Metro Concast Steel Corp. vs. Allied Bank Corp.

A debtor's obligation is not extinguished by the breach of a separate contract with a third party, even where the debtor expected to use proceeds from that separate contract to pay its own obligations. The breach of a third party's obligation does not constitute force majeure unless it meets the elements of a fortuitous event: the cause must be independent of human will, impossible to foresee or avoid, and must render it impossible for the debtor to fulfill the obligation in a normal manner, with the obligor free from participation in the aggravation of the injury or loss.

Metro Concast Steel Corporation is a domestic corporation engaged in the business of manufacturing steel, with the individual petitioners serving as its officers and as sureties for its loans. The corporation obtained several loans from Allied Bank Corporation, a banking institution, covered by a promissory note and twelve separate letters of credit/trust receipts, with the individual petitioners executing Continuing Guaranty/Comprehensive Surety Agreements as security. The loan transactions carried stipulated interest rates and penalty charges for default, and the parties' relationship was governed by these credit instruments and the Civil Code provisions on obligations and contracts.

Metro Concast Steel Corporation, through its officers Jose S. Dychiao, Tiu Oh Yan, Guillermo Dychiao, Mercedes Dychiao, Vicente Dychiao, and Filomena Dychiao, obtained several loans from Allied Bank Corporation on various dates. These loan transactions were covered by Promissory Note No. 96-21301 dated December 13, 1996 in the amount of ₱2,000,000.00, with interest pegged at 15.25% per annum and a 3% monthly penalty charge in case of default, and twelve trust receipts dated from June 20, 1995 to March 21, 1997, with amounts ranging from ₱92,919.00 to ₱17,340,360.73, uniformly providing for a 14% per annum interest rate and 1% penalty charge. The individual petitioners executed several Continuing Guaranty/Comprehensive Surety Agreements in favor of Allied Bank as security for these obligations.

When petitioners failed to settle their obligations, Allied Bank sent demand letters dated December 10, 1998 seeking payment of the total amount of ₱51,064,093.62, but to no avail. Allied Bank then filed a complaint for collection of sum of money before the RTC. In their Second Amended Answer, petitioners admitted their indebtedness but denied liability for the interests and penalties charged, claiming to have paid the total sum of ₱65,073,055.73 in interest charges for the period covering 1992 to 1997. They alleged that the economic reverses suffered by the Philippine economy in 1998 and the devaluation of the peso against the US dollar contributed to the downfall of the steel industry, directly affecting Metro Concast's business and eventually leading to its cessation.

In order to settle their debts, petitioners offered to sell Metro Concast's remaining assets, consisting of machineries and equipment, to Allied Bank, which the latter refused. Allied Bank instead advised them to sell the equipment and apply the proceeds to their outstanding obligations. Petitioners offered the equipment for sale, but since there were no takers, the equipment was reduced into ferro scrap or scrap metal over the years. In 2002, Peakstar Oil Corporation, represented by Crisanta Camiling, expressed interest in buying the scrap metal. During negotiations, petitioners claimed that Atty. Peter Saw, a member of Allied Bank's legal department, acted as the latter's agent. With the alleged conformity of Allied Bank through Atty. Saw, a Memorandum of Agreement dated November 8, 2002 was drawn between Metro Concast, represented by Jose Dychiao, and Peakstar, through Camiling, under which Peakstar obligated itself to purchase the scrap metal for a total consideration of ₱34,000,000.00, payable as follows: (a) ₱4,000,000.00 by way of earnest money, with ₱2,000,000.00 paid in cash and the other ₱2,000,000.00 paid in two post-dated checks of ₱1,000,000.00 each; and (b) the balance of ₱30,000,000.00 to be paid in ten monthly installments of ₱3,000,000.00, secured by bank guarantees from Bankwise, Inc. in the form of separate post-dated checks.

