METROPOLITAN BANK AND TRUST COMPANY, PETITIONER, VS. SPOUSES EDMUND CO AND LILY CO, RESPONDENTS.

Metropolitan Bank and Trust Company versus Spouses Edmund Co and Lily Co

The Case

This is a petition for review on certiorari filed by Metropolitan Bank and Trust Company, which we will call Metrobank, against the spouses Edmund and Lily Co. The case began as an action for breach of contract and annulment of mortgage filed by the spouses against the bank. The central dispute is whether the bank had agreed to extend a credit line of 48 million pesos to the spouses, and whether the bank's subsequent foreclosure of their mortgaged properties was therefore unjustified. This case matters because it clarifies the legal nature of a credit line agreement, the requirements for establishing the existence of such an agreement through the doctrine of promissory estoppel, and the limits of that doctrine when the alleged promise is not supported by any evidence.

Procedural History

The spouses filed a complaint for breach of contract and annulment of mortgage before the Regional Trial Court of Quezon City. In February 2014, the trial court rendered a decision in favor of the spouses, declaring the extrajudicial foreclosure null and void and awarding damages. Metrobank moved for reconsideration. In May 2014, the trial court granted the motion, reversed its earlier decision, and dismissed the complaint. The spouses appealed to the Court of Appeals. In May 2015, the Court of Appeals reversed the trial court's May 2014 order and reinstated the February 2014 decision with modification. Metrobank moved for reconsideration, which the appellate court denied. Metrobank then filed this petition for review on certiorari before the Supreme Court.

Facts

The spouses have been running a bed and furniture manufacturing business since 1992. They regularly obtained bank loans from Metrobank's Magdalena Center branch, whose manager had been giving them loan accommodations without collateral since July 1997. From July to October 1997, Metrobank extended several unsecured short-term loans to the spouses, which they repaid by depositing postdated checks received from their customers. In October 1997, the parties entered into a credit line agreement for 10 million pesos. The spouses mortgaged several parcels of land to secure their indebtedness. In May 1998, they entered into a second credit line agreement for 7 million pesos. By 1999, both credit lines had been exhausted and had lapsed.

The business relationship soured when the branch manager was removed in 1999. His successor refused to extend fresh loans and demanded payment of the outstanding principal. The spouses claimed that they had established a 48 million peso credit line with the bank, and that the bank breached this agreement by refusing to grant additional loans. The spouses admitted that there was no written agreement evidencing the 48 million peso credit line, and that the bank never made a promise to extend such a credit line. They simply inferred its existence from the series of loans they had obtained. Metrobank denied the existence of any such credit line, arguing that the loans were extended on a case-to-case basis and that the only agreements were the two written credit line agreements totaling 17 million pesos.

When the spouses stopped paying their obligations, Metrobank filed petitions for extrajudicial foreclosure of the mortgaged properties. The auction sale proceeded despite the filing of the complaint, and Metrobank acquired the properties as the sole bidder.

Issues

• Whether or not there was an agreement between Metrobank and the spouses to establish a credit line of 48 million pesos.
• Whether or not Metrobank's foreclosure of the mortgages was justified under the circumstances.
• Whether or not the interest imposed on the loans was valid.

Applicable Provisions

The Court applied the doctrine of promissory estoppel, which is rooted in the principle that a party may not be allowed to adopt an inconsistent position where it would result in injury to another who relied on the former's representations. The Court also discussed the nature of a credit line agreement as a preparatory contract. The Civil Code provisions on contracts are relevant, particularly the rule on how contracts are perfected. The Court quoted the following principle:

Contracts are perfected by mere consent and become binding upon the parties regardless of the form they may have been entered into.

This principle bears on the case because the spouses argued that the absence of a written agreement for the 48 million peso credit line did not matter, since contracts may be perfected orally. However, the Court found that there was no consent at all to such an agreement, whether written or oral.

Ruling

On the first issue, the Court ruled for Metrobank. The Court defined a credit line as the fixed limit of credit granted by a bank to a customer, to the full extent of which the latter may avail himself in his dealings with the former, but which he must not exceed. The Court noted that a credit line is merely a preparatory contract to the contract of loan, under which the bank is obliged to lend amounts not exceeding the limit provided. The Court found that both the trial court and the Court of Appeals agreed that there was no document or written agreement embodying the claimed 48 million peso credit line. Edmund himself admitted on the witness stand that they never entered into any written agreement, and that the bank never made a promise to do so. He simply inferred the existence of the credit line from the fact that they were able to obtain a series of loans. The Court quoted Edmund's testimony:

We have not been assured but we have been doing this. As far as Mr. Go Bun Wan, yes, your honor. He continued allowing me to re-avail, whatever I have paid. I will be able to re-avail, your honor. It was not done in writing but we had been practicing it for almost a year, your honor. So you only presumed that the loan you were asking for 48 million pesos will be granted because of the practice you were continuing with the bank? Yes, your honor.

The Court held that the branch manager did not even make a verbal commitment to extend 48 million pesos in credit to the spouses. The spouses simply inferred his commitment from a series of loan approvals which were ultimately not attributable to him, as the power to grant increases in credit lines was lodged solely in the bank's Executive Committee. The Court found that the doctrine of promissory estoppel could not apply because there was no clear and unequivocal promise made by the bank. The repeated extension of loans did not constitute an implied promise to establish a 48 million peso credit line. The Court therefore held that no agreement to create such a credit line existed.

On the second issue, since there was no 48 million peso credit line agreement, the spouses' obligation under the written credit line agreements and promissory notes became due and demandable upon their default. The foreclosure was therefore justified. On the third issue, the Court did not disturb the reduction of interest rates to 12 percent per annum as ordered by the lower courts, finding no reason to overturn that aspect of the ruling.

Doctrine

A credit line agreement is a preparatory contract to a loan, under which the bank is obliged to lend amounts not exceeding the limit provided. The existence of a credit line agreement cannot be inferred merely from a bank's repeated extension of loans to a borrower. Promissory estoppel requires a clear and unequivocal promise, and the reliance of the party claiming the estoppel must be reasonable and justified. A borrower's subjective belief that a credit line exists, based solely on a pattern of loan approvals, is insufficient to establish an agreement, especially where the alleged promise was never made in writing or orally, and where the bank officer allegedly making the promise had no authority to do so.

Disposition

The Supreme Court granted Metrobank's petition, reversed the decision of the Court of Appeals, and reinstated the trial court's May 2014 order dismissing the spouses' complaint.

Remember This

Memorize this line: a credit line is a preparatory contract that must be proven by clear evidence, and a bank's pattern of lending does not by itself create an implied credit line agreement. Examiners like to use this case to test the elements of promissory estoppel and the distinction between a preparatory contract and the principal contract of loan.