letters of guaranty and that Allied Bank did not ratify these acts. The CA also found Allied Bank to be an innocent mortgagee and upheld the foreclosure and auction sale conducted by Allied Bank. Cross-claims for damages between Allied Bank and the spouses Pantaleon were denied due to lack of evidence.

Petition for Review and Issues Raised

GGDI petitioned for review, contesting the CA’s absolution of Allied Bank’s liability, asserting that Mercado’s letters were not contracts of guaranty as prohibited by Section 74 of the General Banking Act, but binding undertakings. GGDI further argued that Allied Bank is liable under the doctrine of apparent authority, that the bank acted in bad faith, and that it should be held estopped from denying Mercado’s authority to issue the letters.

Nature and Scope of Letters of Guaranty under Section 74 of the General Banking Act

Section 74 prohibits banks from entering into contracts of guaranty or suretyship, but does not define such contracts. The Court relied on the Civil Code’s definitions distinguishing contracts of guaranty from suretyship, defining a contract of guaranty as a collateral undertaking to pay third-party debts only if the primary obligor fails or cannot pay. The Court determined the letters issued by Mercado did not entail an express obligation by Allied Bank to pay the debt in case of default by the spouses Pantaleon; rather, these letters guaranteed the manner of release of loan proceeds, thus not constituting prohibited contracts of guaranty under Section 74.

Application of Doctrine of Apparent Authority

The Court held that Mercado, as Branch Manager of Allied Bank, was clothed with apparent authority to issue the letters, as his actions were within the ordinary course of his branch’s banking business and executed on bank letterhead. There was no indication to GGDI that Mercado exceeded his authority, and GGDI relied in good faith on such letters. The doctrine of apparent authority binds Allied Bank, especially since banks must maintain public confidence and cannot disclaim responsibility arising from their agents’ actions when those agents appear authorized.

Allied Bank’s Liability and Damages Awarded

Given that Mercado’s letters were binding undertakings distinct from prohibited contracts of guaranty, Allied Bank became liable for breaching its promise to release loan proceeds directly to GGDI but was not liable for the unpaid balance of the purchase price under the Deed of Sale contracts where it had no privity. GGDI was awarded temperate damages amounting to P500,000.00 for pecuniary loss that could not be precisely quantified, exemplary damages of P150,000.00 to deter similar future breaches, and attorney’s fees of P100,000.00. Allied Bank was further held liable to pay costs of suit jointly and severally with the spouses Pantaleon.

Allied Bank as Mortgagee in Bad Faith and Nullity of Foreclosure

Allied Bank’s act of foreclosing the mortgage and acquiring the property through public auction was declared null and void. The Court reasoned that Allied Bank knew the sale was not fully paid and that Mercado’s letters constituted undertakings that were not honored, causing GGDI loss. Allied Bank was deemed a mortgagee in bad faith for disregarding these circumstances. Consequently, the transfer certificate of title issued in the bank’s name and the foreclosure sale were invalidated, and the bank was ordered to reconvey the property to GGDI.

Rights and Obligations under the Deed of Sale and Rescission

The spouses Pantaleon were held liable to pay the remaining balance of P4,000,000.00 plus 18% interest as stipulated in the Deed of Sale within 30 days from finality of the judgment; failure to do so would result in rescission of the sale, forfeiture of prior payments as liquidated damages, cancellation of the title in their name, and restoration of the property to GGDI. The Court rejected GGDI’s claim to a higher purchase price reflected in the MOA, affirming the parol evidence rule precluding extrinsic evidence to modify the Deed of Sale terms, and disapproved any attemp

Case Syllabus (G.R. No. 181426)

Parties and Procedural Posture

Petitioner: Games and Garments Developers, Inc. (GGDI), a corporation and registered owner of a parcel of land subject to the dispute.
Respondent: Allied Banking Corporation (Allied Bank), and other parties include spouses Bienvenida and Benedicto Pantaleon, and Ernesto Mercado, former Branch Manager of Allied Bank-Pasong Tamo.
Case initiated by GGDI’s Complaint for Breach of Contract and Damages before the RTC of Quezon City (Civil Case No. Q-98-34077).
RTC rendered judgment in favor of GGDI against spouses Pantaleon and Allied Bank.
Court of Appeals (CA) affirmed with modification the RTC decision, but dismissed the complaint against Allied Bank citing lack of privity and statutory prohibition of bank guaranty contracts.
Petition for Review on Certiorari under Rule 45 was filed by GGDI before the Supreme Court to challenge appellate ruling absolving Allied Bank.