Peakstar reneged on all its obligations under the MoA. Petitioners asseverated that their failure to pay their outstanding loan obligations must be considered force majeure, and since Allied Bank was the party that accepted the terms and conditions of payment proposed by Peakstar, petitioners must be deemed to have settled their obligations to Allied Bank. Jose Dychiao testified during trial that it was Atty. Saw himself who drafted the MoA and subsequently received the ₱2,000,000.00 cash and the two Bankwise post-dated checks worth ₱1,000,000.00 each from Camiling. However, Atty. Saw turned over only the two checks and ₱1,500,000.00 in cash to the wife of Jose Dychiao. Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of moral damages in the amount of ₱20,000,000.00 in favor of Metro Concast and at least ₱25,000,000.00 for each individual petitioner, ₱25,000,000.00 as exemplary damages, ₱1,000,000.00 as attorney's fees, and ₱500,000.00 for other litigation expenses.

The RTC dismissed the complaint, holding that the causes of action sued upon had been paid or otherwise extinguished, ruling that since Allied Bank was duly represented by its agent Atty. Saw in all negotiations and transactions with Peakstar, the MoA was binding upon the bank. The CA reversed, finding no legal basis to declare petitioners discharged from their obligations, examining the MoA and finding that it did not indicate that Allied Bank intervened or was a party thereto, that the post-dated checks were issued in favor of Jose Dychiao, and that there was no sufficient evidence showing Atty. Saw was duly authorized to act for Allied Bank.

• Extinguishment of Obligations: Petitioners argued that their loan obligations to Allied Bank had already been extinguished due to Peakstar's failure to perform its own obligations to Metro Concast pursuant to the MoA, and since Allied Bank was the party that accepted the terms and conditions of payment proposed by Peakstar, petitioners must be deemed to have settled their obligations.

• Force Majeure: Petitioners classified Peakstar's default as a form of force majeure, arguing that they have, beyond their control, lost the funds they expected to have received from Peakstar which they would use to pay their own loan obligations to Allied Bank.

• Agency of Atty. Saw: Petitioners argued that Allied Bank was equally bound by Metro Concast's MoA with Peakstar since its agent, Atty. Saw, actively represented it during the negotiations and execution of the said agreement, pointing to the facts that Atty. Saw drafted the MoA, accepted the bank guarantee issued by Bankwise, and was apprised of developments regarding the sale and disposition of the scrap metal.

• No Legal Basis for Discharge: Allied Bank argued on appeal that there was no legal basis in fact and in law to declare that when Bankwise reneged its guarantee under the MoA, petitioners should be deemed discharged from their obligations lawfully incurred in favor of Allied Bank.

• MoA Not Binding on Allied Bank: The bank pointed out that the MoA did not indicate that Allied Bank intervened or was a party thereto, that the post-dated checks pursuant to the MoA were issued in favor of Jose Dychiao, and that there was no sufficient evidence showing that Atty. Saw was duly and legally authorized to act for and on behalf of Allied Bank.

• Atty. Saw's Receipts: Allied Bank noted that while Atty. Saw received the earnest money from Peakstar, the receipt was signed by him on behalf of Jose Dychiao, and the checks and receipts were signed by Atty. Saw either as representative of petitioners or as partner of the latter's legal counsel, not in any way as representative of Allied Bank.

• Extinguishment of Obligations: Whether the loan obligations incurred by the petitioners under the subject promissory note and various trust receipts have already been extinguished.

• Extinguishment of Obligations: No. The loan obligations were not extinguished. The MoA was a separate contract from the loan transactions, and absent any showing that the terms and conditions of the loan transactions were modified or novated by the MoA, the contracts should be treated separately and distinctly. Petitioners failed to prove that their obligations had been paid or otherwise extinguished, and the burden of proving payment devolves upon the debtor who offers such a defense.

• Extinguishment of Obligations: Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due, the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation, or novation. The Court dispelled the notion that the MoA would have any relevance to the performance of petitioners' obligations to Allied Bank. The MoA is a sale of assets contract, while petitioners' obligations to Allied Bank arose from various loan transactions. Absent any showing that the terms and conditions of the latter transactions have been modified or novated by the terms and conditions in the MoA, said contracts should be treated separately and distinctly from each other, such that the existence, performance, or breach of one would not depend on the existence, performance, or breach of the other. The issue of whether Allied Bank expressed its conformity to the assets sale transaction was actually irrelevant to the issues related to petitioners' loan obligations. Moreover, the fact of Allied Bank's representation through Atty. Saw was not proven and hence cannot be deemed a sustainable defense to exculpate petitioners from their loan obligations.

