Central Bank of the Philippines vs CA Digest

Central Bank of the Philippines v. CA (1985)Ponente: Makasiar, C.J.Topic: Delay (Art. 1169)Facts:April 28, 1965 - Island Savings Bank (ISB) approvedthe loan application for P80,000 of Sulpicio Tolentino, who, asa security for the loan, also executed a real estate mortgageover his 100-ha land. The approved loan application called for P80,000 loan, repayable in semi-annual installments for a period of 3 years, with 12% interest.May 22, 1965 – a mere P17,000 partial release of theloan was made by ISB, and Tolentino and his wife Editasigned a promissory note for P17,000 at 12% annual interest, payable within 3 years from the date of execution of thecontract at semi-annual installments of P3,459.An advance interest for the P80,000 loan covering a6-mo period amounting to P4,800was deducted from the partial release of P17,000, but this was refunded to Tolentinoon July 23, 1965, after being informed by ISB that there wasno fund yet available for the release of the P63,000 balance.Aug. 13, 1965 – the Monetary Board of the CentralBank issued Resolution No. 1049, which prohibited ISB frommaking new loans and investments, after finding that it wassuffering liquidity problems.June 14, 1968 – the Monetary Board issuedResolution No. 967, which prohibited ISB from doing business in the Philippines, after finding that it failed to put upthe required capital to restore its solvency.Aug. 1, 1968 – ISB, in view of non-payment of theP17,000 covered by the promissory note, filed an applicationfor the extra-judicial foreclosure of the real estate mortgagecovering the 100-ha land; and the sheriff scheduled auction.Tolentino filed a petition with the CFI for injunction,specific performance or rescission and damages with preliminary injunction, alleging that since ISB failed to deliver the P63,000 remaining balance of the loan, he is entitled tospecific performance by ordering ISB to deliver it with interestof 12% per annum from April 28, 1965, and if said balancecannot be delivered, to rescind the real estate mortgage.CFI issued a TRO enjoining ISB from continuingwith the foreclosure of the mortgage, however, after findingTolentino’s petition unmeritorious, ordered the latter to payISB P17,000 plus legal interest and legal charges and liftingthe TRO so the sheriff may proceed with the foreclosure.CA, on appeal by Tolentino, modified CFI’s decision byaffirming dismissal of Tolentino’s petition for specific performance, but ruled that ISB can neither foreclose themortgage nor collect the P17,000loan.SC: Thepar ties, inthe P8,000 loan agreement,undertook reciprocal obligations, wherein theobligation/promise of each party is the consideration for thatof the other; and when one party has performed or is ready andwilling to perform his part of the contract, the other party whohas not performed or is not ready and willing to performincurs in delay (Art. 1169, CC).When Tolentino executed a real estate mortgage, hesignified his willingness to pay the P80,000 loan, and fromsuch date, the obligation of ISB to furnish the loan accrued.Thus, ISB’s delay started on April 28, 1965 and lasted 3 yearsor when Resolution No. 967 was issued prohibiting ISB fromdoing further business, whichmadeitlegally impossiblefrom ISB to furnish the P63,000 of the loan.Resolution No. 1049 cannot interrupt the default of ISBin complying with its obligation to release the P63,000 balance because it merely prohibited ISB from making new loans andinvestments, not from releasing the balance of

loanagreements previously contracted.The mere pecuniary inability to fulfill an engagementdoes not discharge the obligation of the contract, nor does itconstitute any defense to a decree of specific performance; andthe mere fact of insolvency of a debtor is never an excuse for the nonfulfillment of an obligation, but instead, is taken as a breach of contract.The fact that Tolentino demanded and accepted the refundof the pre-deducted interest cannot be taken as a waiver of hisright to collect the P63,000 balance. The act of ISB in askingfor the advance interest was improper considering that onlyP17,000 out of the P80,000 loan was released.The alleged discovery by ISB of the overvaluation of theloan collateral cannot exempt it from complying with itsobligation to furnish the entire P80,000 loan because bank officials/employees have the obligation to investigate theexistence and valuation of the properties being offered as aloan security before approving the loan application.Issues/Held/Ratio 1)WON the action of Tolenitno for specific performance can prosper. NO.Since ISB was in default under the agreement, Tolentinomay choose between specific performance or rescission, butsince ISB is now prohibited from doing further business, theonly remedy left is Rescission only for the P63,000 balance of the loan. 2)WON Tolentino is liable to pay the P17,000 debtcovered by the promissory note. YES.The bank was deemed to have complied with itsreciprocal obligation to furnish a P17,000 loan. The promissory note gave rise to Tolentino’s reciprocal obligationto pay such loan when it falls due and his failure to pay theoverdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Art. 1191,CC). ISB has the right to rescind the promissory note, beingthe aggrieved party.Since both parties were in default in the performance of their reciprocal obligations, both are liable for damages. Incase both parties have committed a breach of their reciprocalobligations, the liability of the first infractor shall be equirablytempered by the courts (Art. 1192, CC). The liability of ISBfor damages in not furnishing the entire loan is offset by theliability of Tolentino for damages (penalties and surcharges)for not paying his overdue P17,000 debt. Since Tolentinoderived some benefit for his use of the P17,000, he shouldaccount for the interest thereon (interest was not included inthe offsetting). 3)WON Tolentino’s real estate mortgage can beforeclosed to satisfy the P17,000 if his liability to paytherefor subsists. NO.