Land Bank of the Philippines vs. Ong

A bank that accepts a conditional payment from a third person for the assumption of a mortgage, and subsequently disapproves the application without notice while retaining the payment, is obligated to return the amount under the principle of unjust enrichment, as it has no legal ground to keep the money.

On March 18, 1996, the Spouses Johnson and Evangeline Sy obtained a PhP 16 million loan from Land Bank, secured by three residential lots, five cargo trucks, and a warehouse. The loan agreement included an acceleration clause. When the Spouses Sy found themselves unable to service the loan, they sought to transfer their obligation.

• On December 9, 1996, the Spouses Sy sold three of their mortgaged parcels of land to Alfredo Ong (Evangeline Sy's father) for PhP 150,000 under a Deed of Sale with Assumption of Mortgage.
• Alfredo Ong went to Land Bank to facilitate the assumption of mortgage, where the branch head, Atty. Edna Hingco, informed him that he needed to pay PhP 750,000 and submit financial documents for the bank to approve the assumption.
• Ong paid the PhP 750,000 and submitted the required documents, and was assured by Atty. Hingco that the property titles would be transferred to his name.
• Land Bank's credit investigation revealed that Ong had a past due real estate mortgage with another bank, leading to the disapproval of his application to assume the mortgage.
• Land Bank failed to inform Ong of the disapproval of his application.
• Several months later, Land Bank foreclosed on the mortgaged properties of the Spouses Sy.
• Ong only learned of the foreclosure upon seeing a Notice of Foreclosure and Auction Sale published by the RTC.
• Land Bank did not return the PhP 750,000 paid by Ong, prompting him to file a suit for recovery of sum of money with damages.

• Land Bank argued that under Article 1236 of the Civil Code, it was not bound to accept payment from Ong, a third person, and that Ong's recourse should be against the original debtors, the Spouses Sy.
• The bank contended that no novation occurred because it did not consent to the substitution of debtors, which is an indispensable requirement.
• It claimed it was not unjustly enriched because it subtracted the PhP 750,000 from the Spouses Sy's outstanding loan obligation when it made its bid during the foreclosure sale.
• Land Bank asserted that the lower courts erred in awarding attorney's fees and in imposing a 12% interest rate on the amount to be returned.

• Alfredo Ong maintained that Land Bank acted in bad faith by foreclosing on the properties without informing him that his application for assumption of mortgage had been denied.
• He argued that he was led to believe that his payment of PhP 750,000 was a prerequisite for the approval of the assumption and the transfer of the properties to his name.
• Ong claimed entitlement to the return of his PhP 750,000, plus moral damages, attorney's fees, and litigation expenses.

• Procedural Issues:
  • Whether the Supreme Court should consider a factual defense raised by the petitioner for the first time on appeal.
• Substantive Issues:
  • Whether Article 1236 of the Civil Code applies, thereby making Ong's proper recourse an action against the Spouses Sy instead of Land Bank.
  • Whether a novation of the loan agreement occurred when Ong and the Spouses Sy executed the Deed of Sale with Assumption of Mortgage.
  • Whether Land Bank is liable to return the PhP 750,000 to Ong under the principle of unjust enrichment.
  • Whether the award of attorney's fees and the imposition of a 12% per annum interest rate were proper.

• Procedural:
  • The Court ruled that it cannot entertain issues, arguments, or theories not raised in the lower courts, and thus disregarded Land Bank's new defense that it had subtracted the PhP 750,000 from its foreclosure bid. The Court also deferred to the factual findings of the trial court as they were sustained by the appellate court and no exceptions to the general rule were shown.
• Substantive:
  • The Court held that Article 1236 of the Civil Code does not apply because Ong did not pay on behalf of the Spouses Sy but made a conditional payment for his own interest as a prospective mortgagor. Since the condition—the approval of his application—failed, his recourse is not against the original debtors.
  • The Court found that no novation occurred. A key requisite for novation by substitution of the debtor is the creditor's consent, which Land Bank never gave. The bank did not intervene in the contract between the Spouses Sy and Ong.
  • The Court ruled that Land Bank is liable to return the PhP 750,000 based on the principle of unjust enrichment. By accepting Ong's payment and failing to inform him of the disapproval of his application, the bank was estopped from denying its obligation. It unjustly retained a benefit at Ong's expense without any just or legal ground.
  • The Court affirmed the award of attorney's fees, finding it just and equitable under Article 2208(2) of the Civil Code because Ong was compelled to litigate to protect his interests. However, the Court modified the interest rate, ruling that the obligation was not a loan or forbearance of money, and thus the applicable legal interest rate is 6% per annum from the date of judicial demand (December 12, 1997) until finality of the judgment. The total award shall then earn 12% per annum from finality until fully paid.

