Central Bank of the Philippines v. CA (1985)
967 was issued prohibiting ISB from
Ponente: Makasiar, C.J.
Topic: Delay (Art. 1169)
Facts:
April 28, 1965 - Island Savings Bank (ISB) approved
the loan application for P80,000 of Sulpicio Tolentino, who, as
a security for the loan, also executed a real estate mortgage
over 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 the
loan was made by ISB, and Tolentino and his wife Edita
signed a promissory note for P17,000 at 12% annual interest,
payable within 3 years from the date of execution of the
contract at semi-annual installments of P3,459.
An advance interest for the P80,000 loan covering a
6-mo period amounting to P4,800was deducted from the
partial release of P17,000, but this was refunded to Tolentino
on July 23, 1965, after being informed by ISB that there was
no fund yet available for the release of the P63,000 balance.
Aug. 13, 1965 – the Monetary Board of the Central
Bank issued Resolution No. 1049, which prohibited ISB from
making new loans and investments, after finding that it was
suffering liquidity problems.
June 14, 1968 – the Monetary Board issued
Resolution No. 967, which prohibited ISB from doing
business in the Philippines, after finding that it failed to put up
the required capital to restore its solvency.
Aug. 1, 1968 – ISB, in view of non-payment of the
P17,000 covered by the promissory note, filed an application
for the extra-judicial foreclosure of the real estate mortgage
covering 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 to
specific performance by ordering ISB to deliver it with interest
of 12% per annum from April 28, 1965, and if said balance
cannot be delivered, to rescind the real estate mortgage.
CFI issued a TRO enjoining ISB from continuing
with the foreclosure of the mortgage, however, after finding
Tolentino’s petition unmeritorious, ordered the latter to pay
ISB P17,000 plus legal interest and legal charges and lifting
the TRO so the sheriff may proceed with the foreclosure.
CA, on appeal by Tolentino, modified CFI’s decision by
affirming dismissal of Tolentino’s petition for specific
performance, but ruled that ISB can neither foreclose the
mortgage nor collect the P17,000 loan.
SC: The parties, in the P80,000 loan agreement,
undertook reciprocal obligations, wherein the
obligation/promise of each party is the consideration for that
of the other; and when one party has performed or is ready and
willing to perform his part of the contract, the other party who
has not performed or is not ready and willing to perform
incurs in delay (Art. 1169, CC).
When Tolentino executed a real estate mortgage, he
signified his willingness to pay the P80,000 loan, and from
such date, the obligation of ISB to furnish the loan accrued.
Thus, ISB’s delay started on April 28, 1965 and lasted 3 years
or when Resolution No.
doing further business, which made it legally impossible
from ISB to furnish the P63,000 of the loan.
Resolution No. 1049 cannot interrupt the default of ISB
in complying with its obligation to release the P63,000 balance
because it merely prohibited ISB from making new loans and
investments, not from releasing the balance of loan
agreements previously contracted.
The mere pecuniary inability to fulfill an engagement
does not discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific performance; and
the 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 refund
of the pre-deducted interest cannot be taken as a waiver of his
right to collect the P63,000 balance. The act of ISB in asking
for the advance interest was improper considering that only
P17,000 out of the P80,000 loan was released.
The alleged discovery by ISB of the overvaluation of the
loan collateral cannot exempt it from complying with its
obligation to furnish the entire P80,000 loan because bank
officials/employees have the obligation to investigate the
existence and valuation of the properties being offered as a
loan 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, Tolentino
may choose between specific performance or rescission, but
since ISB is now prohibited from doing further business, the
only remedy left is Rescission only for the P63,000 balance of
the loan.
2) WON Tolentino is liable to pay the P17,000 debt
covered by the promissory note.  YES.
The bank was deemed to have complied with its
reciprocal obligation to furnish a P17,000 loan. The
promissory note gave rise to Tolentino’s reciprocal obligation
to pay such loan when it falls due and his failure to pay the
overdue 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, being
the aggrieved party.
Since both parties were in default in the performance of
their reciprocal obligations, both are liable for damages. In
case both parties have committed a breach of their reciprocal
obligations, the liability of the first infractor shall be equirably
tempered by the courts (Art. 1192, CC). The liability of ISB
for damages in not furnishing the entire loan is offset by the
liability of Tolentino for damages (penalties and surcharges)
for not paying his overdue P17,000 debt. Since Tolentino
derived some benefit for his use of the P17,000, he should
account for the interest thereon (interest was not included in
the offsetting).
3) WON Tolentino’s real estate mortgage can be
foreclosed to satisfy the P17,000 if his liability to pay
therefor subsists.  NO.
 The fact that when Tolentino executed his real estate
mortgage, no consideration was then in existence, as there was
no debt yet because ISB had not made any release on the loan,
does not make the real estate mortgage void for lack of
consideration.
It is not necessary that any consideration should pass at
the time of the execution of the contract of real mortgage.
When the consideration is subsequent to the mortgage, the
latter can take effect only when the debt secured by it is
created as a binding contract to pay. And when there is partial
failure of consideration, the mortgage becomes unenforceable
to the extent of such failure. Where the indebtedness actually
owing to the holder of the mortgage is less than the sum
named in the mortgage, the mortgage cannot be enforced for
more than the actual sum due.
Since ISB failed to furnish the P63,000 balance, the real
estate mortgage of Tolentino became unenforceable to such
extent. P63,000 is 78.75% of P80,000, hence the mortgage
covering 100 ha is unenforceable to the extent of 78.75 ha.
The mortgage covering the remainder of 21.25 ha subsists as a
security for the P17,000 debt.

Judgment:
1) Tolentino is ordered to pay ISB P17,000 plus P41,
210 (12% interest per annum)
2) In case Tolentino fails to pay, his real estate mortgage
covering 21.25 ha shall be foreclosed to satisfy his
total indebtedness
3) The real estate mortgage covering 78.75 ha is
unenforceable and ordered released in favor of
Tolentino