View full case

ESTANISLAO v. CHINA BANKING CORPORATION

FACTS:

The spouses Danilo and Magdalena Manalastas executed a Real Estate Mortgage (REM) in favor of respondent China Banking Corporation (Chinabank) over two real estate properties to secure a loan of P700,000.00. They later executed several amendments to the mortgage contract, increasing their credit line. The spouses Manalastas also executed several promissory notes (PNs) in favor of Chinabank, with the spouses Sinamban signing as co-makers in two of the PNs. Chinabank filed a Complaint for sum of money against the spouses Manalastas and the spouses Sinamban, alleging that they failed to pay their loan obligations. Chinabank pursued extrajudicial foreclosure proceedings and held a foreclosure sale, with Chinabank offering the highest bid. However, the defendants' total obligations had risen, leaving a loan deficiency. Chinabank prayed for the defendants to settle the deficiency plus interest. The spouses Sinamban denied having executed some of the promissory notes but admitted signing some PN forms as co-makers.

The spouses Sinamban admitted that they signed some promissory note forms as co-makers upon the request of their relatives, the spouses Manalastas. However, they claimed that they did not receive any money or benefits from the loans. They denied knowledge of the mortgage security provided by the spouses Manalastas and insisted that the mortgage collateral was worth more than the outstanding loans. They also denied receiving notification of the auction sale and stated that they were unaware of the Certificate of Sale and Statement of Account. The spouses Manalastas were declared in default by the RTC, and Chinabank was allowed to present evidence ex parte against them. During the testimony of Rosario D. Yabut, Branch Manager of Chinabank-San Fernando Branch, the identities of the loan documents and signatures of the defendants were confirmed. The RTC rendered a Decision in favor of Chinabank, ordering both the spouses Manalastas and the spouses Sinamban to pay the deficiency amount. The spouses Sinamban filed a Motion for Reconsideration, arguing that they should only be liable for the promissory notes they signed, and not for the deficiency amount. The RTC set aside its previous decision with respect to the spouses Sinamban, relieving them of any liability. However, after a motion for reconsideration by Chinabank, the RTC reinstated its previous decision with modification, holding both the spouses Manalastas and the spouses Sinamban jointly liable for the deficiency amount.

This case involves a dispute over the liability for a loan obtained by the spouses Manalastas. The spouses Manalastas executed three promissory notes (PNs) in favor of the respondent bank, which were also co-signed by the spouses Sinamban. To secure the PNs, the spouses Manalastas mortgaged their property. However, the spouses Manalastas defaulted on the loan, leading the bank to file a complaint for collection against both the spouses Manalastas and the spouses Sinamban.

The Regional Trial Court (RTC) initially held that the spouses Sinamban were solidarily liable for the entire loan amount, reasoning that they, as co-makers, assumed joint and several liability with the spouses Manalastas. The RTC ordered the spouses Sinamban to pay their proportionate share of the loan, plus accrued interest, attorney's fees, and costs of suit.

On appeal, the Court of Appeals (CA) reversed the RTC's decision. The CA held that the spouses Sinamban should be liable solely for the deficiency pertaining to the two PNs they co-signed, as the mortgage security provided by the spouses Manalastas secured all three PNs and benefited the co-makers. The deficiency judgment pertaining to PN No. OACL 634-95 was held to be the sole liability of the spouses Manalastas.

The spouses Sinamban then appealed to the CA, challenging the decision of the RTC and raising several errors committed by the lower court.

ISSUES:

  1. Whether the spouses Sinamban are solidarily liable with the spouses Manalastas on the two promissory notes they co-signed.

  2. Whether the spouses Sinamban should be relieved of any liability arising from the decision dated July 30, 1999.

  3. Whether the order of December 8, 1999 of the RTC is vague.

  4. Whether the obligation of the spouses Sinamban and the spouses Manalastas is solidary.

  5. Whether Chinabank properly applied the auction proceeds to the loan obligations.

  6. Whether or not the proceeds of the foreclosure sale should be applied according to the order or manner chosen by Chinabank.

  7. Whether or not the spouses Sinamban are solidarity liable for the deficiency on two of the promissory notes.

RULING:

  1. The Court affirms the decision of the CA with modification. The ruling is as follows:

  2. The spouses Sinamban are solidarily liable with the spouses Manalastas on Promissory Note No. OACL 00636-95.

  3. The spouses Sinamban are solidarily liable with the spouses Manalastas on Promissory Note No. CLF 5-93.

  4. The spouses Sinamban are solely liable for the deficiency amount on Promissory Note No. OACL 634-95.

  5. The obligation of the spouses Sinamban and the spouses Manalastas is solidary. The spouses Sinamban expressly bound themselves to be jointly and severally liable with the spouses Manalastas. The authorization given by the spouses Sinamban and the spouses Manalastas to Chinabank also supports the finding of solidary liability.

  6. Chinabank properly applied the auction proceeds to the loan obligations. Chinabank chose to proceed against the co-debtors simultaneously, as implied in its statement of account. By deducting the auction proceeds from the aggregate amount of the three loans due, each promissory note will assume a proportionate share of the resulting deficiency on the total indebtedness.

  7. The Court held that the proceeds of the foreclosure sale should be applied according to the order or manner chosen by Chinabank. Each promissory note was obtained under a single credit line extended by Chinabank, secured by a single real estate mortgage over the properties of the spouses Manalastas. Since none of the promissory notes is more onerous than the others, the foreclosure of the mortgage will benefit all the promissory notes proportionately.

  8. The Court ruled that the spouses Sinamban are solidarity liable for the deficiency on two of the promissory notes. The spouses Sinamban are solidarity liable with the spouses Manalastas for the deficiency amount on Promissory Note No. OACL 636-95 and Promissory Note No. CLF 5-93.

PRINCIPLES:

  • A co-maker of a promissory note who binds himself "jointly and severally" with the maker renders himself directly and primarily liable with the maker on the debt, without reference to his solvency.

  • A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it. A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through his signature.

  • If a person binds himself solidarily with the principal debtor, the provisions on joint and solidary obligations shall be observed. There is a solidary liability only when there is a concurrence of two or more creditors or debtors in one and the same obligation.

  • Solidary liability arises when the obligation expressly states so, or when the law or the nature of the obligation requires solidarity. (Article 1207 of the Civil Code)

  • The creditor may proceed against any one of the solidary debtors or all of them simultaneously. Each demand made against a debtor shall not be an obstacle to subsequent demands against the others, as long as the debt has not been fully collected. (Article 1216 of the Civil Code)