SPOUSES MAXIMO S. DIRIGE AND VIRGINIA F. DIRIGE, PLAINTIFFS-APPELLEES, VS. EQUITABLE-PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK (NOW BANCO DE ORO), DEFENDANTS-APPELLEES.

Dirige versus Equitable-Philippine Commercial and International Bank

The Case

This is an ordinary appeal brought by the spouses Maximo and Virginia Dirige against the Equitable-Philippine Commercial and International Bank, now Banco de Oro, from a judgment of the Regional Trial Court of Santiago City, Isabela, Branch 35, in a complaint for breach of contract and specific performance with damages. The spouses claimed that the bank had approved an additional loan of six million pesos but released only two million seven hundred thousand pesos, and they asked the court to compel the release of the three million three hundred thousand peso balance. The bank answered that no such loan had been approved beyond what was actually released. The case matters because it draws the line, with precision, between the accepted promise to lend and the loan itself — a distinction every examinee in obligations and contracts must be able to state on demand.

Procedural History

The spouses filed their complaint on June 27, 2000 before the Regional Trial Court of Santiago City, Isabela, Branch 35, praying for a temporary restraining order against the foreclosure of their mortgaged properties, for the release of the loan balance, and for damages. The trial court denied the temporary restraining order on August 20, 2001, and trial thereafter ensued. On August 2, 2010, the trial court rendered judgment in favor of the spouses, ordering the bank to pay the three million three hundred thousand peso balance with interest, five hundred thousand pesos in damages, and two hundred thousand pesos in attorney's fees. The bank's motion for reconsideration was denied, so the bank elevated the matter to the Supreme Court by ordinary appeal, assigning as errors the trial court's findings that a six million peso loan had been approved and that the balance had to be released, as well as the award of damages and attorney's fees.

Facts

Over several years beginning in December 1993, the spouses obtained a series of loans from the bank, in the amounts of ten million pesos, thirteen million pesos, thirteen million five hundred thousand pesos, nineteen million five hundred thousand pesos, and a further ten million pesos, all secured by real estate registered in their names. In November 1997, they applied for an additional loan of six million pesos. On November 4, 1997, they executed a real estate mortgage for that amount, and the mortgage was annotated on their titles as an additional mortgage for six million pesos. Only two million seven hundred thousand pesos, however, was ever released, as evidenced by a promissory note and its addendum.

The spouses insisted that the six million peso loan had been approved and that the two million seven hundred thousand pesos was a mere partial availment, so that the bank was obliged to release the three million three hundred thousand peso balance, which they needed as working capital. When the bank refused, their working capital was drained, they suffered business reversals, and the bank moved toward foreclosure. The bank, for its part, maintained that only the two million seven hundred thousand peso loan was approved; that the six million peso mortgage merely described the amount the collaterals could secure; and that the remaining three million three hundred thousand pesos was in fact used to secure a previously unsecured bills purchase credit line.

At trial, the bank's own witnesses testified that the six million peso mortgage was meant to cover both the two million seven hundred thousand peso term loan and the three million three hundred thousand peso bills purchase facility, and that the bank is not obliged to release any amount of a credit line even if already approved. The trial court relied on the mortgage annotation and a later credit application as proof of a perfected six million peso loan and ruled for the spouses.

Issues

• Whether or not there was a perfected contract of loan for six million pesos, such that the bank was obliged to release the three million three hundred thousand peso balance.
• Whether or not the real estate mortgage for six million pesos proved the existence and perfection of a six million peso loan.
• Whether or not the spouses, whose action was for specific performance, may recover the balance of the loan or are limited to an action for damages.
• Whether or not the award of damages and attorney's fees in favor of the spouses may stand.

Applicable Provisions

Article 1934 of the Civil Code provides:

An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan shall not be perfected until the delivery of the object of the contract.

This is the provision on which the entire appeal turns, because it separates the binding promise to lend from the loan that delivery alone perfects.

Article 1315 of the Civil Code provides:

The contract is perfected by mere consent.

This governs consensual contracts and explains why the promise to extend the loan bound the bank, though it did not perfect the loan itself.

Article 1316 of the Civil Code provides:

Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation.

This classifies the simple loan among real contracts, so that without delivery there is no loan as to the undelivered amount.

Ruling

On the first issue, the Court held that there was no perfected contract of loan for six million pesos. A contract of loan is a real contract, perfected not by mere consent but by the delivery of the object of the obligation. Since the three million three hundred thousand pesos was never delivered, the loan was not perfected to that extent. What took effect was only the accepted promise to lend, which falls under the first clause of Article 1934 and binds the bank, but only to the extent of liability for damages. The Court quoted the distinction drawn from Professor Tolentino:

The accepted promise mentioned in this article becomes a consensual contract; its non-fulfilment will give rise to an action for damages, but it does not constitute the real contract of loan, which requires the delivery of the thing for its perfection, and which gives rise to obligations only on the part of the borrower.

On the second issue, the Court held that the real estate mortgage did not prove a perfected loan. A mortgage is a mere accessory contract that cannot validly arise without a principal obligation. The bank's consent to extend a six million peso loan was shown by its act of registering the mortgage, but because no loan was perfected as to the three million three hundred thousand pesos, the mortgage is valid only with respect to the two million seven hundred thousand pesos actually released.

On the third issue, the Court held that the spouses' action for specific performance could not prosper. Their cause of action was the release of the balance of a loan, a relief that presupposes a perfected loan. Since no such loan existed as to that amount, the relief could not be granted, and the bank's liability, if the evidence warranted, was only for damages for the non-release of the loan.

On the fourth issue, the award of damages and attorney's fees fell with the reversal of the trial court's judgment, the complaint being dismissed.

Doctrine

A simple loan is a real contract, perfected only by the delivery of the object of the obligation. Before delivery there is no contract of loan; there is only an accepted promise to lend, a consensual contract under the first clause of Article 1934, whose breach gives rise to an action for damages but not to an action to compel the release of the loan. A real estate mortgage, being an accessory contract, cannot validly exist without a principal obligation, so a mortgage secures only the loan actually perfected by delivery. An action for specific performance of a loan cannot lie where the loan has not been perfected for want of delivery.

Disposition

The Supreme Court granted the appeal, reversed and set aside the decision of the trial court, and dismissed the complaint, without prejudice to the filing of an appropriate action for damages by the spouses.

Remember This

Memorize the line: the promise to lend is consensual and binds, but the loan is real and is perfected only by delivery. Examiners use this case to test whether you can separate the accepted promise under the first clause of Article 1934 from the loan itself, and to test the accessory nature of the real estate mortgage.