In Manuel Go Cinco vs. Court of Appeals, the Supreme Court clarified the duties of a creditor when a debtor attempts to settle a debt using loan proceeds. The Court ruled that a creditor’s unjust refusal to accept payment from a loan secured by the debtor is a violation of the debtor’s rights and warrants relief. This decision underscores the principle that creditors cannot unreasonably obstruct payment if the debtor has secured legitimate means to settle their obligations, and it clarifies the legal consequences of such obstruction.

Mortgage Impasse: Can a Creditor Block Loan Payoff?

The case revolves around spouses Manuel and Araceli Go Cinco, who sought a loan from Philippine National Bank (PNB) to pay off their debt to Maasin Traders Lending Corporation (MTLC), presided over by Ester Servacio. The Go Cincos had an existing loan with MTLC, secured by a real estate mortgage. To settle this debt, they applied for a loan with PNB, offering the same properties as collateral. PNB approved the loan, but conditioned its release on the cancellation of the MTLC mortgage. Manuel Go Cinco informed Ester Servacio about the PNB loan intended for MTLC repayment, even providing a Special Power of Attorney (SPA) authorizing her to collect the PNB loan proceeds.

However, when Ester Servacio approached PNB, she was asked to sign a deed of release/cancellation of mortgage before the loan proceeds could be released to her. Objecting to the fact that the spouses used the property already mortgaged to her as collateral for the PNB loan, Ester refused to sign and collect the money. Consequently, MTLC initiated foreclosure proceedings against the Go Cincos. The Go Cincos then filed a suit to prevent the foreclosure, arguing that Ester’s refusal was unjustified and that they had effectively settled their obligation with MTLC. The central legal question was whether Ester’s refusal to accept the loan proceeds constituted a valid reason to prevent the extinguishment of the debt and the subsequent foreclosure.

The Regional Trial Court (RTC) initially ruled in favor of the spouses Go Cinco, finding that Ester’s refusal to collect the PNB loan proceeds was unjustified. The RTC held that creditors could not unreasonably prevent the settlement of obligations, especially when debtors risk higher interest rates. The Court of Appeals (CA) reversed this decision, emphasizing the absence of an explicit agreement for the cancellation of the MTLC mortgage to facilitate the PNB loan collection. The CA viewed the SPA as merely authorizing Ester to withdraw the loan proceeds, not necessarily apply them to the MTLC loan. This divergence in interpretation led the Supreme Court to address whether the loan to MTLC had been extinguished.

The Supreme Court emphasized that obligations are extinguished through various means, including payment or performance. Under Article 1232 of the Civil Code, payment includes not only the delivery of money but also any other form of fulfilling an obligation. Moreover, Article 1233 states that a debt is only considered paid when the agreed-upon thing or service has been completely delivered or rendered. The Court acknowledged that while the SPA itself wasn’t a direct payment, it authorized Ester to collect the PNB loan proceeds, which, upon receipt, would have served as payment for the MTLC loan. The critical point was that Ester’s refusal prevented the final step of delivering the money and extinguishing the obligation.

The Court then dissected Ester’s reasons for refusing the payment. Ester argued that the spouses Go Cinco should have obtained her consent before using the mortgaged properties as collateral for the PNB loan. Additionally, she claimed the SPA only allowed her to collect the PNB loan proceeds, with no explicit agreement to apply it to the MTLC loan. The Supreme Court found these arguments unconvincing. It clarified that a mortgagor is legally allowed to take out subsequent mortgages on a property, subject to the rights of prior mortgagees. Citing Section 4, Rule 68 of the 1997 Rules of Civil Procedure, the Court noted the law recognizes junior encumbrancers’ rights in the distribution of foreclosure sale proceeds. Article 2130 of the Civil Code invalidates any stipulation forbidding the owner from alienating mortgaged property, further reinforcing the right to take subsequent mortgages.

“Under Article 2130 of the Civil Code, a stipulation forbidding the owner from alienating the immovable mortgaged is considered void. If the mortgagor-owner is allowed to convey the entirety of his interests in the mortgaged property, reason dictates that the lesser right to encumber his property with other liens must also be recognized.”

