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[G.R. No. 165480. March 9, 2005]

FLORENDO vs. BANK OF COMMERCE

THIRD DIVISION

Gentlemen:

Quoted hereunder, for your information, is a resolution of this Court dated MAR 9 2005.

G.R. No. 165480 (Ma. Lourdes S. Florendo vs. Bank of Commerce.)

Under consideration is this petition for review on certiorari of the June 30, 2004 decision [1] of the Court of Appeals in CA-G.R. CV No. 73380, reversing and setting aside an earlier decision of the Regional Trial Court at Quezon City, Branch 101, in its Civil Case No. Q-98-35844.

The main case from whence the instant petition sprung - Civil Case No. Q-98-35844 - is an action for Declaration of Nullity of Bank of Commerce (BOC) Promissory Notes TL-96-296 and TL-97-332, Real Estate Mortgage dated December 13, 1996 and Deed of Pledge dated June 23, 1997 with prayer for preliminary injunction and restraining order filed by herein petitioner Ma. Lourdes Florendo (Florendo) against, among others, respondents Bank of Commerce and Notary Public Vicente C. Cruz.

In her amended complaint, Florendo substantially alleged that sometime in 1996, Donald Dee, Vice President of the Confederation of Philippine Exporters, Inc. (Philexport) and Sergio Ortiz Luis, Jr., President and Chairman of Export & Industry Bank (EIB), conceived of a plan to organize and put up a bank with a minimum capitalization of P1.25 Billion. In order to raise the P300 Million needed to complete the capitalization of the new bank, Dee and Ortiz-Luis, Jr. devised a scheme to get P150 Million from the Bank of Commerce and Westmont Bank, using persons enticed by them to pose as "dummy borrowers" on a "No Risk" basis. One of the persons thus enticed is petitioner Florendo. Under the scheme known in bank jargon as "back-to-back" transaction, the loaned funds would be retained by the two (2) aforementioned lending banks as deposits of the borrowers, the same to be used as the dummies' capital contribution in the bank to be formed in exchange for shares of stock thereof, which shares of stock are to be pledged with the two banks. The borrowed money will earn interest at money-market rate, said interest to be applied as payment for interest on the loan. Only the spread or difference between the loan interest rate and the money-market rate need be paid by the borrowers on deferred payment, i.e., payable annually in arrears. As an irresistible selling point of the scheme, the dummy borrowers were made to believe that they would stand to make a lot of money because as soon as the value of the shares in the newly-formed bank goes up, the borrowers could simply turn around and sell those shares at a very big profit.

Convinced, Florendo bought the idea. Whereupon, she availed of the credit facilities of respondent Bank of Commerce (BOC). She claims that as one of such "dummy borrowers", BOC made her sign Promissory Note No. TL-96-296 for P33 Million with unregistered pledge on shares of stock of the Export and Industry Bank (the bank to be organized), as collateral for said loan. She further alleged that five (5) months after signing the promissory note, respondent BOC suddenly tightened the screws on the dummy borrowers, like her. In order to meet respondent BOC's demand for additional collateral, she was supposedly prevailed upon to mortgage her two (2) parcels of land: a 232 square-meter lot located at Quezon City and covered by TCT No. 142471, and a 199 square-meter lot located in Manila and covered by TCT No. 134457, both lots to serve as additional security for the P33 Million loan extended her by respondent BOC. Later, BOC made her execute a Deed of Undertaking, therein promising to submit in pledge to the latter her 330,000 shares in the Export and Industry Bank, for which a Deed of Pledge was signed by her on March 24, 1997. After the financial crisis in 1997, BOC again made her sign another promissory note, this time BOC PN No. TL-97-332.

In the same complaint, Florendo further alleged that on September 25, 1997, or before the maturity of the new promissory note, respondent BOC initiated an extrajudicial foreclosure of her real estate mortgage, and that to forestall the same, she paid respondent BOC P2.5 Million on October 24, 1997, and P200,000 on November 5, 1997, until her total payment amounted to P3.8 Million.

Hence, her complaint for annulment, etc., in Civil Case No. Q-98-35844, for which she spent P1 Million in attorney's fees to protect her interests.

In its answer, respondent BOC denied the material allegations of the complaint and averred that the loan of P33 Million it extended to Florendo was fully documented through Promissory Note PN No. TL-96-296 and a Disclosure Statement executed by Florendo wherein the maturity date of the note was on July 4, 2001 with interest due and payable in 180 days or every six months; that the proceeds of the same P33 Million loan were deposited to Florendo's account with BOC, which amount Florendo used in the purchase of 330,000 shares of stock of the Export and Industry Bank (EIB) at P100 per share, as evidenced by Stock Certificate No. A-0329 issued by EIB; that Florendo mortgaged her two (2) real estate properties and pledged her 330,000 shares in EIB as security for the said P33 Million loaned to her by BOC, as respectively evidenced by a Deed of Real Estate Mortgage and a Deed of Pledge. Later, so respondent BOC alleged, it restructured Florendo's loan, as evidenced by Promissory Note No. TL-97-332 in the amount of P37,422,572.92, the loan to bear an interest rate of 26% payable every thirty days until the loan's maturity on October 13, 1997; that in a letter dated January 27, 1998 addressed to Florendo, respondent BOC demanded payment of her loan obligation which, by then, had ballooned to P41,546,791.73. The foreclosure was averted when respondent Bank agreed to a new maturity date, in consideration of which Florendo executed another promissory note, Promissory Note No. TL-97-504, with a June 30, 1998 maturity date.

