G.R. No. 120363 - Cecilleville Realty and Service Corp. vs. Court of Appeals

Case Summary (G.R. No. 120363)

Key Dates

Loan secured by Spouses Sy: March 18, 1996; Notice of Loan Approval: February 22, 1996 (contained acceleration clause). Deed of Sale with Assumption of Mortgage executed by Spouses Sy in favor of Angelina Gloria Ong: December 9, 1996. Alfredo’s payment of PhP 750,000: issued about two weeks after meeting with bank branch head (early 1997); judicial demand/filing of collection suit: December 12, 1997. RTC decision and CA decision are in the record; Supreme Court decision dated November 24, 2010 (use of the 1987 Constitution as the governing constitutional framework is applicable).

Applicable Law and Legal Principles

Primary statutory and doctrinal authorities invoked: Civil Code provisions—Art. 1236 (payment by third person), Art. 1293 (novation by substitution of debtor requires creditor’s consent), Art. 19 (duty to act with justice, honesty and good faith), Art. 22 (unjust enrichment concept), Art. 2208 (attorney’s fees exceptions), and Art. 2209 (legal interest on money obligations). Doctrinal principles considered include novation (extinctive vs. modificatory), estoppel, unjust enrichment (accion in rem verso), and the rules on the proper rate and commencement of legal interest as synthesized in Eastern Shipping Lines and related jurisprudence.

Factual Background

Spouses Sy borrowed PhP 16 million from Land Bank, secured by multiple properties and assets. The Sy spouses executed a Deed of Sale with Assumption of Mortgage transferring three charged parcels to Angelina Gloria Ong for PhP 150,000, with the written aim that the vendees would effect restructuring/assumption of the loan and obtain titles once obligations were settled. Alfredo, Angelina’s father, informed Land Bank of the sale/assumption and was told by the branch head that requirements for assumption included payment of PhP 750,000 (part of principal) and updating accrued interest; he was advised to submit documents and was told titles would be transferred upon approval. Alfredo paid PhP 750,000 and received a receipt; he was further given forms and told the title would be transferred, but the Lending Center later denied the assumption on credit grounds. Land Bank foreclosed the mortgage without notifying Alfredo of the denial; Alfredo learned of the foreclosure from a notice of auction. Alfredo demanded return of his payment; after non-return he filed suit for recovery of money with damages.

Trial Court Disposition

The Regional Trial Court found the assumption contract was not perfected because the Lending Center’s credit investigation resulted in disapproval, and Alfredo was not informed of that disapproval. Under principles of equity and justice, the trial court ordered Land Bank to return PhP 750,000 with interest at 12% per annum from December 12, 1997 (date of filing) and awarded attorney’s fees and litigation expenses of PhP 50,000.

Court of Appeals Ruling

The Court of Appeals affirmed the RTC. It concluded that Alfredo’s payment of PhP 750,000 was made for the approval of his assumption of the mortgage and not merely to extinguish arrears of the Spouses Sy; hence Article 1236’s rule that a creditor need not accept payment from a third person without interest did not, as applied here, preclude relief against Land Bank. The CA further found that Land Bank’s and Alfredo’s preparations for assumption effectively novated the debt or, at least, gave rise to obligations that required the bank to recognize Alfredo’s interest, and thus affirmed the trial court’s refund and award.

Issues on Appeal to the Supreme Court

Whether Article 1236 Civil Code applies and whether novation occurred.
Whether the Court of Appeals misconstrued evidence and law in upholding the return of PhP 750,000 with interest.
Whether the award of PhP 50,000 for attorney’s fees and litigation expenses was reversible error.

Supreme Court: Recourse and Article 1236 Analysis

The Supreme Court agreed with Land Bank insofar as the bank was not obliged to accept payment from a third person who had no interest in the debtor’s obligation (first paragraph, Art. 1236). However, the Court distinguished Alfredo’s payment as a conditional payment made to secure his own interest as a prospective mortgagor (i.e., to effect assumption and have titles transferred), not a payment made on behalf of the Spouses Sy to extinguish their debt. Because Alfredo’s interest was contingent on the bank’s approval, and that approval was denied, the Court held the second paragraph of Article 1236 (allowing a payer to demand reimbursement from the debtor under certain conditions) did not make recourse against the Spouses Sy proper. In short, recourse was not against the Spouses Sy: Alfredo was not paying for another in the ordinary sense and therefore could not demand reimbursement from the Sy spouses.

