Gonzales vs. Philippine Commercial and International Bank

An accommodation party who signs a promissory note is solidarily liable with the principal borrower, but a bank abuses its rights and acts in gross negligence when it terminates a credit line and dishonors a check without prior written notice to the accommodation party regarding both the loan default and the credit line termination, as stipulated in the contract.

Petitioner Eusebio Gonzales, a long-time client of respondent Philippine Commercial and International Bank (PCIB), executed a Credit-On-Hand Loan Agreement (COHLA) in October 1992. In 1995 and 1996, Gonzales and spouses Panlilio obtained three loans totaling PhP 1,800,000 from PCIB, covered by promissory notes stipulating solidary liability and a real estate mortgage. Gonzales signed as an accommodation party; the loan proceeds were released directly to the spouses Panlilio, who also serviced the periodic interest dues through their own PCIB account. In July 1998, the spouses Panlilio defaulted on the interest payments. On October 7, 1998, PCIB unilaterally terminated Gonzales's COHLA and froze his Foreign Currency Deposit (FCD) account without prior written notice to Gonzales. Two days prior, on October 5, a meeting set between Gonzales, the spouses Panlilio, and PCIB officers to discuss the account had failed to materialize due to the officers encountering heavy traffic. On September 30, 1998, Gonzales had issued a PhP 250,000 check drawn against the COHLA in favor of Rene Unson; upon presentment on October 13, 1998, the check was dishonored because the credit line had been terminated, causing Gonzales humiliation and compelling him to source funds elsewhere to pay Unson.

• Accommodation Arrangement: Gonzales, a PCIB client for 15 years, accommodated his friend Jose Panlilio at the suggestion of PCIB account officer Edna Ocampo. Gonzales and the spouses Panlilio executed three promissory notes totaling PhP 1,800,000, secured by a real estate mortgage. The promissory notes expressly stipulated that the borrowers were "jointly and severally" liable. The loan proceeds were deposited directly into the spouses Panlilio's account, and the interest dues were debited exclusively from their account.
• Default and Termination of Credit Line: The spouses Panlilio defaulted on their periodic interest payments starting July 1998. On October 7, 1998, PCIB terminated Gonzales's Credit-On-Hand Loan Agreement (COHLA) and froze his Foreign Currency Deposit (FCD) account. The COHLA's effectivity clause stipulated that the bank could terminate the agreement only "upon prior notice served on CLIENT." PCIB officers claimed they verbally relayed the termination, but no written notice was ever sent prior to the termination. A letter dated October 2, 1998, which PCIB claimed advised Gonzales of the unpaid interest, only mentioned the PhP 1.8M loan and did not state that the COHLA was being cancelled.
• Dishonor of Check: On September 30, 1998, Gonzales issued a PhP 250,000 check to Rene Unson drawn against the COHLA. When presented on October 13, 1998, PCIB dishonored the check because the credit line had been terminated. Gonzales had a heated argument with Unson at the Philippine Columbian Association, causing him embarrassment. Unson sent demand letters, and Gonzales was forced to pay the PhP 250,000 in cash from other sources since his FCD account was frozen.
• Demand and Litigation: Gonzales demanded the return of his FCD proceeds and damages for the unjust dishonor. PCIB refused, citing the outstanding loan, prompting Gonzales to file a complaint for damages.

• Liability on Promissory Notes: Petitioner argued that the liability on the promissory notes pertained solely to the principal borrower, Jose Panlilio, as acknowledged by respondent bank, which released the proceeds directly to him.
• Unjust Dishonor of Check: Petitioner maintained that respondents were at fault in dishonoring the check, asserting that the reason "Account Closed" was improper given that a certification dated December 7, 1998, showed the COHLA was still valid and his FCD account held sufficient collateral. He further asserted he was not properly notified of the default or the termination of the credit line.
• Entitlement to Damages: Petitioner asserted that clear proof supported an award of damages resulting from the humiliation and financial injury caused by the unjust dishonor.

• Solidary Liability: Respondent countered that petitioner was solidarily liable on the promissory notes, which expressly stipulated joint and several liability.
• Justified Dishonor: Respondent argued that the dishonor was proper and exercised in accordance with the cross-default provisions of the promissory notes and the COHLA, which authorized the bank to set off funds and terminate the credit line upon default without notice. They claimed petitioner was verbally informed of the delinquency and the potential consequences.
• No Damages: Respondent contended that the bank acted in the regular exercise of its rights under the contracts and thus should not be liable for damages.

• Solidary Liability: Whether petitioner is solidarily liable with the spouses Panlilio for the three promissory notes covering the PhP 1,800,000 loan.
• Dishonor of Check: Whether respondent bank properly dishonored the check drawn against the credit line under the COHLA.
• Damages: Whether petitioner is entitled to damages arising from the bank's actions.

