ILOILO City – The Supreme Court (SC) has reinforced the rights of borrowers, ruling that banks cannot arbitrarily refuse payments or misallocate them, as such practices unfairly burden borrowers with additional charges and higher interest.
In a decision penned by Associate Justice Alfredo Benjamin S. Caguioa, the SC’s Third Division directed Premiere Development Bank to accept a P2.6-million check issued by spouses Engracio and Lourdes Castañeda as full settlement of their personal loan.
Case Background
The Castañeda spouses obtained a P2.6-million personal loan from the bank.
Engracio, as an executive of Casent Realty and Central Surety, was a surety for three corporate loans amounting to P86.8 million.
The spouses issued two checks – P2.6 million to settle their personal loan and P6 million as partial payment for Central Surety’s corporate loan.
The bank pooled the total P8.6 million payment across all four loans, including those of Casent Realty and Central Surety.
The spouses contested this allocation, asserting that the P2.6-million payment was meant exclusively for their personal loan.
Both the Regional Trial Court (RTC) and the Court of Appeals (CA) ruled in their favor.
The SC upheld the lower courts’ decisions, affirming that the bank must allocate the P2.6 million solely to the personal loan.
Under Article 1252 of the Civil Code, borrowers have the right to specify how payments should be allocated when settling multiple loans. Lenders can only decide in the absence of such instructions.
The SC clarified that the spouses and the corporations (Casent Realty and Central Surety) are distinct legal entities. The bank’s decision to treat them as a single borrower was a violation of this principle.
Financial institutions are held to high standards of integrity and diligence. The SC also criticized the bank for its bad faith in refusing to properly allocate the P2.6 million payment, which unnecessarily prolonged the debt and caused undue financial hardship.
The SC ordered the bank to apply the P2.6 million payment exclusively to the personal loan.
The bank was also directed to pay the spouses P4 million in damages for the financial burden caused by its actions./PN