Factual Background and Transactions

Bienvenida Pantaleon agreed to purchase for P19,000,000.00 a parcel of land in Bayanan, Muntinlupa covered by TCT No. 205965, owned by GGDI; the price included P14,000,000.00 to GGDI, P4,000,000.00 to the Cosay family, and P1,000,000.00 attorney’s fees.
Parties executed Memorandum of Agreement (MOA) dated August 22, 1996 with payment terms involving immediate partial payments and balances due with 18% interest, guaranteed by Allied Bank via branch manager Mercado.
Mercado issued two letters of guaranty dated August 22, 1996 and January 27, 1997, assuring GGDI the proceeds of Bienvenida’s approved real estate loan would be paid directly to GGDI contingent upon title transfer and mortgage annotations.
GGDI executed a Deed of Sale on August 23, 1996 in favor of the spouses Pantaleon, but the purchase price was reduced to P11,000,000.00 to lessen transaction taxes.
Transfer Certificate of Title for the land was cancelled in GGDI’s name and reissued to Bienvenida on the same day; a Real Estate Mortgage was executed in favor of Allied Bank to secure Bienvenida’s P14,000,000.00 loan.
Despite Mercado’s letters, Allied Bank released approved loan proceeds to spouses Pantaleon instead of directly to GGDI.
Subsequent check payments to GGDI bounced, prompting demands for payment on the guaranteed sums.

Contentions and Claims

GGDI claims Allied Bank is liable under Mercado’s letters of guaranty to pay the balance of the purchase price directly to GGDI and for damages due to Allied Bank’s failure to honor this undertaking.
Allied Bank denies liability, contending:
- It was not a party to the MOA or Deed of Sale;
- Mercado lacked authority to bind the bank to guaranty agreements due to statutory prohibitions under Section 74 of the General Banking Act;
- The letters were unenforceable, and the bank neither ratified nor was estopped from denying them;
- Allied Bank claims to be an innocent mortgagee and had validly foreclosed on the mortgage after loan default.
Spouses Pantaleon claim full payment was made pursuant to an irrevocable guaranty and deny further obligations, blaming Allied Bank for failure to release funds causing default.
Both Allied Bank and spouses Pantaleon filed cross-claims for damages based on alleged bad faith and wrongful foreclosure.

Trial Court Findings

RTC held GGDI fulfilled its obligation by transferring title and possession to spouses Pantaleon.
Spouses Pantaleon and Allied Bank failed to pay the balance of the purchase price.
Mercado’s letters constituted valid obligations binding Allied Bank.
Allied Bank’s denial of Mercado’s authority and invocation of banking law prohibitions were unmeritorious.
Allied Bank was found to have acted in bad faith being aware of the incomplete payment and still foreclosing on the property.
The RTC awarded GGDI:
- The unpaid balance of P7,360,000.00 plus 18% interest from March 29, 1997;
- Cancellation of Deed of Sale, transfer certificate of title, mortgage, and sale certificates in favor of the spouses Pantaleon and Allied Bank upon non-payment;
- Exemplary damages, attorney’s fees, and costs jointly and severally against spouses Pantaleon and Allied Bank;
- Issued writ of preliminary attachment on spouse Pantaleons’ properties.

Court of Appeals Ruling and Reasoning

CA reversed RTC’s ruling holding Allied Bank liable under the MOA, Deed of Sale, and letters of guaranty.
Cited Section 74 of the General Banking Act, which prohibits banks from entering into guaranty or surety contracts.
Found Mercado lacked authority to issue