HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE, AND DORIS C. MAGLASANG, AS HEIRS OF DECEASED SPOUSES RAYMUNDO I. CRYSTAL AND DESAMPARADOS C. CRYSTAL, PETITIONERS…

Crystal versus Bank of the Philippine Islands

The Case

This is a petition for review brought by the heirs of the deceased spouses Raymundo and Desamparados Crystal against the Bank of the Philippine Islands. The spouses had sued the bank to stop the foreclosure of their real estate mortgages, claiming they were mere guarantors and that the bank acted illegally in refusing a third party's offer to pay their loan. The case matters because it gathers in one decision several rules a bar candidate must command: when an obligation is solidary, when a solidary undertaking partakes of the nature of a suretyship, when a creditor may refuse payment by a third person, and whether a corporation may recover moral damages.

Procedural History

The spouses filed a complaint for injunction with damages, with a prayer for a restraining order and writ of preliminary injunction, before the Regional Trial Court of Cebu City. They later amended the complaint to include allegations concerning a foreign currency savings account. The trial court dismissed the complaint and ordered the spouses to pay moral and exemplary damages and attorney's fees to the bank. The spouses appealed to the Court of Appeals, which affirmed the trial court. The Court of Appeals also denied their motion for reconsideration. The heirs then came to the Supreme Court by petition for review.

Facts

In March 1978, the spouses Raymundo and Desamparados Crystal obtained a loan of 300,000 pesos in behalf of the Cebu Contractors Consortium Company from the Bank of the Philippine Islands, Butuan branch. The loan was secured by a chattel mortgage on the company's heavy equipment and machinery, and on the same date the spouses executed a continuing suretyship binding themselves as surety for the company up to that principal amount. The following day, Raymundo Crystal executed a promissory note for 300,000 pesos in favor of the same branch.

In August 1979, the company renewed a previous loan, this time with the Bank of the Philippine Islands, Cebu City branch. The renewal was evidenced by a promissory note signed by the spouses in their personal capacities and as managing partners of the company, stating that they are jointly and severally liable with the company. Earlier, because the company had no real property to offer as security, the spouses had executed real estate mortgages over their own lot in favor of the Cebu City branch, one in September 1977 and another in October 1977 to secure an additional loan of 20,000 pesos.

The company failed to pay its loans to both branches when they fell due, and the spouses likewise failed to pay despite demands. The bank foreclosed the chattel mortgage, with proceeds of 240,000 pesos applied to the Butuan loan, which had then reached 707,393.90 pesos. Meanwhile, in July 1981, the Insular Bank of Asia and America offered to buy the mortgaged lot and to pay the spouses' indebtedness directly in exchange for the release of the mortgages, but the bank rejected the offer. The bank then instituted extrajudicial foreclosure of the real estate mortgages, prompting the spouses to file their action for injunction with damages.

Issues

• Whether or not the bank's refusal to accept the payment scheme proposed by the Insular Bank of Asia and America extinguished the spouses' loan obligation.
• Whether or not the spouses are solidarily liable under the promissory note, such that the bank could validly foreclose the mortgages.
• Whether or not the spouses are entitled to moral damages on their counterclaims.
• Whether or not the bank, a juridical person, is entitled to moral damages.
• Whether or not the awards of exemplary damages and attorney's fees in favor of the bank are proper.

Applicable Provisions

Article 1236 of the Civil Code provides:

Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

This governs the first issue, because the Insular Bank of Asia and America was a stranger to the loan agreement and the bank was not obliged to accept its payment.

Article 1311 of the Civil Code provides:

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.

This supports the ruling that the third party's offer could not bind or vary the loan contract between the spouses and the bank.

Article 1207 of the Civil Code provides:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires.

This is the test the Court applied in holding that the phrase jointly and severally creates a solidary obligation.

Ruling

On the first issue, the Court held that the bank's refusal did not extinguish the obligation. The Insular Bank of Asia and America was not privy to the loan agreement or the promissory note, and contracts take effect only between the parties. Under Article 1236, the creditor is not bound to accept payment by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary, and the Court found no such stipulation in the promissory note.

On the second issue, the Court held that the spouses were solidarily liable. The promissory note, which is the controlling repository of their obligation, states:

On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu Philippines, the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,0000.00), Philippine Currency, subject to periodic installments on the principal as follows: P30,000.00 quarterly amortization starting September 28, 1979.

The Court explained that when the obligor undertakes to be jointly and severally liable, the obligation is solidary. More importantly, the promissory note partakes of the nature of a suretyship and is an additional security for the loan, and the surety's liability to the creditor is direct, primary, and absolute.

On the third issue, the Court held that the spouses were not entitled to moral damages, there being no wrongful or unjust act on the part of the bank in demanding payment and in seeking foreclosure.

On the fourth issue, the Court held that the bank was not entitled to moral damages. A juridical person is generally not entitled to moral damages because it cannot experience physical suffering or sentiments such as wounded feelings, serious anxiety, mental anguish, or moral shock. While the Court may allow moral damages to corporations, it is not automatically granted; there must still be proof of the factual basis of the damage and its causal relation to the defendant's acts. The filing of an unfounded suit does not automatically warrant moral damages, for the law could not have meant to impose a penalty on the right to litigate.

On the fifth issue, the Court held that the awards of exemplary damages and attorney's fees were proper, since the spouses instituted the complaint notwithstanding that they were the ones who failed to pay their obligations, forcing the bank to litigate and defend its interest.

Doctrine

First, a liability is solidary only when the obligation expressly so states, when the law so provides, or when the nature of the obligation so requires; an undertaking to be jointly and severally liable makes the obligation solidary. Second, a solidary undertaking instituted to guarantee a principal obligation partakes of the nature of a suretyship, and the surety is directly and equally bound with the principal. Third, under Article 1236, the creditor is not bound to accept payment by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Fourth, a juridical person is generally not entitled to moral damages, and even when allowed, the award requires proof of the factual basis of the damage and its causal relation to the defendant's acts; the filing of an unfounded suit is not a ground for moral damages.

Disposition

The petition was denied and the decision and resolution of the Court of Appeals were affirmed, with the modification that the award of moral damages to the Bank of the Philippine Islands was deleted, with costs against the petitioners.

Remember This

Memorize the line that jointly and severally means solidary, and that a solidary undertaking to guarantee a principal obligation is in the nature of a suretyship. Examiners use this case for the solidary obligation and suretyship rules, for the Article 1236 rule on payment by a third person, and for the rule that a corporation is generally not entitled to moral damages.