Central Bank v Court of Appeals G.R. No.

L-
45710 October 3, 1985
MAKASIAR, CJ.:
MARCH 16, 2014LEAVE A COMMENT
The bank’s asking for advance interest for the loan is improper considering that the total
loan hasn’t been released. A person can’t be charged interest for nonexisting debt. The
alleged discovery by the bank of overvaluation of the loan collateral is not an issue. Since
Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent.
Facts: Island Savings Bank, upon favorable recommendation of its legal department, approved
the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan. The loan called for a lump sum of P80,000, repayable in semi-annual
installments for 3 yrs, with 12% annual interest. After the agreement, a mere P17K partial
release of the loan was made by the bank and Tolentino and his wife signed a promissory note
for the P17,000 at 12% annual interest payable w/in 3 yrs. An advance interest was deducted fr
the partial release but this prededucted interest was refunded to Tolentino after being informed
that there was no fund yet for the release of the P63K balance.

Monetary Board of Central Bank, after finding that bank was suffering liquidity problems,
prohibited the bank fr making new loans and investments. And after the bank failed to restore
its solvency, the Central Bank prohibited Island Savings Bank from doing business in the
Philippines. Island Savings Bank in view of the non-payment of the P17K filed an application for
foreclosure of the real estate mortgage. Tolentino filed petition for specific performance or
rescission and damages with preliminary injunction, alleging that since the bank failed to deliver
P63K, he is entitled to specific performance and if not, to rescind the real estate mortgage.

Issues: 1) Whether or not Tolentino’s can collect from the bank for damages

2) Whether or not the mortgagor is liable to pay the amount covered by the promissory
note

3) Whether or not the real estate mortgage can be foreclosed

Held:

1) Whether or not Tolentino’s can collect from the bank for damages

The loan agreement implied reciprocal obligations. When one party is willing and ready to
perform, the other party not ready nor willing incurs in delay. When Tolentino executed real
estate mortgage, he signified willingness to pay. That time, the bank’s obligation to furnish the
P80K loan accrued. Now, the Central Bank resolution made it impossible for the bank to furnish
the P63K balance. The prohibition on the bank to make new loans is irrelevant bec it did not
prohibit the bank fr releasing the balance of loans previously contracted. Insolvency of debtor is
not an excuse for non-fulfillment of obligation but is a breach of contract.

The bank’s asking for advance interest for the loan is improper considering that the total loan
hasn’t been released. A person can’t be charged interest for nonexisting debt. The alleged
discovery by the bank of overvaluation of the loan collateral is not an issue. The bank officials
should have been more responsible and the bank bears risk in case the collateral turned out to
be overvalued. Furthermore, this was not raised in the pleadings so this issue can’t be raised. The
bank was in default and Tolentino may choose bet specific performance or rescission w/
damages in either case. But considering that the bank is now prohibited fr doing business,
specific performance cannot be granted. Rescission is the only remedy left, but the rescission
shld only be for the P63K balance.

2) Whether or not the mortgagor is liable to pay the amount covered by the promissory note

The promissory note gave rise to Sulpicio M. Tolentino’s reciprocal obligation to pay the
P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of
the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved
party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date
for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire
loan because he cannot possibly be in default as there was no date for him to perform his
reciprocal obligation to pay. Since both parties were in default in the performance of their
respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation
to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay
his P17,000.00 debt within 3 years as stipulated, they are both liable for damages.

3) Whether or not the real estate mortgage can be foreclosed

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the
real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00
is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable
to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists
as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a
P17,000.00 debt.