ALLIED BANKING CORPORATION AND ERNESTO PASCUAL, PETITIONERS, VS. CRISTINA B. FUKUOKA, AND SPOUSES CRISOSTOMO AND WARLITA BORILLO, RESPONDENTS.

Allied Banking Corporation versus Fukuoka

The Case

This is a petition for review on certiorari brought by Allied Banking Corporation and its Talon Branch Manager, Ernesto Pascual, against Cristina B. Fukuoka and the spouses Crisostomo and Warlita Borillo. Fukuoka sued for reformation of contract, specific performance, consignation, and damages, asking that the real estate mortgage she signed over her Las Piñas property be corrected so that it secures only her own one million peso loan and not the unrelated obligations of Crisostomo Borillo. The case matters because it shows how the Court uses the parties' contemporaneous and subsequent acts to reform an instrument that does not express their true agreement, and how a bank's own conduct can amount to fraud in the execution of a mortgage.

Procedural History

Fukuoka filed her complaint before the Regional Trial Court of Las Piñas City, Branch 275. The complaint was later amended to implead Crisostomo's spouse, Warlita Borillo. On February 12, 2004, the trial court rendered judgment in favor of Fukuoka, ordering the petitioners and Crisostomo to pay moral damages, exemplary damages, lost income, attorney's fees, and costs, and dismissing the petitioners' cross-claim for lack of merit. The trial court denied the petitioners' motion for reconsideration.

The petitioners appealed to the Court of Appeals under Rule 41. On September 18, 2009, the Court of Appeals dismissed the appeal for lack of merit and also dismissed the cross-claim, treating it as a new matter that must be litigated in a separate action. The Court of Appeals denied reconsideration on May 27, 2010. The petitioners then came to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Crisostomo Borillo was a long-time client of Allied Bank. In 1993, Fukuoka engaged his services to renovate her house in Pilar Village, Las Piñas City. She later wanted to buy the adjacent lot but had no money, so she asked Crisostomo to inquire how much the monthly amortization would be for a one million peso loan. He gave her a Schedule of Monthly Amortization showing twenty nine thousand five hundred eighty three pesos and thirty four centavos per month for sixty months.

Crisostomo applied for a loan, which Allied Bank approved on December 15, 1995, and he executed a promissory note. A Loan Release Manifold was issued in his name showing nine hundred eighty four thousand nine hundred thirty seven pesos and fifty centavos credited to his current account. On the same date, Crisostomo accompanied Fukuoka and others to the Talon Branch, where he gave her nine hundred seventy nine thousand pesos. Fukuoka then signed a Real Estate Mortgage over her property in the presence of Branch Manager Ernesto Pascual. The deed recited that, in consideration of a credit accommodation of one million pesos, she mortgaged the property to the bank, and it carried a note stating that it was to secure the loan of Crisostomo and C.P. Borillo Construction.

From January 1996 to May 1999, the bank deducted Fukuoka's monthly amortizations from a savings account opened at her request. Meanwhile, from December 1995 to July 1996, Crisostomo executed several other promissory notes in favor of the bank. In June 1999, the bank refused to deduct the amortization. Fukuoka, then in Japan, returned and confronted Pascual, who told her to look for Crisostomo and hire a lawyer. After a demand letter, she filed the complaint.

Issues

• Whether or not the requisites for reformation of contract are present, the petitioners claiming that Fukuoka never obtained a loan but merely bound herself as surety for Crisostomo's obligations.
• Whether or not the petitioners are bound by the internal arrangement between Fukuoka and Crisostomo, given their claim of no privity.
• Whether or not Crisostomo acted alone in defrauding Fukuoka.
• Whether or not the cross-claim of the petitioners against Crisostomo should be granted.

Applicable Provisions

Article 1359 of the New Civil Code provides:

When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.

This is the very basis of Fukuoka's action, because the mortgage instrument did not express the true agreement of a one million peso loan to her.

Article 1371 of the New Civil Code provides:

In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

This guided the Court in reading the parties' conduct, from the credit ticket to the monthly deductions, as proof of their real intention.

Ruling

On the first issue, the Court affirmed that there exists a contract of loan secured by a real estate mortgage between Allied Bank and Fukuoka, so reformation is proper. The bank's intention to lend to Fukuoka was evident from a Credit Ticket issued in her name and from the fact that the monthly amortizations in the schedule matched the amounts actually deducted from the savings account. The Court found it ludicrous that either Crisostomo or Fukuoka would unilaterally impose the amortizations, and implausible that the bank could not explain the coincidence. The bank accepted her payments under the schedule, and she was never remiss.

On the second and third issues, the Court held that the transaction was tainted with fraud, and that the bank could not claim ignorance. Its employee issued a Credit Ticket in Fukuoka's name on the same date the loan was released to Crisostomo, and its employees inserted the note securing Crisostomo's loans without her knowledge or consent. The deed submitted in evidence was for two million two hundred thousand pesos, not one million, and the bank insisted on a later mortgage dated May 28, 1996, when Fukuoka's passport showed she was not in the country. The notaries were never presented, and the first page of the questioned deeds bore no signature. Fraud being a question of fact, the Court deferred to the lower courts' findings.

On the fourth issue, the Court reinstated the cross-claim before the trial court for further proceedings, since Crisostomo's loans were uncontroverted and to avoid multiplicity of suits, the Court not being a trier of facts. The Court stressed that reformation does not create a new contract; it merely ascertains the real intention of the parties.

Doctrine

Reformation under Article 1359 requires a meeting of the minds and a failure of the instrument to express the true intention by reason of mistake, fraud, inequitable conduct, or accident. The true intention is judged principally by the parties' contemporaneous and subsequent acts under Article 1371. A bank that issues a credit ticket in one party's name, accepts her amortization payments, and inserts a clause extending the mortgage to another's debts without her consent is guilty of fraud, and reformation lies to strike out that clause.

Disposition

The Court affirmed the Court of Appeals decision with modification, reinstating the petitioners' cross-claim against Crisostomo Borillo and directing the Las Piñas trial court to proceed with it with deliberate dispatch.

Remember This

Memorize this line: reformation does not create a new contract; it merely expresses the true intention of the parties as shown by their acts before, during, and after execution. Examiners use this case to test Article 1359 and Article 1371, and to show that a bank's own conduct can supply the fraud that justifies reformation.