Bank Not Subsidiarily Liable Without Clear Obligation: Prudential Bank v. Abasolo

The Supreme Court, in Prudential Bank and Trust Company v. Abasolo (G.R. No. 186738, September 27, 2010), clarified the extent of a bank's liability to third parties in loan transactions. The case arose from a dispute over a property sale where the seller claimed a bank employee promised that loan proceeds would be paid directly to her. The Court ruled that a bank cannot be held subsidiarily liable for such alleged promises without clear evidence of an obligation.

Facts of the Case

Liwayway Abasolo held a Special Power of Attorney to sell two parcels of land in Laguna. In 1995, Corazon Marasigan wanted to buy the properties but lacked 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 processing, with assurance that the proceeds would be paid directly to her. Abasolo executed a Deed of Absolute Sale, and Marasigan obtained a loan from PBTC's Tondo Branch secured by a real estate mortgage over the properties. The bank released the loan proceeds to Marasigan, who failed to fully pay the purchase price.

Abasolo filed a complaint for collection of sum of money and annulment of sale and mortgage against Marasigan and PBTC. The trial court held PBTC subsidiarily liable, a ruling affirmed by the Court of Appeals. PBTC appealed to the Supreme Court.

The Issue

The sole issue was whether PBTC could be held subsidiarily liable to Abasolo for the unpaid purchase price.

The Court's Ruling

The Supreme Court reversed the lower courts' rulings and dismissed the complaint against PBTC. 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 the loan proceeds to her.

The Court emphasized the principle of relativity of contracts under Article 1311 of the Civil Code, which provides that 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 that third person. A written request would have sufficed to prove such an obligation, given the nature of banking business and the amount involved.

The Court also rejected the application of the doctrine of apparent authority. While 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 the employee abused his authority or attempted to commit fraud lies with the party claiming such liability. Abasolo failed to discharge this burden, as there was no evidence of collusion between the bank employee and Marasigan.

Significantly, the Court noted that Abasolo's own testimony showed she relied on the promissory note executed by Marasigan, not on the bank employee's alleged representations, before executing the Deed of Sale.

Practical Takeaways

• Banks are not automatically liable to third parties in loan transactions absent a clear, documented obligation. Verbal assurances from bank employees may not be sufficient to hold the bank liable.
• Documentation is critical. A written request or agreement specifying that loan proceeds be paid to a third party is essential to establish a bank's obligation.
• The principle of relativity of contracts limits liability to the parties to a contract. Third parties must prove a clear and deliberate stipulation in their favor.
• The doctrine of apparent authority requires proof of abuse of authority or fraud by the bank's agent. Bare allegations are insufficient.
• Reliance on security instruments like promissory notes, rather than on unverified representations, strengthens a party's position in disputes.

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