The Supreme Court has ruled that banks are not permitted to unreasonably refuse payment by borrowers who risk facing additional charges and higher interest.
In a decision promulgated on August 19, 2024 but only made public yesterday, the High Court’s Third Division through Associate Justice Alfredo Benjamin Caguioa ordered Premiere Development Bank to accept the check tendered by spouses Engracio Castañeda and Lourdes Castañeda as full payment of their personal loan.
Records of the case showed that the spouses took out a P2.6 million loan from the bank.
Castañeda was the president of Casent Realty and Development Corporation and Vice President of Central Surety and Insurance Company, Inc.
The companies also had three other corporate loans with the bank amounting to P 8.6 million.
The separate agreements for the personal and corporate loans included a waiver that the bank can apply payments to any of the borrower’s loans, due or not.
When the loan was due, the Castañedas gave the bank two checks, one for P 2.6 million to pay off their personal loan, and another for P6 million to settle Central Surety’s corporate loan.
The total amount of P8.6 million covers the full payment of both debts.
However, the bank declined to accept the checks as full payment for the personal and corporate loans.
The bank justified its refusal to accept the checks, saying that the personal loan is also bound to the corporate loans since Engracio is a co-borrower, mortgagor, and obligor of the corporate loans considering his positions in the company, though the corporate loans were secured by separate pledge and real estate mortgage contracts.
Instead, court records showed, the bank combined the two check payments and applied the total amount to all four loans.
This prompted the Castañeda couple to sue the bank for the correct application of the P2.6 million check to their personal loan.
Both the Regional Trial Court and the Court of Appeals ruled that the bank should have applied the P2.6 million check solely to the spouses’ personal loan and not to the companies’ loans.
The SC upheld the RTC and the CA ruling, with the magistrates citing Article 1252 of the Civil Code.
That Article states that when a borrower has multiple loans with the same lender, the borrower has the right to choose how to allocate payments among the different loans.
If the borrower, according to the SC, does not exercise this right, the lender may determine the allocation.
However, it clarified that this only applies to multiple loans held by the same borrower.
“Here, the Bank incorrectly treated the spouses and the companies as a single borrower, combining payments for separate personal and corporate loans,” the SC ruling said, adding that the spouses and the companies are different entities.
It added that while Engracio serves as president of Casent Realty and vice president of Central Surety, he and his wife maintain separate legal personalities from the companies.
As such, the SC held that the loans of the spouses and the companies cannot be combined, and payments made by the spouses for their personal loan cannot be applied to the corporate loans, and vice versa.
“To rule otherwise, would create the absurd and unfair situation where spouses Castaneda’s P2.6 million loan would remain delinquent until all the debts of the Central Surety and Casent Realty would be fully paid,” the SC explained. “In effect, their personal loans would be held hostage until such time that the corporate loans would be extinguished as the bank would have full discretion to apply the spouses’ loan payments to the corporate loans rather than to their personal loan.”
The SC further said it cannot countenance such an “inequitable situation” as the interest payments and charges of the personal loan would continue to accumulate to the Castaneda’s “disadvantage and prejudice.”
The SC also reminded the bank of its duty to act in good faith and uphold the high standards of integrity and diligence expected of financial institutions, adding that by unreasonably refusing to apply the P 2.6 million payment exclusively to the spouses’ personal loan to fully settle their debt, the bank acted in bad faith.
“This allowed the personal loan to remain outstanding, accruing interest and additional charges, effectively holding it hostage until the corporate loans of the companies were fully paid,” the SC added.
The court ordered the bank to apply the P 2.6 million check solely to the spouses’ personal loan and pay the spouses P4 million in damages.
Concurring with the decision are Associate Justices Henri Jean Paul Inting, Japar Dimaampao, Maria Filomena Singh and Samuel Gaerlan.