• Solidary Liability: Petitioner's solidary liability was affirmed. As an accommodation party under Section 29 of the Negotiable Instruments Law, he lent his name to enable the spouses Panlilio to obtain credit. An accommodation party is deemed an original promisor and debtor, directly and equally bound with the principal. Furthermore, the promissory notes expressly stipulated joint and several liability, and contracts have the force of law between the parties. The bank's knowledge that petitioner was an accommodation party did not exonerate him from liability.
• Dishonor of Check: The dishonor was ruled improper due to the bank's gross negligence and bad faith. The bank failed to provide prior written notice of the default to petitioner, an accommodation party who was not servicing the loan. It also violated the express stipulation in the COHLA requiring "prior notice served on CLIENT" before termination. The cross-default provisions did not grant an absolute unilateral right to disregard the contractual requirement of prior notice. The bank's failure to give prior notice constituted an abuse of rights under Article 19 of the Civil Code, and such failure was prima facie evidence of bad faith.
• Damages: Petitioner was adjudged entitled to damages. The unjust termination of the credit line and dishonor of the check constituted acts contra bonus mores under Article 21 of the Civil Code. Nominal damages of PhP 50,000 were awarded to vindicate the violated right to prior notice. Moral damages of PhP 50,000 were awarded for the mental anguish, humiliation, and embarrassment suffered, which were the proximate result of the wrongful dishonor. Exemplary damages of PhP 10,000 were imposed by way of example for the public good, considering the bank's gross negligence. Attorney's fees of PhP 50,000 were awarded pursuant to Article 2208(1) of the Civil Code, as exemplary damages were adjudicated.

• Accommodation Party — Defined under Section 29 of the Negotiable Instruments Law as one who signs an instrument as maker, drawer, acceptor, or indorser without receiving value therefor, and for the purpose of lending his name to some other person. An accommodation party lends his name to enable the accommodated party to obtain credit; he assumes liability to the other parties thereto. The relation between the accommodation party and the accommodated party is one of principal and surety, making the accommodation party directly and equally bound with the principal. The knowledge of the lender that the party is merely an accommodation party does not exonerate him from liability on the instrument.
• Abuse of Rights (Article 19, Civil Code) — Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. The elements are: (1) existence of a legal right or duty, (2) exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another. Failure to give prior written notice of the termination of a credit line, when contractually required, constitutes prima facie evidence of bad faith and falls squarely within the purview of abuse of rights.
• Extraordinary Diligence of Banks — The business of banking is impressed with public interest, requiring banks to exercise extraordinary diligence in treating the accounts of their depositors with meticulous care, given the fiduciary nature of banking. A bank may not wantonly exercise its rights without respecting the rights of its clients.

• "While solidarily liable with the spouses Panlilio on the PhP 1,800,000 loan covered by the three promissory notes, Gonzales is only an accommodation party and as such only lent his name and credit to the spouses Panlilio. While not exonerating his solidary liability, Gonzales has a right to be properly apprised of the default or delinquency of the loan precisely because he is a co-signatory of the promissory notes and of his solidary liability."
• "The effectivity clause of the COHLA is crystal clear that termination of the COH should be done only upon prior notice served on the CLIENT. This is the legal duty of PCIB––to inform Gonzales of the termination. [...] The failure to give prior notice on the part of PCIB is already prima facie evidence of bad faith."
• "With banks, the degree of diligence required is more than that of a good father of the family considering that the business of banking is imbued with public interest due to the nature of their function. The law imposes on banks a high degree of obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of banking."

• Ang v. Associated Bank, G.R. No. 146511, September 5, 2007 — Followed. Cited for the definition and requisites of an accommodation party under the Negotiable Instruments Law, establishing that an accommodation party is solidarily liable as a surety.
• MERALCO v. CA, No. L-39019, January 22, 1988 — Followed. Cited for the proposition that failure to give prior notice when required constitutes a breach of contract and a violation of Article 21 of the Civil Code, entitling the aggrieved party to moral damages.
• Solidbank Corporation/Metropolitan Bank and Trust Company v. Tan, G.R. No. 167346, April 2, 2007 — Followed. Cited regarding the high degree of diligence required of banks due to the fiduciary nature of their business.

• Section 29, Negotiable Instruments Law — Defines an accommodation party. Applied to hold Gonzales solidarily liable as a surety despite not receiving the loan proceeds.
• Article 19, Civil Code — Embodies the principle of abuse of rights. Applied to find PCIB liable for acting in bad faith by terminating the credit line without prior notice.
• Article 21, Civil Code — Provides compensation for acts contrary to morals, good customs, or public policy. Applied to justify damages for the unjust dishonor of the check.
• Article 1207, Civil Code — Provides that solidary liability cannot be presumed but must be expressly stated or required by law. Applied in conjunction with the express "jointly and severally" stipulation in the promissory notes.
• Article 2208(1), Civil Code — Allows recovery of attorney's fees when exemplary damages are awarded.
• Article 2219, Civil Code — Enumerates acts for which moral damages may be recovered, including acts referred to in Article 21.
• Article 2220, Civil Code — Allows moral damages for breaches of contract where the defendant acted fraudulently or in bad faith.

Corona, C.J. (Chairperson), Nachura, A.J., Del Castillo, A.J., Perez, A.J.