Associated Bank vs. Court of Appeals

A surviving corporation in a merger may enforce contracts entered into by the absorbed corporation even after the date of the merger agreement, where the merger agreement provides that all references to the absorbed corporation in any deed, document, or paper shall be deemed references to the surviving corporation.

Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into an Agreement of Merger on September 16, 1975, with ABC as the surviving bank, thereafter operating as Associated Citizens Bank, later renamed Associated Bank on March 10, 1981 by virtue of its Amended Articles of Incorporation. The merger agreement contained a stipulation that upon the effective date of the merger, all references to CBTC in any deed, document, or other papers of whatever kind or nature and wherever found shall be deemed references to ABC, the surviving bank, as if such references were direct references to ABC. Private respondent Lorenzo Sarmiento Jr. executed a promissory note in favor of CBTC on September 7, 1977, two years after the merger agreement was signed.

Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into an Agreement of Merger on September 16, 1975, with ABC as the surviving bank, thereafter operating as Associated Citizens Bank. On March 10, 1981, the surviving bank changed its corporate name to Associated Bank by virtue of its Amended Articles of Incorporation. The merger agreement provided that upon the effective date of the merger, all rights, privileges, powers, assets, and property of CBTC would vest in ABC without need of further act or deed. Critically, the agreement also stipulated that "all references to [CBTC] in any deed, documents, or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]."

On September 7, 1977, Lorenzo Sarmiento Jr. executed Promissory Note No. TL-2649-77 in the amount of P2,500,000, naming CBTC as payee, undertaking to pay on or before March 6, 1978, with interest at 14% per annum, 3% per annum as liquidated damages, compounded interests, and attorney's fees equivalent to 10% of the amount due in case of litigation. Sarmiento made partial payments but failed to fully satisfy the obligation. A demand letter dated June 6, 1985 was sent through counsel and received by Sarmiento on November 12, 1985. As of September 30, 1986, his outstanding balance stood at P4,689,413.63 after deducting a P1,000,000 payment made in February 1986.

On August 22, 1985, Associated Bank filed a complaint for collection of sum of money against Sarmiento in the Regional Trial Court of Manila, Branch 48, docketed as Civil Case No. 85-32243. Sarmiento denied the material allegations and raised affirmative defenses, including lack of cause of action, improper party, onerous terms, improper application of partial payments, prematurity, prescription, and laches. On May 22, 1986, Sarmiento was declared as if in default for failure to appear at the pre-trial conference despite due notice. His motion to lift the order of default was denied on September 16, 1986, and the bank was allowed to present evidence ex parte on October 16, 1986. The bank's accountant, Esteban C. Ocampo, testified on the promissory note, the merger, the partial payments, and the outstanding balance as reflected in the statement of account.

On October 17, 1986, the trial court rendered judgment in favor of the bank, ordering Sarmiento to pay P4,689,413.63 with 14% interest per annum, P200,000 as attorney's fees, and costs of suit. On appeal, the Court of Appeals limited itself to the question of whether the bank had established a cause of action against Sarmiento. The appellate court held that Associated Bank had no cause of action because the promissory note was executed in favor of CBTC two years after the merger agreement, and the surviving bank could not have acquired any interest in the note, which did not exist at the time of the merger. The CA reversed the RTC decision and dismissed the complaint on January 30, 1996.

• Cause of Action: Petitioner argued that the Court of Appeals erred in reversing the RTC decision and declaring that it had no cause of action against respondent over the promissory note.
• Privity of Contract: Petitioner maintained that the CA erred in declaring that, since the promissory note was executed in favor of CBTC two years after the merger, respondent is not liable to petitioner because there is no privity of contract between respondent and Associated Bank.
• Real Party in Interest: Petitioner contended that the CA erred in ruling that petitioner, despite the merger between petitioner and CBTC, is not a real party in interest insofar as the promissory note executed in favor of the absorbed company is concerned.