Supreme Court: Novation

The Court held there was no novation. Novation by substitution of debtor requires the creditor’s consent; not all requisites of novation were present. The Court emphasized that novation must be expressly consented to and that the record did not show a clear, unequivocal intent and consent by Land Bank to substitute debtors. Thus the bank was not bound to recognize a substitution of debtors based solely on the Deed of Sale between Spouses Sy and Spouses Ong.

Supreme Court: Estoppel and Unjust Enrichment — Liability of Land Bank

Although Land Bank was not required to accept the substitution of debtors or the conditional payment, the Supreme Court found the bank estopped from denying Alfredo’s interest because of its conduct. By accepting the PhP 750,000 payment, processing documents (promissory note and mortgage forms), assuring Alfredo that titles would be transferred and that the account would be brought current in his name, yet failing to notify him of the Lending Center’s eventual disapproval and later foreclosing, the bank misled Alfredo into reasonably relying on a belief that he had become the recognized debtor. The Court applied the elements of estoppel and found them satisfied: Land Bank’s conduct (acceptance of payment and assurances), Alfredo’s reasonable reliance, the material harm to Alfredo if Land Bank later asserted contrary positions, and the foreseeability of Alfredo’s reliance. Consequently, unjust enrichment (accion in rem verso) principles applied: Land Bank unjustly retained a benefit to Alfredo’s loss where the bank had no legal ground to keep the payment. The Court therefore held Land Bank liable to return the conditional payment.

Evidentiary and Procedural Points Addressed

The Court rejected Land Bank’s contention that it acted in good faith and enjoyed presumption of regularity because of the branch’s active role in accepting payment, having Alfredo sign bank documents, and assuring title transfer. The Court also declined to consider for the first time on appeal Land Bank’s new theory that the PhP 750,000 had been properly applied to reduce the Sy spouses’ indebtedness by the same amount from Land Bank’s foreclosure bid, since that argument was not raised below. Credibility assessments of witnesses by

Case Syllabus (G.R. No. 120363)

Case Citation and Procedural Posture

Reported at 650 Phil. 627, First Division; G.R. No. 190755; Decision dated November 24, 2010.
Appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in CA-G.R. CR-CV No. 84445 (Alfredo Ong v. Land Bank of the Philippines) which affirmed the Decision of the Regional Trial Court (RTC), Branch 17, Tabaco City.
Petitioner: Land Bank of the Philippines; Respondent/plaintiff-appellee: Alfredo Ong.
Relief sought on appeal: reversal or modification of CA judgment ordering return of payment and awarding interest and attorney’s fees.

Undisputed Facts

On March 18, 1996, spouses Johnson and Evangeline Sy obtained a loan from Land Bank, Legazpi City in the amount of PhP 16,000,000.
The loan was secured by three residential lots, five cargo trucks, and a warehouse.
Loan structure: PhP 6,000,000 short-term maturing on February 28, 1997; PhP 10,000,000 payable over seven years.
Notice of Loan Approval dated February 22, 1996 contained an acceleration clause accelerating maturity upon default of amortizations or other charges.
On December 9, 1996, the Spouses Sy executed a Deed of Sale with Assumption of Mortgage selling three of the mortgaged parcels for PhP 150,000 to Angelina Gloria Ong (Evangeline’s mother). The deed expressly recited inability to settle the bank obligation and provided that vendees could represent for restructuring and that bank would release the mortgage upon settlement so titles could be issued in vendees’ names.
Alfredo Ong (Evangeline’s father and petitioner in this appeal) went to Land Bank to inform it of the sale and assumption of mortgage.
Atty. Edna Hingco, Land Bank Legazpi Branch Head, advised Alfredo and his counsel of requirements for assumption of mortgage, informed them that part of principal was to be paid (computed by the bank as PhP 750,000) and that due or accrued interests needed updating for approval of assumption.
Two weeks later Alfredo issued a check for PhP 750,000 and personally delivered it to Atty. Hingco; Land Bank issued a receipt. Alfredo also submitted required documents (including financial statements for 1994 and 1995).
Atty. Hingco informed Alfredo that the Spouses Sy title would be transferred in his name, but the transfer did not materialize and no notice of transfer was sent to him.
Alfredo later learned his application for assumption of mortgage was not approved after a credit investigation disclosed a past-due real estate mortgage of PhP 18,300,000 with another bank (which Alfredo later claimed was fully paid).
Land Bank proceeded to foreclose the mortgage of the Spouses Sy after several months. Alfredo discovered the foreclosure when he saw the properties included in a Notice of Foreclosure of Mortgage and Auction Sale at the RTC in Tabaco, Albay.
Alfredo’s counsel was later informed by Land Bank’s lawyer that the PhP 750,000 he paid would be returned.

