CENTRAL BANK OF THE PHILIPPINES vs.

CA, L-45710 (1985)

Petitioners: CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO,
JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank

Respondents: THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO

Ponente: Makasiar, C.J.

FACTS:

LOAN AND MORTGAGE

4/28/1965, Island Savings Bank (ISB) approves the loan application of Sulpicio M. Tolentino
(Tolentino) upon favorable recommendation of its legal department
o The approved loan application had the following terms:
Lump sum 80,000.00 loan
Repayable in semi-annual installments
For a period of 3 years
With 12% annual interest
It required Tolentino to use the loan as additional capital to develop another property into a
subdivision
As security for the loan, Tolentino executes a real estate mortgage over his 100-hectare land in Cubo,
Las Nieves, Agusan

PARTIAL RELEASE OF LOAN AND ACKNOWLEDGEMENT

5/22/1965, only 17,000.00 of the 80,000.00 loan was released by ISB
Tolentino and his wife Edita signed a promissory note acknowledging receipt of the partial release of
the loan
o 17,000.00 at 12% annual interest
o Payable within 3 years from date of execution of contract at semi-annual installments of 3,459.00
o 4,800.00 was deducted from the partial release of 17,000.00 as an advance interest for the
80,000.00 loan covering a 6-month period

ISB BECOMES INSOLVENT

7/23/1965, the pre-deducted interest was refunded to Tolentino after being informed by ISB that there
was no fund available to release the 63,000.00 balance of the loan though the vice-president and
treasurer of the latter repeatedly promised to do so
8/13/196, the Monetary Board of the Central Bank (Monetary Board), after finding that the latter was
suffering liquidity problems, issued Resolution No. 1049 1
o Prohibiting ISBP from making new loans and investments
6/14/1968, the Monetary Board issued Resolution No. 967
o This prohibited ISB from doing business in the Philippines and
o Instructed the Acting Superintendent of Banks to take charge of ISB assets

ISB FILES FOR EXTRAJUDICIAL FORECLOSURE OF TOLENTINOS MORTGAGE

1 In vie of the chronic reserve deficiencies of the ISB against its deposit liabilities, the Board, by unanimous vote decides as follows:
1) To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions
or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent
of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible;

xxx
 8/1/1968, ISB filed an application for the extrajudicial foreclosure on Tolentinos mortgage covering
the 100-hectare land
o In view of the non-payment of the 17,000.00 covered by the promissory note
1/22/1969, the sheriff scheduled an auction to the land

TOLENTINO FILES WITH THE CFI

1/20/1969, Tolentino filed a petition with the CFI of Agusan for injunction, specific performance or
rescission and damages with preliminary injunction
o He is entitled to specific performance by ordering ISB to deliver the 63,000.00 with interest of
12%/annum from 4/28/1965
Because ISB failed to deliver the 63,000.00 balance of the 80,000.00 loan
o Rescission of contract if 63,000.00 cannot be delivered

CFI PROCEEDINGS AND RULING

1/21/1969, issued a TRO enjoining the ISB from continuing with the foreclosure of the mortgage
1/29/1969, admitted the answer in intervention filed by Central Bank and the Acting Superintendent of
Banks praying for the dismissal of Tolentinos dismissal
2/15/1972, after trial on the merits, found Tolentinos petition unmeritorious
o Ordered Tolentino to pay ISB 17,000.00 plus legal interest and legal charges due
o Lifted the TRO of the foreclosure of the mortgage

CA RULING
2/11/1977, modified the CFI decision
o Affirmed dismissal of Tolentinos petition for specific performance
o Ruled that ISB cannot foreclose the mortgage or collect the 17,000.00
Central Bank appeals from this decision

ISSUE/S:

1. W/N TOLENTINOS ACTION FOR SPECIFIC PERFORMANCE CAN PROSPER

2. W/N TOLENTINO IS LIABLE TO PAY THE 17,000.00 COVERED BY THE PROMISSORY NOTE
3. W/N TOLENTINOS MORTGAGE MAY BE FORECLOSED TO PAY THE 17,000.00

HELD:

1. No, Tolentinos action for specific performance to order ISB to release the 63,000.00 blanace
cannot prosper.

ISB and Tolentino undertook a reciprocal obligation in entering into the 80,000.00 loan agreement
The promise of Tolentino to pay was the consideration for the obligation of ISB to furnish the
80,000.00 loan
When one part has performed or is ready to perform his part of the contract, the other part who has
not performed or is not ready and willing to perform incurs delay2
ISBs obligation to furnish the 80,000.00 loan accrued from the date Tolentino signified his willingness
to pay by executing a real estate mortgage

