Bank Not Subsidiarily Liable for Loan Proceeds Released to Borrower

The Supreme Court has ruled that a bank cannot be held subsidiarily liable for releasing loan proceeds to its borrower when there was no clear agreement that the proceeds should go to a third party. The case of Prudential Bank and Trust Company v. Abasolo (G.R. No. 186738, September 27, 2010) clarifies the limits of a bank's liability in loan transactions involving third-party sellers.

The Facts of the Case

Liwayway Abasolo, acting as attorney-in-fact for the heirs of Leonor Valenzuela-Rosales, agreed to sell two parcels of land in Laguna to Corazon Marasigan for P2,448,960. Since Marasigan had no cash, she proposed mortgaging the properties to Prudential Bank and Trust Company (PBTC), with the loan proceeds to be paid directly to Abasolo as payment for the properties.

During consultations at PBTC's head office, an employee named Norberto Mendiola allegedly advised Abasolo to transfer the properties to Marasigan first to facilitate the loan application, with assurance that the proceeds would be paid directly to her. Abasolo executed a Deed of Absolute Sale over the properties, and titles were issued in Marasigan's name.

The loan was approved, and Marasigan executed a real estate mortgage over the properties. However, without a written request for a bank guarantee, PBTC released the loan proceeds directly to Marasigan, who failed to fully pay the purchase price to Abasolo.

The Issue

The central question was whether PBTC could be held subsidiarily liable for the unpaid purchase price in the event Marasigan failed to pay.

The Court's Ruling

The Supreme Court reversed the lower courts' rulings and held that PBTC could not be held subsidiarily liable. The Court emphasized several key points:

No inherent obligation to the seller. In the absence of a lender-borrower relationship between PBTC and Abasolo, the bank had no inherent obligation to release the loan proceeds to her. The loan contract was between PBTC and Marasigan alone.

Banking practices require documentation. The Court cited Section X302 of the Manual of Regulations for Banks, which requires banks to establish systems for documenting and monitoring loans. A bank guarantee is essentially a promise to repay the liabilities of a debtor, and it would be contrary to established banking practice for an employee to issue such a guarantee without a written request, especially given the amount involved.

Relativity of contracts. Under Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns and heirs. For a third person to demand fulfillment of a stipulation in a contract, the contracting parties must have "clearly and deliberately conferred a favor upon a third person." Since no written request existed, there was no clear and deliberate conferral of favor upon Abasolo.

No apparent authority established. While the Court acknowledged the doctrine that a banking corporation may be liable to innocent third persons for representations made by an agent acting within the general scope of authority, the burden of proving that Mendiola abused his authority or attempted to commit fraud fell on Abasolo. She failed to discharge this burden. Notably, Mendiola was not privy to the approval or disallowance of the loan application, and there was no evidence of collusion between him and Marasigan.

Abasolo's own actions showed reliance on the promissory note. The Court noted that Abasolo required Marasigan to execute a promissory note before she would execute the Deed of Sale. This indicated that Abasolo relied on Marasigan's personal undertaking to pay, not on any alleged bank guarantee.

Practical Takeaways

• Banks are not guarantors of third-party transactions. A bank's liability extends only to its contractual obligations with its own borrowers and depositors.

• Get it in writing. Sellers who agree to receive loan proceeds as payment should insist on a written instruction from the borrower directing the bank to release funds directly to them.

• Understand the limits of employee representations. Statements made by bank employees during consultations do not automatically bind the bank, especially when they deviate from established banking procedures.

• Documentation protects all parties. The Court's ruling underscores the importance of written documentation in banking transactions, particularly for large amounts.

• Verify before transferring title. Property sellers should not transfer title based solely on assurances that loan proceeds will be paid to them. A promissory note from the buyer may not be sufficient protection.

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