Procedural Steps in the Trial Court

On December 12, 1997, Alfredo Ong filed an action for recovery of sum of money with damages (Civil Case No. T-1941) against Land Bank for refusal/refusal to return the PhP 750,000 that he had paid.
Alfredo alleged Land Bank foreclosed without informing him of the denial of his assumption application, that he was lured to pay the PhP 750,000 believing it would secure approval and transfer of the mortgaged properties to him and his wife.
He claimed attorney’s fees of PhP 150,000, filing fee of PhP 15,000, and PhP 250,000 in moral damages (among other reliefs sought).

Evidence and Testimony at Trial

Testimony of Atty. Edna Hingco (Land Bank branch manager): she had no authority to approve loans; could not assure approval of assumption; explained that assumption of mortgage is processed as a new loan subject to credit evaluation (character, capacity, capital, collateral, conditions) and referred to the Lending Center for decision.
Atty. Hingco’s breakdown of Alfredo’s PhP 750,000 payment as applied by the bank: PhP 101,409.59 to principal; PhP 216,246.56 to accrued interests receivable; PhP 396,571.77 to interests; PhP 18,766.10 to penalties; PhP 16,805.98 to accounts receivable — total PhP 750,000.
Atty. Hingco testified that months after payment the Lending Center rejected Alfredo’s loan application and that the Lending Center, not she, should have informed Alfredo of the denial.
Atty. Hingco admitted Alfredo demanded return of PhP 750,000 but there was no written demand prior to the filing of the complaint; she further testified that Alfredo paid before applying and the bank received the amount because the Spouses Sy account was past due and demandable; the Deed of Assumption was not used as basis for payment.

Ruling of the Regional Trial Court

RTC held the contract approving the assumption of mortgage was not perfected due to an adverse credit investigation finding which led to disapproval.
RTC found Alfredo was not informed of disapproval and had only received a letter dated May 22, 1997 informing him that the Spouses Sy account had matured with no payments — a letter sent even before the credit investigation that led to disapproval.
Applying equity and justice, the RTC ordered Land Bank to return the PhP 750,000 to Alfredo with interest at 12% per annum computed from December 12, 1997 (the filing of the complaint).
RTC awarded attorney’s fees and litigation expenses in the amount of PhP 50,000 to Alfredo, and taxed costs against Land Bank.
Dispositive excerpt: Land Bank ordered to pay P750,000.00 with 12% interest from Dec. 12, 1997 and attorney’s fees and litigation expenses of P50,000.00; costs against defendant bank.

Ruling of the Court of Appeals

On appeal, Land Bank argued (1) the RTC erred in holding that Alfredo’s payment of PhP 750,000 was a requirement for approval of assumption; (2) RTC erred in ordering return of PhP 750,000 on grounds of failure of novation; and (3) RTC erred in awarding PhP 50,000 as attorney’s fees and litigation expenses.
The CA affirmed the RTC decision.
The CA held Alfredo’s recourse was not against the Spouses Sy; it characterized the PhP 750,000 payment as for approval of his assumption of mortgage and not payment of Spouses Sy arrears.
The CA found that L