There was legal impossibility to ISBs furnishing the 63,000.00 balance of the 80,000.00 loan
ISBs delay to furnish the loan started on 4/28/1965, and lasted for 3 years or when the Monetary
Board issued Resolution No. 967 on 6/15/1968, which prohibited ISB from doing business

The Board Resolution No. 1049 issued on 8/13/1965 cannot interrupt the default of ISB in
complying with its obligation of releasing the 63,000.00

2 Civil Code, Art. 1169

 The said resolution merely prohibited ISB from making new loans and investments
Nowhere did it prohibit ISB from releasing the balance of loan agreements previously contracted
Gutierrez Repide vs. Afzelius and Afzelius 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
Mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but
instead it is taken as a breach of the contract by him

Fact of Tolentinos demand and acceptance of the refund of the pre-deducted interest cannot
be taken as a waiver of his right to collect the 63,000.00 balance
ISBs act of asking the advance interest for 6 months of the supposed 80,000.00 was improper
o Considering that only 17,000.00 of the total balance was released
A person cannot be legally charged interest for a non-existing debt
The acceptance of Tolentino of the pre-deducted interest was an exercise of his right to demand
the completion of the 80,000.00 loan
An exercise of a right does not affect the exercise of the other

The alleged discovery of ISB of the overvaluation of the loan collateral cannot exempt it from
complying with its reciprocal obligation to furnish the 80,000.00 loan
Rural Bank of Caloocan, Inc. vs. CA bank officials and employees are expected to exercise
caution and prudence in the discharge of their functions
o It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the
properties being offered as a loan security
o Mere reliance by bank officials and employees on their customer's representation regarding
the loan collateral being offered as loan security is a patent non-performance of this
responsibility
o The bank shall bear the risk in case the collateral turn out to be over-valued if ever its officials
rely on the representation of their customers as to the valuation of the loan collateral
The CFI also enjoined Central Bank from presenting proof on the alleged over-valuation because
of their failure to raise the issue in their pleadings and thus cannot raise the same in the Supreme
Court

Tolentino may choose between specific performance or rescission with damages in either case
Since ISB was in default in fulfilling its reciprocal obligation

However, rescission is the only remedy left

ISB is now prohibited from doing further business by the Monetary Board
Rescission is only for the 63,000.00 balance of the 80,000.00 loan
o ISB is only in default for 63,000.00 as this was the amount that they failed to furnish

2. No, but he is liable for the only interest due on the 17,000.00 as both he and ISB are liable for
damages.

If there is a right to rescind the contract, it belongs to ISB, the aggrieved party
ISB was deemed to have complied with its obligation in furnishing the 17,000.00 loan
The promissory note signed by Tolentino and his wife have rise to his reciprocal obligation to pay the
17,000.00 when it fell due
Tolentino is not entitled to rescission
o He failed to pay the overdue amortizations made him in default
o If he did not sign the promissory note to pay 17,000.00 within 3 years, he would have been
entitled to the rescission of the entire loan
 He could not have been in default if there was no date for him to perform his reciprocal
obligation

The liability of ISB for damages in not furnishing the entire loan is offset by Tolentinos liability for
damages for not paying the overdue 17,000.00 debt
Both parties were in default in performing their respective reciprocal obligations
NCC1192 in case both parties have committed a breach of their reciprocal obligations, the
liability of the first infractor shall be equitably tempered by the courts

The liability of Tolentino for interest on the 17,000.00 deby shall not be included in offsetting the
liabilities of both parties and it is only just that he be accountable for such
Tolentino derived some benefit for using the money

3. The real estate mortgage cannot be entirely foreclosed to satisfy the 17,000.00 debt.

In accessory contracts of real estate mortgages, the consideration of the debtor in furnishing the
mortgage is the existence of a valid, voidable, or unenforceable contract
BDO v Bayuga the consideration of the accessory contract of real estate mortgage is the same as
that of the principal contract

Fact that when Tolentino executed his real estate mortgage, no consideration was then in
existence, does not make the mortgage void for lack of consideration
There was no debt yet as ISB had not released the whole loan
But it is not necessary that any consideration should pass at the time of execution of real estate
mortgage
When the consideration is subsequent to the mortgage, the mortgage can take effect only when the
debt secured by it is created as a binding contract to pay
When there is partial failure of consideration, the mortgage becomes unenforceable to the extent of
such failure
Where the indebtedness actually owing the holder of the mortgage is less than the sum names in the
mortgage, the mortgage cannot be enforced for more than the actual sum due

The real estate mortgage can only be enforced to 21.25 hectares of the total 100 hectares
ISB failed to furnish 63,000.00 of the loan
63,000.00 is 78.75% of the total loan
the mortgage is unenforceable to 78.75% of the 100 hectare land

RULING: CA MODIFIED.

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS

THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM
COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE
TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING
21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.