CENTRAL BANK OF THE PHILIPPINES V COURT OF

APPEALS
MAKASIAR; October 3, 1985
NATURE
Petition for certiorari to review the decision of the Court of Appeals.

FACTS

- Island Savings Bank approved the loan application for P80K of Sulpicio Tolentino
who executed a real estate mortgage over his 100 hectare land.
- The loan called for a lump sum of P80K, repayable in semi-annual installments for
3 yrs, w/ 12% annual interest. It was required that Tolentino shall use the loan
solely as additional capital to develop his other property into a subdivision.
- A mere P17K partial release of the loan was made by the bank and Tolentino and
his wife signed a promissory note for the P17K 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. The bank VP and Treasurer promised
release of the 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
fr 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 w/
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.
- Trial court found Tolentino’s petition unmeritorious. CA affirmed dismissal of
Tolentino’s petition for specific performance, but it ruled that the bank can neither
foreclose the real estate mortgage nor collect the P17K loan.

ISSUES

1. WON Tolentino’s action for specific performance can prosper

2. WON Tolentino is liable to pay the P17K covered by the promissory note
3. If liable to pay P17K, WON Tolentino’s real estate mortgage can be foreclosed

HELD

1. NO
- 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. YES
- The promissory note gave rise to this liability. His failure to pay made him party
in default, hence, not entitled to rescission. This time, it is the bank which has right
to rescind the promissory note.
- Since both Tolentino and the bank are in default, both are liable for damages.
Liability may be offset.
3. NO
- Since the bank failed to furnish the balance, the real estate mortgage became
unenforceable to such extent.