• Effectivity of Merger: Respondent contended that the merger took effect on the date of execution of the agreement, September 16, 1975, and since the promissory note was executed on September 7, 1977 — two years after the merger — CBTC could not have conveyed or transferred its interest in the note to petitioner, as the note did not exist at the time of the merger.
• Prescription and Laches: Respondent claimed the action had prescribed pursuant to Article 1149 of the Civil Code and was barred by laches.
• Contract Pour Autrui: Respondent offered the alternative defense that the promissory note was a contract pour autrui, an accommodation for the benefit of a third person who actually received the consideration.
• Lack of Consideration: Respondent claimed he received no consideration for the promissory note, citing petitioner's failure to submit proof of his loan application and actual receipt of the loan amount.

• Enforceability of Contract by Surviving Corporation: Whether Associated Bank, the surviving corporation in a merger, may enforce a promissory note executed by private respondent in favor of CBTC, the absorbed company, after the merger agreement had been signed.
• Prescription and Laches: Whether the action for collection was barred by prescription or laches.
• Contract Pour Autrui: Whether the promissory note was a contract pour autrui benefiting a third person.
• Consideration: Whether private respondent received consideration for the promissory note.

• Enforceability of Contract by Surviving Corporation: Yes. The surviving corporation may enforce the promissory note because the merger agreement expressly provided that all references to CBTC in any deed, document, or paper shall be deemed references to the surviving bank, regardless of when the document was executed.
• Prescription and Laches: No. The action was based on a written contract and was filed within the ten-year prescriptive period under Article 1144 of the Civil Code; laches is inapplicable where the claim was filed within the prescriptive period.
• Contract Pour Autrui: No. The promissory note contained no stipulation in favor of a third person; it merely laid down terms of payment and penalties.
• Consideration: Yes, consideration was established. The promissory note bearing respondent's signature speaks for itself, and his partial payment of P1,000,000 constituted an express acknowledgment of his obligation.

• Enforceability of Contract by Surviving Corporation: Ordinarily, in a merger, the surviving corporation automatically acquires all rights, privileges, properties, and liabilities of the absorbed corporation without winding up or liquidation. The merger becomes effective only upon issuance of a certificate of merger by the SEC under Section 79 of the Corporation Code. Even assuming the merger took effect on the date of execution (September 16, 1975), the merger agreement contained a clause stating that "all references to [CBTC] in any deed, documents, or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct references to [ABC]." Unlike the earlier provision in the agreement which referred to property and rights "as of the effective date of the merger," this clause imposed no temporal limitation. It was deliberately included to protect the interests of the combining banks and to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. The provision being clear, plain, and free of ambiguity, it must be given its literal meaning under Article 1370 of the Civil Code (verba legis non est recedendum). Thus, although the promissory note named CBTC as payee, the reference to CBTC must be construed as a reference to petitioner bank, and petitioner has a valid cause of action against private respondent.
• Prescription and Laches: The suit for collection of a sum of money based on a written contract prescribes after ten years under Article 1144 of the Civil Code. Sarmiento's obligation became due and demandable on March 6, 1978, and the complaint was filed on August 22, 1985, well within the ten-year prescriptive period. Laches, a creation of equity, is applied to avoid recognizing a right when doing so would result in a clearly inequitable situation. Requiring Sarmiento to pay the remaining balance is not inequitable; allowing him to escape liability would amount to unjust enrichment at the expense of petitioner, especially since CBTC's corporate personality had been dissolved by the merger. The Court has held that laches is inapplicable where the claim was filed within the prescriptive period.
• Contract Pour Autrui: A stipulation pour autrui requires: (1) the stipulation in favor of a third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting parties bears the legal representation or authorization of the third party (Florentino vs. Encarnacion Sr.). The "fairest test" is to examine the intention of the parties as disclosed by their contract. The promissory note contained no stipulation benefiting a third person; it merely stated terms of payment and penalties. No evidence was offered to support the claim, and respondent could have impleaded any third-party beneficiary via a third-party complaint under Section 11, Rule 6 of the Rules of Court but did not.
• Consideration: The promissory note bearing respondent's signature speaks for itself (res ipsa loquitur). Respondent did not question the genuineness and due execution of the instrument. The bank's accountant testified to the outstanding balance, and respondent's partial payment of P1,000,000 was equivalent to an express acknowledgment of his obligation. "A person cannot accept and reject the same instrument."