During the proceedings, the trial court admitted Florendo's parol evidence to prove that the loan agreement between her and respondent BOC suffered from a non-disclosure of her controlling interest in the new bank. The trial court viewed Florendo's allegations, to wit: she permitted herself to be used as a dummy borrower; she is at the same time an "investor" in the new bank; she herself permitted the use of the loan proceeds to buy the shares in the new bank; and that BOC did not credit-check her and just gave her the loan, as an unlawful cause therefor. Applying Article 1352 of the Civil Code, the trial court held that the four contracts executed by Florendo, namely: Promissory Notes No. TL-96-296 and TL-97-332, the Real Estate Mortgage and Deed of Pledge, were void ab initio for being contrary to law, morals, good customs, public order and public policy, the unlawful cause being that the contracts "falsely stated that the promissory notes were for "working capital" when in truth and in fact a mere "wisely drafted scheme to raise the additional capitalization of the Export and Industry Bank through the use of dummy borrowers".

Accordingly, in its decision of September 14, 2001, the trial court rendered judgment for Florendo, thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant Bank of Commerce declaring as NULL and VOID the following documents, to wit:

(1)���� BOC Promissory Note No. TL 96-296;

(2)���� BOC Promissory Note No. TL 97-332;

(3)���� Real Estate Mortgage dated December 13, 1996;

(4)���� Deed of Pledge dated June 23, 1997.

Defendant Bank of Commerce is likewise directed to:

(1)���� Return the collaterals covered by the Real Estate Mortgages plaintiff was asked to execute in favor of the defendant bank;

(2)���� Refund to the plaintiff the partial payments made by her on the loan in the total amount of P3.8 million pesos with legal rate of interests from date of payment;

(3)���� Pay the plaintiff the amount of Five Hundred Thousand Pesos (P500,000.00) as and for attorney's fees; and

(4)���� Pay the costs of the suit.

Lastly, there is no merit to defendant BOC's counterclaim, same is hereby DISMISSED. Likewise, plaintiff is ordered to return the shares pledged to defendant Bank of Commerce. Considering that there is no further proceedings done on defendant Notary Public, Atty. Vicente C. Cruz, the case against him is ordered DISMISSED.

SO ORDERED.

Therefrom, both parties took separate appeals to the Court of Appeals where their appeals were consolidated and docketed as CA-G.R. CV No. 73380.

In her partial appeal, Florendo bewailed the trial court's order for her to return the pledged shares to BOC.

In turn, respondent BOC argued that the trial court erred: (1) in declaring as null and void BOC Promissory Notes No. TL-96-296 and TL-97-332; the Real Estate Mortgage constituted by Florendo on her two parcels of land; and the Deed of Pledge executed by her relative to the shares of stock at the EIB; (2) in ordering BOG to return to Florendo the collaterals covered by the same real estate mortgage; (3) in ordering BOG to refund the partial payments made to it by Florendo in the amount of P3.2 Million with legal interest thereon from the time of payment; (4) in ordering BOG to pay Florendo the sum of P500,000 as attorney's fees and the costs of suit; and (5) in dismissing BOC's counterclaims.

In the herein assailed decision dated June 30, 2004, the Court of Appeals reversed and set aside the appealed decision of the trial court, thus:

WHEREFORE, premises considered, assailed decision is hereby REVERSED and SET ASIDE and complaint is hereby DISMISSED for lack of merit. Counterclaim of defendant-appellants is hereby DISMISSED for lack of merit. No pronouncement as to costs.

Florendo moved for a reconsideration but her motion was denied by the appellate court in its Resolution of September 27, 2004. [2]

Hence, Florendo's present recourse, which must likewise fall.

In the herein assailed decision, the Court of Appeals struck down the trial court's declaration of nullity of BOG Promissory Notes No. TL-96-296, TL-97-332 and the deeds of real estate mortgage and pledge executed by Florendo in connection with the loan extended her by respondent BOG. According to the appellate court, Florendo could not be allowed to introduce evidence on conditions unrelated to the parties' loan transaction other than those stipulated in the loan documents. The same court ratiocinated that when the parties reduced their agreement into writing, it is presumed that they have made the writing the only repository and memorial of truth, and whatever is not found therein must be understood to have been waived and abandoned. [3] cralaw In effect, the appellate court declared as improper the trial court's reception of Florendo's parol evidence to vary the terms and conditions in the two (2) promissory notes, the deeds of real estate mortgage and pledge executed by Florendo in favor of respondent BOC.

