PHILIPPINE NATIONAL BANK, PETITIONER, VS. HON. AUGUSTO M. AMORES, PRESIDING JUDGE, COURT OF FIRST INSTANCE OF MANILA, BRANCH XXIV, MAXIMO KALAW INVESTMENT CORPORATION, AND AUGUS…

Philippine National Bank versus Amores

The Case

This is a petition for review on a pure question of law brought by the Philippine National Bank against Judge Augusto Amores of the Court of First Instance of Manila, Branch Twenty-Four, and against Maximo Kalaw Investment Corporation and Augusto Kalaw. The private respondents had obtained a loan from the bank, secured by a mortgage over a large tract of land in Oriental Mindoro. A portion of that land was later placed under Operation Land Transfer in favor of tenant-beneficiaries, and the Land Bank of the Philippines paid the bank partly in cash and partly in Land Bank bonds. The dispute is over how those bonds must be credited against the loan. The case matters because it fixes the rule that a government lending institution must accept Land Bank bonds at full face value, without discount, in payment of obligations secured by land taken under the agrarian reform program.

Procedural History

The private respondents filed an action for declaratory relief before the Court of First Instance of Manila, Branch Twenty-Four, to settle the manner in which the Land Bank bonds should be applied to their loan. The trial court, through Judge Augusto Amores, rendered its decision on July 8, 1980, granting the complaint. It declared that under Section 80 of Republic Act Number 3844, as amended by Presidential Decree Number 251, the Philippine National Bank must accept, as of the date of payment, the entire 130,000 pesos of Land Bank bonds at their full face value and without any discount. The bank appealed from that decision, assigning several errors. The Supreme Court treated the appeal as raising only one question of law and resolved it in this decision.

Facts

Maximo Kalaw Investment Corporation was the registered owner of a parcel of land in Oriental Mindoro, covered by a transfer certificate of title, with an area of more or less 3,132,122 square meters. The corporation and Augusto Kalaw obtained a loan of 150,000 pesos from the Philippine National Bank, and to secure it the property was mortgaged to the bank.

A portion of the property, with an area of 45.186 hectares, was subjected to Operation Land Transfer in favor of tenant-beneficiaries under Presidential Decree Number 27 and Republic Act Number 3844, as amended by Presidential Decree Number 251. As of July 28, 1977, the Land Bank of the Philippines paid the Philippine National Bank, for the account of the private respondents, 14,588.50 pesos in cash and Land Bank bonds with a total face value of 130,000 pesos.

Relying on its own Board Resolution Number 627, the bank credited the cash to the account of Augusto Kalaw and then applied the bonds on a one-to-one basis to the extent of 31,000 pesos, and on a discounted basis to the extent of 59,400 pesos, for a total of 90,400 pesos. The private respondents protested this manner of application and asked the bank to reconsider its policy. The bank found no merit in the request but agreed that they should seek a judicial ruling to which it would abide. The Land Bank took direct issue with the bank on the policy. The private respondents then brought the action for declaratory relief.

Issues

• Whether or not a government lending institution like the Philippine National Bank may be compelled to accept Land Bank bonds at face value in payment of pre-existing obligations secured by land partially taken under Operation Land Transfer.
• Whether or not the bank may apply the bonds at face value only to the portion of the debt secured by the land actually taken, and at a discount to the portions secured by land not taken.

Applicable Provisions

Section 80 of Republic Act Number 3844, as amended, provides in its pertinent portion:

In the event there is an existing lien or encumbrance on the land in favor of any Government lending institution at the time of acquisition by the Bank, the landowner shall be paid the net value of the land, and the outstanding balance or balances of the obligations to the lending institution or institutions shall be paid by the Land Bank in Land Bank bonds or other securities, existing charters of those institutions to the contrary notwithstanding.

This is the provision the Court construes, and it is the source of the bank's duty to accept the bonds, its own charter notwithstanding.

Ruling

On the first issue, the Court held that the bank is obliged to accept the Land Bank bonds at their par or face value. The Court explained that Presidential Decree Number 27 emancipates the tenant-farmer, while Section 80 provides the mode of bankrolling that emancipation by determining the cost of the land transferred. The only correlation between the two is the determination of that cost. The method of releasing the whole encumbered estate, including portions not taken, does not fall within the ambit of both decrees. The Court also stressed that Land Bank bonds are deemed contracts, and the obligations arising from them fall within the non-impairment clause of the Constitution. The bank, as a government lending institution, has the obligation to support government programs already on stream and must not introduce its own interpretative policies that may thwart them.

On the second issue, the Court held that the bank's method contravenes the principle of indivisibility of mortgage. A mortgage obligation is one and indivisible, and every portion of the mortgaged property answers for the whole obligation once it falls due. The mortgagor cannot compel the mortgagee to apply a payment to a specific portion to effect release, and the mortgagee may not apply payments to release a portion while foreclosing on the rest. The Court also applied the rule of statutory construction that where the law does not distinguish, we should not distinguish. Section 80 does not distinguish between land wholly subjected to agrarian reform and land only partially affected. The Court quoted the law:

SEC. 80. Modes of Payment. -- The Bank shall finance the acquisition of farm lots under any of the following modes of settlement: 1. Cash payment of 10% and balance in 25-year tax-free 6% Land Bank bonds.

The Court noted that nothing in the provision authorizes a government lending institution to distinguish in its acceptance of the bonds, and nothing there can be construed to mean that where only a portion of the encumbered property is taken, only the corresponding portion of the loan will be paid at face value. The clause allowing a similar settlement to be negotiated applies only to obligations with private parties, not to those with government lending institutions like the bank.

Doctrine

A government lending institution must accept Land Bank bonds at their full face value, without discount, in payment of obligations secured by land taken under the agrarian reform program. Section 80 makes no distinction between land wholly taken and land only partially taken, and where the law does not distinguish, neither should the Court. A mortgage obligation is one and indivisible, so the mortgagee may not apply payments at face value to the portion of the debt secured by the land taken and at a discount to the rest. Land Bank bonds are contracts, and obligations arising from them are protected by the non-impairment clause of the Constitution.

Disposition

The petition was denied and the decision of the trial court dated July 8, 1980 was affirmed, with no pronouncement as to costs. The private respondents prevailed.

Remember This

The one line to memorize is that a government lending institution must accept Land Bank bonds at face value, without discount, because the mortgage obligation is one and indivisible and Section 80 does not distinguish between land wholly and partially taken. Examiners use this case on the non-impairment of Land Bank bonds, the indivisibility of mortgage, and the rule that where the law does not distinguish, the Court should not distinguish.