Central Bank of the Philippines vs.

Court of Appeals

G.R. No. L-45710 October 3, 1985

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 P4,800 was 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.
ISSUES: HELD:
1. WON the action of No. Since ISB was in default under the agreement, Tolentino may choose
Tolenitno for specific between specific performance or rescission, but since ISB is now prohibited from
performance can prosper. doing further business, the only remedy left is Rescission only for the P63,000
balance of the loan.
2. WON Tolentino is liable to Yes. The bank was deemed to have complied with its reciprocal obligation to
pay the P17,000 debt furnish a P17,000 loan. The promissory note gave rise to Tolentino’s reciprocal
covered by the promissory obligation to pay such loan when it falls due and his failure to pay the overdue
note. 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

3. WON Tolentino’s real
estate mortgage can be
foreclosed to satisfy the
P17,000 if his liability to
pay therefor subsists.
P17,000, he should account for the interest thereon (interest was not included in
the offsetting).
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.