Anent petitioners' reliance on force majeure, the Court held that Peakstar's breach of its obligations to Metro Concast arising from the MoA cannot be classified as a fortuitous event under jurisprudential formulation. Citing Sicam vs. Jorge, the Court stated that fortuitous events are extraordinary events not foreseeable or avoidable. It is not enough that the event should not have been foreseen or anticipated, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same. The elements of a fortuitous event are: (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury or loss. While it may be argued that Peakstar's breach was unforeseen by petitioners, the same was clearly not impossible to foresee or an event independent of human will. Neither was it shown that said occurrence rendered it impossible for petitioners to pay their loan obligations to Allied Bank. The performance or breach of the MoA bears no relation to the performance or breach of the subject loan transactions, they being separate and distinct sources of obligations. Petitioners' loan obligations remain subsisting because they have not been able to prove that the same had already been paid or in any way extinguished. The Court cited Bank of the Phil. Islands vs. Sps. Royeca for the rule that one who pleads payment has the burden of proving it, and where the existence of a debt is fully established, the burden of proving that it has been extinguished by payment devolves upon the debtor. The Court modified the CA decision only to reckon the computation of applicable interests and penalty charges from December 10, 1998, the date of extrajudicial demand.

• Force Majeure / Fortuitous Event — A fortuitous event is an extraordinary event not foreseeable or avoidable; it is not enough that the event should not have been foreseen or anticipated, but it must be one impossible to foresee or to avoid. The elements are: (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury or loss. The Court applied this doctrine to hold that a third party's breach of a separate contract does not constitute force majeure excusing the debtor's non-performance of its own obligations.

• Separate and Distinct Contracts — Contracts should be treated separately and distinctly from each other, such that the existence, performance, or breach of one would not depend on the existence, performance, or breach of the other, absent any showing that the terms and conditions of one have been modified or novated by the terms and conditions of the other. The Court applied this principle to hold that the MoA for the sale of assets was separate from the loan transactions, and thus Peakstar's breach of the MoA had no bearing on petitioners' obligations to Allied Bank.

• Burden of Proof in Payment — One who pleads payment has the burden of proving it; even where the plaintiff must allege non-payment, the debtor has the burden of showing with legal certainty that the obligation has been discharged by payment. Where the existence of a debt is fully established by the evidence, the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such a defense. The Court applied this rule to hold that petitioners failed to discharge their burden of proving that their loan obligations had been extinguished.

• "Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same." — This passage, quoted from Sicam vs. Jorge, defines the controlling standard for force majeure and was central to the Court's rejection of petitioners' defense.

• "Absent any showing that the terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the MoA, said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one would not depend on the existence, performance or breach of the other." — This passage articulates the Court's core reasoning that the MoA and the loan transactions were separate contracts, making Peakstar's breach irrelevant to petitioners' obligations.

• "As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must allege, rather than on the plaintiff to prove non-payment. The debtor has the burden of showing with legal certainty that the obligation has been discharge by payment." — This passage, quoted from Bank of the Phil. Islands vs. Sps. Royeca, establishes the burden of proof rule applied to petitioners' defense of payment.

• Sicam vs. Jorge, 556 Phil. 278 (2007) — Controlling precedent cited for the definition and elements of a fortuitous event or force majeure; the Court applied its four-element test to reject petitioners' force majeure defense.

• Bank of the Phil. Islands vs. Sps. Royeca, 581 Phil. 188 (2009) — Followed for the rule that one who pleads payment has the burden of proving it, and that the debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.

• Article 1231, Civil Code — Identifies the modes of extinguishing obligations: payment or performance, loss of the thing due, condonation or remission of the debt, confusion or merger of the rights of creditor and debtor, compensation, and novation. The Court applied this provision to determine whether petitioners' obligations had been extinguished.

Carpio, J. (Chairperson), Velasco, Jr., J., Brion, J., and Perez, J. concurred in the decision.