Bank Not Liable for Employee's Promise to Seller: Relativity of Contracts in Loan Proceeds Release

When a bank employee assures a property seller that loan proceeds will be paid directly to them, can the seller hold the bank liable if those proceeds go elsewhere? In Prudential Bank and Trust Company v. Abasolo (G.R. No. 186738, September 27, 2010), the Supreme Court clarified this question, ruling that a bank cannot be held subsidiarily liable absent a clear contractual obligation.

The Facts

Liwayway Abasolo, 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 lacked cash, she proposed mortgaging the properties to Prudential Bank and Trust Company (PBTC), with loan proceeds to be paid directly to Abasolo.

During consultations at PBTC's head office, an employee, Norberto Mendiola, allegedly advised Abasolo to transfer the properties to Marasigan first to facilitate the loan processing, assuring her that proceeds would be paid directly to her. Following this advice, Abasolo executed a Deed of Absolute Sale in favor of Marasigan.

The loan was approved, but PBTC released the proceeds to Marasigan—not to Abasolo—because there was no written request for a bank guarantee. Marasigan failed to fully pay Abasolo, who then filed a complaint for collection and annulment of sale and mortgage against both Marasigan and PBTC.

The Issue

The sole issue before the Supreme Court was whether PBTC could be held subsidiarily liable for the unpaid purchase price if Marasigan failed to pay.

The Ruling

The Supreme Court reversed the Court of Appeals and ruled in favor of PBTC, dismissing the complaint against the bank.

No lender-borrower relationship, no obligation. The Court held that in the absence of a lender-borrower relationship between PBTC and Abasolo, there was no inherent obligation for the bank to release loan proceeds to her. Banking institutions follow well-defined lending policies and sound practices, including proper documentation for any guarantee.

Relativity of contracts. Citing Article 1311 of the Civil Code, the Court emphasized that contracts take effect only between the parties, their assigns, and heirs. For Abasolo to claim against PBTC, there must have been a clear and deliberate conferral of favor upon her—such as a written request for the proceeds to be paid to her. No such document existed.

No apparent authority. The Court rejected the trial court's reliance on the doctrine of apparent authority. While a banking corporation may be liable for its agent's acts within the general scope of authority, the burden of proof lies on the claimant to show that the employee abused his authority or committed fraud. Abasolo failed to discharge this burden. Notably, Mendiola was not even privy to the loan approval process.

Reliance on the promissory note, not the bank. The Court pointed to Abasolo's own testimony: she executed the Deed of Sale only after Marasigan signed a promissory note for her assurance. This showed that Abasolo relied on Marasigan's promise to pay, not on any guarantee from the bank.

Practical Takeaways

• Get it in writing. Verbal assurances from bank employees about payment arrangements are not enough. A written request or agreement is essential, especially for significant amounts.
• Understand who your contracting party is. The principle of relativity of contracts means third parties cannot demand performance unless the contract clearly and deliberately confers a favor upon them.
• Banks require documentation. Banking regulations and sound lending practices demand proper documentation for any arrangement, including bank guarantees.
• Proving apparent authority requires evidence. To hold a principal liable for an agent's acts, one must prove the agent acted within the scope of authority or that fraud attended the agent's actions.
• Protect your interests in property sales. When selling property contingent on a buyer's financing, consider conditions in the deed of sale itself rather than relying on separate arrangements with the buyer's lender.

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