Strict application of debt payments
A recent decision of the Supreme Court in “Premiere Development Bank vs. Spouses Engracia and Lourdes Castañeda” gave clarity to a provision that is standard in loan or credit agreements with banks.
By way of background, the bank applied a payment made by the Castañedas to their personal loan and to three corporate loans where they acted as surety despite specific instructions that the payment should be applied only to the personal loan.
The amount paid was insufficient to fully repay the personal loan and unpaid corporate loans. The net result of the bank’s action was to render the personal loan as outstanding and unpaid and, as a result, it incurred additional interest charges.
The bank based, among others, the payment application on the following provision in the personal loan:
“In case I/We have several obligations with the Bank, I/We hereby empower the Bank to apply without [notice] and in any manner it sees fit, any or all of my/our deposits and payment to any of my obligations whether due or not. Any such application of deposits or payment shall be conclusive and binding upon me/us.”
Except for some cosmetic changes, this “waiver provision” (as it is commonly described) is practically a template in all bank loans or credit facility agreements. It allows the bank to “seize” any deposits the borrower may have in it and apply it to his or her unpaid debt obligations.
As worded, the application can be done without giving the borrower prior or post notice and it shall be considered conclusive (i.e., immune from questioning) and binding (i.e., the borrower has no choice but accept it).
The borrower would only know about the sequestration and application when he or she receives the bank’s statement of account.
So, if, for example, he or she issues a check against that deposit not knowing that a certain amount had been debited from it (or worse, it’s already emptied), the check would be dishonored for insufficiency of funds, with resultant adverse effect on the issuer’s credit standing.
The court did not agree with the bank’s interpretation of that provision. It ruled that the phrase “several obligations with the Bank” refers to “… several obligations of the same borrower.”
“As such, payments can be validly applied only to obligations of the same debtor but not to obligations of other persons or entities. Simply stated, this provision only authorizes application of payment if Spouses Castañedas had other outstanding obligations with PDB [referring to the bank] obtained in their personal capacity.”
With this reasoning, the court affirmed the earlier rulings of the trial and appellate courts ordering the bank to apply the payment made by the Castañedas solely to their personal loan.
Worse, it chastised the bank for its action and ordered it to pay them P2 million in moral damages, P2 million in exemplary damages and P50,000 in attorney’s fees.
In giving those awards (which in the legal community are considered punitive or disciplinary in effect), the court said “… the highest degree of diligence is required of banks in dealing with its clients, considering that the banking business is imbued with public interest.
“As stated earlier, PDB did not act merely with negligence but with evident bad faith. This justifies the award of exemplary damages of P2 million. This should deter banks from committing similar dubious practices.”
Although the court’s statement was directed to a particular bank, it may be considered as “a shot across the bow” (or a warning) addressed to all banks in the Philippines in the handling of their client’s deposits or payment of their loan with them.
Henceforth, the court’s interpretation of the “waiver provision” shall be controlling in case issues arise in the future on the validity of the unilateral seizure of a client’s bank deposit to pay for loans that indicate his or her name as the borrower, or where his or her name appears as one of the borrowers, guarantors or a comaker in other bank loans.