• Unjust Enrichment (Article 22, Civil Code) — This principle provides that a person shall not be unjustly benefited at the expense of another. It was applied to compel Land Bank to return the PhP 750,000 it received from Ong, as the bank had no legal right to retain the money after his application to assume the mortgage was disapproved.
• Estoppel — This doctrine prevents a person from asserting a claim inconsistent with their earlier conduct if another person reasonably relied on that conduct to their detriment. It was applied against Land Bank, whose actions of accepting payment and remaining silent misled Ong into believing his assumption of mortgage would be approved, thereby estopping the bank from arguing it had no obligation to him.
• Novation (Article 1293, Civil Code) — This is the extinguishment of an obligation by the creation of a new one that substitutes it. The Court explained that novation through the substitution of a debtor requires the express consent of the creditor. In this case, since Land Bank never consented to the substitution of the Spouses Sy by Ong, no novation occurred.
• Payment by a Third Person (Article 1236, Civil Code) — This article governs payments made by a third party on behalf of a debtor. The Court held this doctrine was inapplicable because Ong was not paying for the Spouses Sy; rather, he made a conditional payment to protect his own interest as a prospective new debtor.
• Accion in rem verso — This is an action for recovery based on unjust enrichment. The Court found all its requisites present: (1) Land Bank was enriched; (2) Ong suffered a loss; (3) the enrichment was without just or legal ground; and (4) Ong had no other legal remedy.

• "Equity, as the complement of legal jurisdiction, seeks to reach and complete justice where courts of law, through the inflexibility of their rules and want of power to adapt their judgments to the special circumstances of cases, are incompetent to do so. Equity regards the spirit and not the letter, the intent and not the form, the substance rather than the circumstance, as it is variously expressed by different courts."

• Eastern Shipping Lines, Inc. v. Court of Appeals — Referenced as the landmark case establishing the guidelines for the imposition of interest rates. It was used to determine that the obligation was not a loan or forbearance of money and to apply the correct interest rates (6% before finality, 12% after).
• Sunga-Chan v. Court of Appeals — Cited to distinguish that the 12% per annum interest rate under Central Bank Circular No. 416 applies only to loans or forbearance of money, while the 6% rate under Article 2209 of the Civil Code applies to other money judgments.
• Spouses Benjamin and Agrifina Lim v. M.B. Finance Corporation — Cited to provide a detailed discussion on the concept and essential requisites of novation, which was used to conclude that no novation took place in this case.

• Article 19, Civil Code — Cited to underscore the duty of every person to act with justice, give everyone his due, and observe honesty and good faith, a duty which Land Bank failed to observe in its dealings with Ong.
• Article 22, Civil Code — This is the statutory basis for the principle of unjust enrichment, which was the primary ground for ordering Land Bank to return the payment to Ong.
• Article 1236, Civil Code — Discussed by the Court to reject Land Bank's argument that Ong's recourse was against the Spouses Sy, clarifying that Ong was not a third person paying for another but a party acting in his own interest.
• Article 1293, Civil Code — Cited to establish that the creditor's consent is indispensable for a novation involving the substitution of a debtor.
• Article 2208(2), Civil Code — Provided the legal basis for the award of attorney's fees, as Ong was compelled to litigate to protect his interests due to Land Bank's unjust refusal to return his money.
• Article 2209, Civil Code — Applied to determine that the proper legal interest rate for the obligation was 6% per annum, as it did not constitute a loan or forbearance of money.