• Doctrine of Merger — Effect on Contracts — In a merger, the surviving corporation automatically acquires all rights, privileges, powers, immunities, franchises, assets, and liabilities of the absorbed corporation without need of winding up or liquidation. Where the merger agreement provides that all references to the absorbed corporation in any deed, document, or paper shall be deemed references to the surviving corporation, this clause applies to all contracts regardless of date of execution, enabling the surviving corporation to enforce contracts entered into by the absorbed corporation even after the merger agreement date. The Court applied this by construing the reference to CBTC in the promissory note as a reference to the surviving bank, Associated Bank.
• Verba Legis — When the language of a contract is clear, plain, and free of ambiguity, it must be given its literal meaning and applied without convoluted interpretation. (Verba legis non est recedendum.) The Court applied this doctrine to the merger agreement's stipulation on references to CBTC, holding that no other construction could be given to the unequivocal language.
• Laches Inapplicable Within Prescriptive Period — The doctrine of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law. The Court applied this by noting that the complaint was filed within the ten-year prescriptive period for actions upon written contracts under Article 1144 of the Civil Code.
• Stipulation Pour Autrui — Requisites — A stipulation pour autrui requires: (1) the stipulation in favor of a third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting parties bears the legal representation or authorization of the third party. The "fairest test" is to examine the intention of the parties as disclosed by their contract. The Court found none of these requisites present in the promissory note.

• "Thus, the fact that the promissory note was executed after the effectivity date of the merger does not militate against petitioner. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner." — This passage articulates the ratio decidendi: the merger agreement's clause on references to CBTC applies to all contracts regardless of execution date, enabling the surviving bank to enforce the promissory note.
• "No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity, the provision must be given its literal meaning and applied without a convoluted interpretation. Verba lelegis non est recedendum." — This states the Court's application of the verba legis doctrine to the merger agreement's stipulation, refusing to adopt a narrow or restrictive reading.
• "A person cannot accept and reject the same instrument." — This principle was applied to reject respondent's attempt to deny liability after having made partial payment on the promissory note, which constituted an express acknowledgment of his obligation.

• Florentino vs. Encarnacion Sr., 79 SCRA 192 (1977) — Followed for the requisites of a stipulation pour autrui and the "fairest test" for determining whether a third person's interest in a contract is a stipulation pour autrui or merely an incidental interest. The Court found none of the requisites present in the promissory note.
• Catholic Bishop of Balanga vs. Court of Appeals, 264 SCRA 181 (1996) — Cited for the definition of laches as an equitable principle applied not to penalize neglect but to avoid recognizing a right when doing so would result in a clearly inequitable situation.
• Chavez vs. Bonto-Perez, 242 SCRA 73 (1995) — Followed for the proposition that the doctrine of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law.
• Olizon vs. Court of Appeals, 236 SCRA 148 (1994) — Cited for the principle that laches is applied to avoid an injustice.

• Section 79, Batas Pambansa Blg. 68 (Corporation Code) — Governs SEC approval and effectivity of merger; provides that the merger shall be effective only upon issuance by the SEC of a certificate of merger. The Court noted this provision in determining when the merged corporation ceases to exist and when its rights pass to the surviving corporation.
• Section 80, Batas Pambansa Blg. 68 (Corporation Code) — Enumerates the effects of merger, including that the surviving corporation shall possess all rights, privileges, immunities, and franchises of each constituent corporation, and all property and receivables shall be transferred to and vested in the surviving corporation without further act or deed. The Court cited this provision as the statutory basis for the automatic transfer of rights from the absorbed to the surviving corporation.
• Article 1144, Civil Code — Provides that actions upon a written contract prescribe after ten years from the time the right of action accrues. The Court applied this to hold that the collection suit was filed within the prescriptive period, as the obligation became due on March 6, 1978, and the complaint was filed on August 22, 1985.
• Article 1311, paragraph 2, Civil Code — Governs stipulations pour autrui, allowing a third person to demand fulfillment provided he communicated his acceptance to the obligor before its revocation. The Court found no such stipulation in the promissory note.
• Article 1370, Civil Code — Provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of the stipulations shall control. The Court applied this provision to the merger agreement's clause on references to CBTC, holding that its clear and unambiguous language must be given literal effect.

Davide Jr., Bellosillo, Vitug, and Quisumbing, JJ., concurred.