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HERMAN C. CRYSTAL v. BANK OF PHILIPPINE ISLANDS

FACTS:

The spouses Raymundo and Desamparados Crystal acquired a loan from Bank of the Philippine Islands-Butuan branch (BPI-Butuan) on behalf of Cebu Contractors Consortium Co. (CCCC), secured by a chattel mortgage on CCCC's heavy equipment and machinery. Additionally, the spouses executed a continuing suretyship in favor of BPI-Butuan, binding themselves as surety of CCCC. In August 1979, CCCC acquired another loan from BPI-Cebu City branch, wherein the spouses, in their personal capacities and as managing partners of CCCC, were jointly and severally liable. To secure this loan, the spouses executed a real estate mortgage on their own property. Subsequently, CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City, leading BPI to foreclose the chattel mortgage and real estate mortgage. The foreclosure of the chattel mortgage was completed in 1988. In 1985, the spouses filed an action for injunction to halt the foreclosure of the real estate mortgages. The trial court dismissed the complaint and ordered the spouses to compensate BPI for damages and attorney's fees. The Court of Appeals upheld the trial court's decision. Dissatisfied, the spouses appealed to the Supreme Court, arguing that BPI's refusal to accept payment for one of their loans terminated their loan obligation. However, the Court found their argument to be unfounded.

ISSUES:

  1. Whether BPI's refusal to accept payment from IBAA for the loan extinguishes the spouses' loan obligation.

  2. Whether the spouses are solidarily liable for the loans.

  3. Whether the spouses are entitled to the benefit of exhaustion.

RULING:

  1. No, BPI's refusal to accept payment from IBAA does not extinguish the spouses' loan obligation. IBAA is not a party to the loan agreement or the promissory note between the spouses and BPI. Contracts only take effect between the parties involved.

  2. Yes, the spouses are solidarily liable for the loans. They agreed to bind themselves jointly and severally, making them solidarily liable for the loans.

  3. No, the spouses are not entitled to the benefit of exhaustion. Being guarantors-mortgagors, they are not entitled to claim that the properties of CCCC should be exhausted first before resorting to the foreclosure of the real estate mortgages.

PRINCIPLES:

  • Contracts take effect only between the parties involved.

  • Joint and several liability makes the debtors solidarily liable for the debts.

  • Guarantors-mortgagors are not entitled to the benefit of exhaustion before foreclosure.