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

L-45710 October 3, 1985

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.