Bank Liability for Loan Proceeds: When a Third Party Can (and Cannot) Claim Against a Bank

A seller who transfers property to a buyer on the strength of a bank employee's assurance that loan proceeds will be paid directly to her may be left without recourse against the bank. In Prudential Bank and Trust Company v. Abasolo (G.R. No. 186738, September 27, 2010), the Supreme Court clarified the limits of a bank's liability to third parties under the principle of relativity of contracts.

The case illustrates a common scenario: a property owner agrees to sell land, and the buyer plans to finance the purchase through a bank loan. When the bank releases the loan proceeds to the buyer instead of the seller, who bears the loss? The answer depends on whether a clear, deliberate stipulation in favor of the third party exists.

The Facts: A Sale Dependent on a Bank Loan

Liwayway Abasolo, as attorney-in-fact for the heirs of the property owner, agreed to sell two parcels of land to Corazon Marasigan for P2,448,960. Corazon had no cash, so she proposed mortgaging the properties to Prudential Bank to raise the purchase price, with the proceeds to be paid directly to Abasolo.

During consultations at the bank, an employee allegedly advised Abasolo to transfer the titles to Corazon first to expedite the loan processing, with an assurance that the proceeds would be paid directly to her. Abasolo executed a Deed of Absolute Sale, and Corazon obtained a loan from the bank secured by a real estate mortgage over the properties. However, the bank released the loan proceeds to Corazon, who failed to pay the purchase price.

Abasolo sued both Corazon and the bank. The trial court held the bank subsidiarily liable, finding that it breached its obligation to release the proceeds directly to Abasolo. The Court of Appeals affirmed. The bank appealed to the Supreme Court.

The Issue: Is a Bank Liable to a Third Party for Loan Proceeds?

The sole issue was whether the bank could be held subsidiarily liable to Abasolo for the unpaid purchase price. The Supreme Court ruled in favor of the bank, reversing the lower courts.

The Ruling: No Lender-Borrower Relationship, No Obligation

The Court held that in the absence of a lender-borrower relationship between the bank and Abasolo, there was no inherent obligation for the bank to release the loan proceeds to her. Banking institutions must follow well-defined lending policies and sound lending practices. A bank guarantee—a promise to repay the liabilities of a debtor—requires proper documentation, typically a written request from the applicant.

Relativity of Contracts and Third Party Beneficiaries

The Court anchored its ruling on Article 1311 of the Civil Code, which embodies the principle of relativity of contracts: contracts take effect only between the parties, their assigns, and heirs. For a third person to demand fulfillment of a stipulation in their favor, they must prove that the contracting parties clearly and deliberately conferred a favor upon them. A mere incidental benefit is insufficient.

In this case, there was no written request directing the bank to pay the loan proceeds to Abasolo. The Court emphasized that given the nature of banking and the substantial amount involved, a written request would have sufficed to prove a clear and deliberate conferral of benefit. Without such proof, there was no obligation to breach.

Apparent Authority Does Not Apply

The Court also rejected the application of the doctrine of apparent authority, which can make a principal liable for its agent's representations made within the general scope of authority. To invoke this doctrine, the third party must prove that the agent abused his authority or attempted to perpetrate fraud. Abasolo failed to discharge this burden of proof. The bank employee was not privy to the loan approval, and there was no evidence of collusion between the employee and the buyer to defraud Abasolo.

Practical Takeaways

• Get it in writing. A seller who expects loan proceeds to be paid directly should insist on a written instruction from the borrower to the bank, or better yet, a written bank guarantee. Verbal assurances from bank employees are not enough.
• Understand the limits of bank liability. A bank is not automatically liable to a third party simply because it financed a transaction. There must be a clear, deliberate stipulation in the third party's favor, properly documented.
• Protect the sale contract. A seller can secure the purchase price through mechanisms within the contract itself—such as a promissory note, a condition that title transfers only upon full payment, or a mortgage in the seller's favor—rather than relying on the buyer's financing arrangements.
• Proving fraud requires evidence. Allegations that a bank employee misled a party must be supported by concrete evidence of abuse of authority or collusion. Bare allegations will not suffice.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.