Furthermore, the Court found it improbable that Ester was unaware of the intended application of the PNB loan proceeds to the MTLC loan. Given Manuel’s expressed intent to settle the MTLC loan and his request for an updated account statement, it was clear that the PNB loan was meant for this purpose. Even Ester’s actions of going to PNB to inquire about the proceeds contradicted her claim that she was only authorized to collect the funds, without any authority to apply them to the MTLC loan. However, while the Court found Ester’s refusal unjustified, it clarified that such refusal does not automatically equate to payment.

The Court cited Article 1256 of the Civil Code, which states that if a creditor refuses a valid tender of payment without just cause, the debtor is released from responsibility only through consignation – depositing the due amount with judicial authorities. In this case, the Go Cincos could not consign the payment because PNB required Ester’s signature on the deed of release/cancellation of mortgage before releasing the funds. Thus, the Go Cincos had to file a suit for specific performance and damages to compel Ester to accept the payment and prevent foreclosure.

“ARTICLE 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.”

The Supreme Court determined that while a complete tender of payment and consignation hadn’t occurred, the Go Cincos had demonstrated a legitimate means of paying off their debt, which was thwarted by Ester’s unjust refusal. This led the Court to compel MTLC and Ester to release the mortgage upon PNB’s assurance that the loan proceeds would be released, and to accept these proceeds as payment for Manuel’s loan with MTLC. The Court further stated that the spouses Go Cinco had undertaken the equivalent of a tender of payment, which should have legal effect. It also relieved the spouses of the obligation to pay interest on the outstanding amount from the date of the unjust refusal, as they were prevented from completing the payment.

In determining damages, the Court removed the amounts awarded by the RTC for loss of savings on interests and unrealized profits, finding no legal or factual basis for these awards. The Court emphasized that actual damages must be proven with certainty and cannot be based on speculation. However, it upheld the award of moral and exemplary damages, finding that Ester acted in bad faith and abused her rights by unjustly refusing payment. The Court reduced the moral damages from P1,000,000.00 to P100,000.00, deeming the original amount excessive. The Court also affirmed the award of attorney’s fees, as the spouses Go Cinco were compelled to litigate to protect their interests.

FAQs

What was the key issue in this case?	The key issue was whether the creditor’s unjust refusal to accept loan proceeds offered as payment by the debtor prevented the extinguishment of the debt and warranted legal intervention.
Why did the creditor refuse to accept the loan proceeds?	The creditor, Ester Servacio, refused because she wanted the borrowers to secure her permission before using the mortgaged property as collateral for another loan. She also argued that she had no express agreement to apply loan proceeds to the debt.
What is the legal effect of a creditor’s unjust refusal to accept payment?	While an unjust refusal doesn’t automatically equate to payment, it can relieve the debtor of the obligation to pay further interest. The debtor may also be entitled to damages if the refusal constitutes an abuse of rights.
What is consignation, and why was it not applicable in this case?	Consignation is the act of depositing the amount due with judicial authorities when a creditor refuses to accept payment. It wasn’t applicable here because the bank required the creditor’s signature on a document before releasing the loan proceeds, which she refused to provide.
Can a mortgagor take out a second mortgage on a property?	Yes, a mortgagor can take out a second or subsequent mortgage on a property, subject to the prior rights of the existing mortgagee. Philippine law recognizes this right, provided it does not violate existing agreements.
What damages were awarded in this case?	The Supreme Court awarded moral and exemplary damages, as well as attorney’s fees, to the debtor. The court deemed the creditor’s refusal an abuse of rights that caused the debtor to incur additional expenses.
What does the Civil Code say about obligations?	The Civil Code addresses obligations in several ways; some are payment or performance (Article 1231 (1)), payment includes the delivery of money but also any other form of fulfilling an obligation (Article 1232), and Article 1233 states that a debt is only considered paid when the agreed-upon thing or service has been completely delivered or rendered
What happened to the award of unrealized profits?	The Supreme Court disallowed this because the borrower could not substantiate the amount.

This case serves as a reminder to creditors that they have a responsibility to act in good faith and not obstruct legitimate attempts by debtors to settle their obligations. The Supreme Court’s decision underscores the principle that creditors cannot unreasonably prevent payment when debtors have secured viable means of fulfilling their obligations. It clarifies the legal consequences of such obstruction, providing relief to debtors who are unjustly prevented from settling their debts.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: MANUEL GO CINCO VS. COURT OF APPEALS, G.R. No. 151903, October 09, 2009