Payment is a mode of extinguishing a debt. Under Article 1233 of the Civil Code, “a debt shall not be understood to have been paid unless the thing has been completely delivered”. The debtor is expected to deliver the sum of money due the creditor. Who applies the payment?
Article 1252 of the Civil Code governs the application of payment: “he who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, xxx, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract.”
Though the debtor’s right to apply payment is not mandatory, Article 1252 gives the right to the debtor to choose which of several loans to apply a particular payment that he tenders to the creditor. The right of the creditor to apply such payment arises only if the debtor fails to direct its application. A debtor can direct the application of payment to whatever account he chooses, unless he has assigned or waived that right. If the debtor does not do so, the right passes to the creditor, who may make such application as he chooses. Notwithstanding the law, banks will include a waiver in their loan contracts empowering it to apply without notice and in any manner it sees fit, any deposits and payments to any of loans, whether due or not; and any application of payments shall be conclusive and binding. The validity of this waiver and bank’s application of payment was ruled in Premiere Dev’t. Bank v. Sps. Castaneda, G.R. 185110, 19 August 2024, uploaded 20 January 2025. In this case, the spouses took out a personal loan of P2.6 Million and three [3] corporate loans of P86.8 Million, which they guaranteed as a surety [one who makes himself personally liable on the loan of another] for their two [2] companies. Both their personal and corporate loan contracts have a waiver that the bank can apply payments to any of the loans even if it is not yet due. On due dates of the two loans, the spouses gave the bank two checks: P2.6 million to pay personal loan and P6 Million to pay one corporate loan. The P8.6 million covers the full payment of two debts. The bank refused to accept them as full payment for the two loans, but applied them as partial payments to all four loans. The spouses sued for the correct application of the P2.6 million check to their personal loan. The Regional Trial Court [RTC] and the Court of Appeals [CA] ruled that the bank should have applied the P2.6 million check solely to their personal loan. The bank appealed invoking the application of payment under Article 1252, Civil Code, the waiver and the suretyship signed by the spouses on the loan of their companies. By piercing the veil of the corporations, they are considered as one.
This is a case of first impression on the issue of application of payment involving a person, who is both a principal debtor of a personal loan and a surety of corporate loans of the same creditor. Our Honorable Supreme Court ruled that when a borrower has multiple loans with the same lender, the borrower has the right to choose how to allocate their payments among the different loans. If he does not exercise this right, the lender may determine the allocation. This is what Article 1252 provides and it refers to a single debtor with several debts to a single creditor. As such, Article 1252 does not apply in this case because the loans executed in favor of the bank have different debtors: spouses and their two corporations, which under the law has a separate legal personality distinct from the persons that compose the corporations. The bank incorrectly treated the spouses and the two corporations as single debtor. The payment for their personal loan cannot be applied to their corporate loans, and vice versa. On the issue of waiver, Article 1159 provides that obligations arising from contracts have the force of law between the contracting parties and must be complied in good faith. Article 1315 provides that parties are bound to fulfill what was expressly stipulated but also to all consequences in keeping with good faith. Clearly, the bank has the duty to act in good faith and uphold the high standards of integrity and diligence. But, the bank acted in bad faith by unreasonably refusing to apply the P2.6 million exclusively to the spouses’ personal loan to fully settle the same. This allowed the personal loan to remain outstanding with added interest and charges, effectively holding it hostage until the corporate loans were fully paid. Thus, the Supreme Court ordered the bank to apply P2.6 million solely to spouses’ personal loan and to pay P4 million in damages.
