Co v. Admiral United Savings Bank
REITERATIONFacts
The Antecedents: Admiral United Savings Bank (ADMIRAL) extended a loan of P500,000.00 to petitioner Henry Dela Rama Co (Co), with Leocadio O. Isip as co-maker. The loan was evidenced by a Promissory Note No. A1-0414, payable on or before February 23, 1984, with stipulated interest and charges. Co and Isip failed to pay the loan upon maturity, prompting ADMIRAL to file a collection case. Co alleged the promissory note was void, that he did not receive benefits, that the obligation was paid or extinguished, and that he ceded vehicles to ADMIRAL. He also filed a third-party complaint against Metropolitan Rentals & Sales, Inc. (METRO RENT), claiming its officers induced him to obtain the loan and assured him of payment. Isip died during the pendency of the case. METRO RENT denied receiving the loan proceeds and liability. Procedural History: The Regional Trial Court (RTC) dismissed ADMIRAL's complaint, finding the obligation paid or extinguished, relying on a release of mortgage and Co's testimony that METRO RENT paid the loan. The RTC also dismissed Co's third-party complaint and counterclaim. The Court of Appeals (CA) reversed the RTC, holding Co liable for the loan, rejecting his defenses of accommodation party and payment, and finding the testimonial evidence of payment as hearsay. The CA ordered Co to pay ADMIRAL the principal amount, interest, liquidated damages, and attorney's fees. The CA denied Co's motion for reconsideration. The Petition: Co appealed to the Supreme Court, faulting the CA for reversing the RTC.
Issue(s)
Whether petitioner Henry Dela Rama Co is liable under the promissory note despite alleging he acted as an accommodation party. Whether the loan obligation was extinguished by payment. Whether the cancellation of the real estate mortgage extinguished the loan obligation. Whether the damages awarded by the Court of Appeals are excessive.
Ruling
The Supreme Court affirmed the Court of Appeals' decision with modifications regarding the awarded damages. Petitioner Henry Dela Rama Co is ordered to pay Admiral United Savings Bank P500,000.00, with interest at 18% per annum from February 28, 1984, until fully paid. Additionally, Co is liable for a service charge equivalent to 2% of the principal loan (P10,000.00) per year from February 28, 1984, until full payment; P150,000.00 as liquidated damages; and P50,000.00 as attorney's fees.
Ratio Decidendi
On the liability of an accommodation party: The Court held that Co, by signing the promissory note, acknowledged receipt of the loan and undertook to pay it. His assertion that he merely acted as an accommodation party for METRO RENT did not release him from liability. The Court reiterated that an accommodation party who lends their name to enable the accommodated party to obtain credit is liable to a holder for value, even if they receive no part of the consideration. Co, being a certified public accountant, was presumed to understand the import of his signature and the consequences of signing the note, especially since he also mortgaged his properties as security. His disclaimer of receiving value was therefore not persuasive. On the extinguishment of the obligation by payment: The Court found Co's defense of payment unsubstantiated. He claimed METRO RENT paid the loan, but presented no receipts. The Release of Real Estate Mortgage, dated April 11, 1983, was presented as proof, but the record did not show that the mortgage was constituted as security for the subject promissory note. Furthermore, Co's failure to demand the return of the Transfer Certificates of Title (TCTs) until June 11, 1987, long after the alleged payment in 1983, militated against his claim. The burden of proving payment rests on the debtor, and Co's bare testimonial assertion was insufficient. On the effect of the cancellation of the real estate mortgage: The Court clarified that a real estate mortgage is an accessory contract to secure a loan. Its cancellation does not automatically extinguish the principal loan obligation. The loan, being the principal contract, remains unaffected by the release or cancellation of the mortgage. A debt can subsist even without a mortgage, and ADMIRAL could still pursue Co for the loan payment under the promissory note, especially since there was no showing that the mortgage was indeed the security for the specific loan in question. On the modification of damages: While affirming the 18% interest rate, the Court found the service charge, liquidated damages, and attorney's fees awarded by the CA to be exorbitant. Citing equity and jurisprudence, the Court reduced the service charge to 2% per annum (P10,000.00 per annum), liquidated damages to P150,000.00, and attorney's fees to P50,000.00. The Court noted that liquidated damages and attorney's fees serve as penalties for breach of contract and can be equitably reduced if iniquitous or unconscionable, as provided by Articles 1229 and 2227 of the Civil Code.
Main Doctrine
An accommodation party is liable to a holder for value even if they receive no consideration. The cancellation of a mortgage does not automatically extinguish the principal loan obligation. The burden of proving payment rests on the debtor.