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Diploma, Katrina

Breach by both parties in reciprocal obligations

Central Bank of the Philipines vs Court of Appeals

3 Oct. 1985
Makasiar, C.J.
Petition for review on certiorari to set aside as null and void the decision of the CA

Central Bank of the Philippines, Director Antonio Castro JR as statutory receiver of Island Savings
Bank - plaintiffs-appellees
Court of Appeals and Sulpicio Tolentino - defendants-appellants

Facts: Island Savings Bank approved the loan of Sulpicio Tolentino of P80k, payable in semi-annual installments for 3
years w/ a 12% annual interest, who in return mortgaged his 100 hectare land in Agusan covered by a TCT. Such loan
proceeds were solely for additional cptial to develop his other property into a subdivision. A partial release of 17K was
made by the bank and the Tolentino spouses signed a promissory note for 17K with interest. An advance interest for the
80K loan covering a 6month period worth P4,800 was deducted from the partial release of 17K but such was refunded
to Tolentino after being informed by the Bank that there was no available fund yet for the release of the remaining 63K.
The Monetary Board of the Central Bank found that Island Savings was suffering liquidity problems and prohibited
them from making new loans and investments except those as government securities. They eventually found out that the
bank failed to put up the required capital to restore its solvency and prohibited them from doing business in the
Philippines. Island Savings Bank filed for extra-judicial foreclosure of the real estate mortgage covering the land of
Tolentino for failure to pay the 17K. Tolentino filed for injunction and specific performance or recission and
damages for since they failed to release the remaining 63K and therefore entitled to specific performance and if cannot
be delivered, to rescind the real estate mortgage. Trial court ruled in favor of the bank ordering Tolentino to pay 17K
plus legal interest and lifting the TRO on his estate so foreclosure may proceed. CA modified their decision by agreeing
the dismissal of Tolentinos petition for specific performance but said that the bank cannot foreclose nor collect the 17K.
Hence this petition by Central Bank who is now in charge of Island Savings Banks assets.

Issue: Can Tolentinos petition for specific performance prosper? Is Tolentino liable for the 17K debt covered by a
promissory note? Can his real estate mortgage be forclosed due to his liability to pay the 17K?

Ruling: Tolentino is ordered to pay the 17K with 12% interest, else his mortgage will be foreclosed
covering 21.25 hectares (representing % release of 17K out of 80K) and the real estate mortgage of
78.75 is declared unenforeable and shall be released in favor of Tolentino. Since the loan agreement was a
reciprocal obligation, the obligation of each party is the consideration for that of the other. The Bank's delay in
furnishing the entire loan startedand lasted for a period of 3 years or when the Monetary Board of the Central Bank
prohibited Island Savings Bank from doing further business.Such prohibition made it legally impossible for Island
Savings Bank to furnish the P63K balance of the P80K loan. The mere fact of insolvency of a debtor is never an excuse
for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him. Rescission is the only
alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan,
because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give
the P63K. As far as the partial release of P17K which Tolentino accepted and executed a promissory note to cover it, the
bank was deemed to have complied with its reciprocal obligation to furnish a P17K loan. His failure to pay the overdue
amortizations under the promissory note made him a party in default, hence not entitled to rescission. If there is a right
to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If both parties have
committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the
courts, WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17K debt.