View full case

ALLIED BANKING CORPORATION v. CHENG YONG

FACTS:

The case involves two petitions seeking to nullify the issuances of the Court of Appeals. Philippine Pacific Fishing Company, Inc. obtained a packing credit accommodation from Allied Banking Corporation, which was secured by a Continuing Guaranty/Comprehensive Surety. Due to business reverses and alleged misuse of corporate funds, Philippine Pacific defaulted on the obligation, leading to an intra-corporate dispute and a criminal case against the company's president. The corporation was later reorganized, with the spouses Cheng Yong and Lilia Gaw elected as President and Treasurer, respectively. A management committee was created in the receivership case, but Allied Bank and Philippine Pacific restructured the credit accommodation into a simple loan before the committee's constitution. The spouses Cheng signed the promissory note and secured it with a chattel mortgage on their fishing vessel. Allied Bank filed for extrajudicial foreclosure, but the vessel sank, resulting in its total loss. The spouses Cheng filed an action for declaratory relief and injunctive remedies to prevent the foreclosure sale. They also filed a complaint seeking to invalidate the promissory note and chattel mortgage. The trial court declared both the promissory note and the deed of chattel mortgage invalid and unenforceable.

ISSUES:

  1. Whether or not the promissory note dated 12 August 1981 is valid.

  2. Whether or not the chattel mortgage over the fishing vessel "Jean III" can be foreclosed for Philippine Pacific's failure to comply with its obligation under the promissory note dated 12 August 1981.

  3. Whether or not the real estate mortgage constituted over spouses Cheng's parcel of land also secured the spouses' obligation as co-makers of the promissory note dated 12 August 1981.

  4. The issues in this case are:

  5. Whether the validity and effectivity of the promissory note dated August 12, 1981 were conditioned upon the ratification by the SEC-created management committee.

  6. Whether the parole evidence introduced by the spouses Cheng should have been discarded.

  7. Whether the real estate mortgage executed by the spouses Cheng over their San Juan property can be held to secure the spouses' obligation as co-makers of the promissory note dated August 12, 1981.

RULING:

  1. The Court of Appeals found that the promissory note dated 12 August 1981 is valid and enforceable, reversing the trial court's decision.

  2. The Court of Appeals affirmed the trial court's decision that the chattel mortgage over the fishing vessel "Jean III" is valid and can be foreclosed for Philippine Pacific's failure to comply with its obligation under the promissory note dated 12 August 1981.

  3. The Court of Appeals affirmed the trial court's decision that the real estate mortgage constituted by the spouses Cheng also secured their obligation as co-makers of the promissory note dated 12 August 1981.

  4. The Court held that:

  5. The validity and effectivity of the promissory note were not conditioned upon ratification by the SEC-created management committee. The terms of the promissory note were clear and explicit, and there was nothing on its face requiring prior ratification.

  6. The parole evidence introduced by the spouses Cheng should not have been allowed as it had the effect of altering the provisions of the promissory note, which were clear and unequivocal.

  7. The real estate mortgage executed by the spouses Cheng over their San Juan property cannot be held to secure their obligation as co-makers of the promissory note. The mortgage collateralized the loan of GCPI, and since that loan was already paid in full, the mortgage was extinguished.

PRINCIPLES:

  • A promissory note is valid and enforceable if it meets the requirements under the law.

  • A chattel mortgage can be foreclosed if the debtor fails to comply with their obligation under the corresponding loan agreement.

  • A real estate mortgage can secure other obligations of the debtor if stated in the mortgage agreement.

  • Parole evidence rule - When the parties have reduced their agreement into writing, they are deemed to have intended such written agreement to be the sole repository and memorial of everything they have agreed upon. Any verbal agreement that tends to vary, alter, or modify the written agreement is not admissible.

  • Mortgage - A mortgage directly and immediately subjects the property upon which it is imposed to the fulfillment of the obligation for whose security it was constituted.