Section 9, Rule 130, of the Rules of Court provides that when the terms of an agreement have been reduced to writing, the written document is to be considered as containing all the terms agreed upon, and there can be, as between the parties and their successors in interest, no evidence of such terms other than the contents of the written document. Simply put, evidence of a prior or contemporaneous verbal agreement are generally not admissible to vary, contradict, or defeat the operation of a valid contact. [4] cralaw While parol evidence is admissible to explain the meaning of written contracts, those evidence cannot serve the purpose of incorporating into the contract contemporaneous conditions which are not mentioned at all in writing, unless there has been fraud or mistake. [5] cralaw It is basic that parties are bound by the terms of their contract, which is the law between them. [6] cralaw

The hornbook rule on interpretation of contracts consecrates the primacy of the intention of the parties as expressed in their written agreement, the same having the force of law between them. In the interpretation of contracts, it is the general rule that if the terms thereof are clear as to the intention of the contracting parties, the literal meaning of the stipulation shall control. When the terms and stipulations embodied in a contract are clear and leave no room for doubt, such should be read in its literal sense and that there is absolutely no reason to construe the same in another meaning.

Here, there is an issue as to the literal meaning of the loan contract and the documents executed by Florendo relative thereto. Florendo would have us believe that her contract with respondent BOC is one of investment instead of loan. This argument is lame. Investments have no need for collaterals, whether mortgage or pledge, which are unique in loan transactions.

In fact, the parties have admitted the existence of the loan covered by two (2) promissory notes, the mortgage and the pledge deeds and the fact of default on due repayment. Florendo not even once controverted the fact that what she entered into were contracts for loans. She understood clearly and plainly the contents and meaning of each of the four (4) documents as what they really are: loan documents. There were no acts done or events that occurred prior to, simultaneously with, or after the execution of the promissory notes and deeds that would indicate the intention of any of the parties to have been otherwise than to get the loan and secure the same with a real estate mortgage on two (2) real estate properties and a pledge of the 33,000 shares in the new bank.

The non-disclosure of Florendo's controlling interest in the new bank did not render void her loan, mortgage and pledge. As aptly pointed out by the Court of Appeals, any conclusion to the contrary would throw caution to the wind and transform the banking industry into chaos because the banks' business is to make loans but they have no control over where the loan proceeds are actually invested in or spent by the borrower. Even if banks could control where the money is invested, the purpose of investment in shares of stock in a new bank is not illegal.

Neither were the subject loan, mortgage and pledge agreements rendered void by Florendo's allegations that there was no required application form for the loan extended her by respondent BOG; that the same loan was approved without proof or statement of her capacity to pay the P33 million lent to her; that the loan was "undercollaterized" by an insufficient real estate mortgage and pledge to respondent BOC of the EIB shares; that the real estate mortgage was signed almost four months from the execution of the promissory notes; and that the Deed of Undertaking to pledge the EIB Shares was executed eleven months after the release of the loan.

At any rate, even assuming arguendo that the loan and the deeds of mortgage and pledge executed by the Florendo relative thereto were all illegal, still, the parties are now barred by the principle of in pari delicto which ordains that when two parties are equally at fault, the law leaves them as they are and denies recovery by either one of them. The rule of in pari delicto non oritur actio denies all recovery to the guilty parties inter se. When two persons are equally at fault, the law does not relieve them. [7] cralaw Petitioner Florendo, therefore, cannot recover even if the loans were declared illegal on the alleged illegal cause she herself admits authorship of.

Petitioner Florendo would have this Court declare void notarized contracts duly signed by the parties, through the admission of parol evidence. This, we are not prepared to do. If notarized contracts, which are public documents, could easily be voided by admission of oral evidence, then commercial contracts would be thrown into confusion. Mere allegations cannot be introduced as part of written contracts which are presumed to be the law between the parties. Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no party can renounce it unilaterally or without the consent of the other. It is a general principle of law that no one may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary thereto, to the prejudice of the other party. [8] cralaw

WHEREFORE, petition is hereby DENIED.

SO ORDERED.

Very truly yours,

(Sgd.) LUCITA ABJELINA-SORIANO
Clerk of Court


Endnotes:

[1] cralaw Penned by Associate Justice Vicente Q. Roxas and concurred in by Associate Justices Romeo A. Brawner and Juan Q. Enriquez, Jr. of the Eleventh Division; Rollo, pp. 40-48.

[2] cralaw Rollo, p. 50.

[3] cralaw Evangelista vs. Mercator Finance Corporation, G.R. No. 148864, August 21, 2003.

[4] cralaw Dela Rama vs. Ledesma, 143 SCRA 1 [1986].

[5] cralaw Ibid.

[6] cralaw MC Engineering, Inc. vs. Court of Appeals, 380 SCRA 116 [2002]; Rizal Commercial Banking vs. CA, 178 SCRA 739 [1989].

[7] cralaw Yu Bun Guan vs. Elvira Ong, 367 SCRA 559 [ 2201]

[8] cralaw Metro Manila Development Corporation vs. Jancom Environmental Corporation, 375 SCRA 320 [2002]; GSIS vs. The Province of Tarlac, 417 SCRA 60 [2003].


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