TL;DR

The Supreme Court ruled that BPI Family Savings Bank was wrong to foreclose on the mortgage of Spouses Ong because its predecessor bank, BSA, had breached their credit line agreement. BSA failed to release the full agreed credit amount, causing financial losses to the Ongs’ printing business. The Court emphasized that in loan agreements, both parties must fulfill their obligations. Since BSA didn’t fully release the credit line, the Ongs were justified in stopping loan payments. BPI, as BSA’s successor, inherited these liabilities and cannot foreclose. The Ongs were awarded damages for the bank’s breach.

When a Bank’s Promise Falters: Upholding Contractual Obligations in Loan Agreements

This case, Spouses Francisco Ong and Betty Lim Ong, and Spouses Joseph Ong Chuan and Esperanza Ong Chuan v. BPI Family Savings Bank, Inc., GR No. 208638, decided on January 24, 2018, revolves around the critical principle of reciprocal obligations in loan contracts. At its heart is the question: Can a bank foreclose on a loan when it has not fully delivered on its promise of a credit line, causing financial detriment to the borrower? The petitioners, the Spouses Ong, sought credit facilities from Bank of Southeast Asia (BSA), later acquired by BPI Family Savings Bank. They planned to expand their printing business, “MELBROS PRINTING CENTER,” and applied for a term loan and a credit line, secured by a real estate mortgage. BSA approved a P15,000,000.00 term loan and a P5,000,000.00 credit line. However, BSA only released a portion of both, specifically withholding P2,000,000.00 from the credit line despite the Ongs fulfilling a condition to release the remaining amount.

The core legal framework rests on Article 1934 of the Civil Code, which states that a loan contract is perfected upon the delivery of the object, and Article 1170, which holds parties liable for damages for fraud, negligence, delay, or contravention of the contract terms. The Supreme Court cited Spouses Palada v. Solidbank Corporation to reinforce that a loan is perfected upon delivery of the loan amount. In this case, the partial release of the P3,000,000.00 credit line perfected the contract for the entire P5,000,000.00 credit facility. The Court rejected the Court of Appeals’ (CA) view that only the term loan materialized into a contract, emphasizing that the approved credit facility was a total of P20,000,000.00, encompassing both the term loan and the omnibus credit line. The letters of approval from BSA for both loan types, coupled with the partial releases, solidified the contractual agreement.

The Court underscored the reciprocal nature of loan obligations. Reciprocal obligations mean that the obligation of one party is contingent on the performance of the other. In a loan, the bank’s obligation is to release the agreed loan amount, and the borrower’s obligation is to repay it. BSA’s failure to release the full credit line constituted a breach of contract and delay in performance. This delay was not just a minor inconvenience; it directly impacted the Ongs’ business. As the Court highlighted, the purpose of the credit agreement was to provide working capital for business expansion, particularly for purchasing machinery and equipment needed for school supply printing before the school opening season. BSA’s delay and eventual refusal to release the remaining P2,000,000.00 crippled the Ongs’ business, forcing them to cancel client orders and damaging their reputation.

BPI, as the successor-in-interest of BSA through merger, inherited both the rights and liabilities of BSA. Section 80 of the Corporation Code explicitly states that a surviving or consolidated corporation is responsible for all liabilities and obligations of constituent corporations as if it incurred them itself. BPI’s argument of acting in good faith in foreclosing the mortgage was deemed irrelevant because it stepped into BSA’s shoes, inheriting its contractual breaches. The Court cited Development Bank of the Philippines v. Guariña Agricultural and Realty Development Corp., reiterating that a debtor cannot be in delay if the creditor has not fully performed its reciprocal obligation. Since BSA failed to fully release the credit line, the Ongs were not in default, and foreclosure was premature and invalid. The Supreme Court referenced Metropolitan Bank v. Wong to stress that the right to foreclose must be exercised strictly according to the law, and any abuse invalidates the action.

Regarding damages, the Court partially affirmed the trial court’s decision. While unrealized profits were deemed insufficiently proven, actual damages of P2,772,000.00, representing the difference in interest paid to other sources due to BSA’s breach, were upheld. Furthermore, exemplary damages of P100,000.00 were awarded to deter similar misconduct by banks, recognizing their vital role and the public trust they hold. Attorney’s fees were reduced from P500,000.00 to P300,000.00. Ultimately, the Supreme Court reversed the CA decision, reinstated the trial court’s ruling with modifications on damages and attorney’s fees, and declared the extrajudicial foreclosure void, firmly establishing the principle that banks must honor their contractual obligations in loan agreements and are liable for damages when they fail to do so.

FAQs

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Spouses Ong v. BPI, G.R No. 208638, January 24, 2018