Philippine National Bank vs. Court of Appeals

A bank that holds a mortgage over a debtor's sugar quota allocation, while possessing the authority to approve or disapprove a lease thereof, must observe the degree of care, precaution, and vigilance that the circumstances justly demand, and is liable for damages caused by its unreasonable refusal to approve a lease, pursuant to Articles 19 and 21 of the Civil Code.

Rita Gueco Tapnio was indebted to the Philippine National Bank (PNB), San Fernando, Pampanga branch, under a crop loan secured by a mortgage on her standing crop, including her sugar quota allocation for the corresponding agricultural year. The Philippine American General Insurance Co., Inc. (Philamgen) executed a surety bond guaranteeing Tapnio's account with PNB, and Tapnio and Cecilio Gueco executed an indemnity agreement in favor of Philamgen, stipulating 12% interest per annum on any amount Philamgen paid to PNB, plus attorney's fees of 15% of the total amount due in case of litigation. Because the sugar quota was mortgaged to PNB, any lease of that quota required the bank's approval.

Rita Gueco Tapnio held an export sugar quota of 1,000 piculs for the agricultural year 1956-1957, which she did not need. She was indebted to PNB under a crop loan secured by a mortgage on her standing crop, including her sugar quota allocation. Philamgen had executed a surety bond in favor of PNB to guarantee Tapnio's account, and Tapnio and Cecilio Gueco had executed an indemnity agreement in favor of Philamgen, stipulating that any amount Philamgen paid to PNB would earn 12% interest per annum plus attorney's fees of 15% in case of litigation. The original bond was for P4,000, later reduced to P2,000.

On April 17, 1956, Tapnio and Jacobo C. Tuazon executed a contract of lease of sugar quota allotment at P2.50 per picul, for a total consideration of P2,500. Because the quota was mortgaged to PNB, the contract was submitted to the branch manager at San Fernando, Pampanga, for approval. The branch manager required the parties to raise the consideration to P2.80 per picul — the minimum lease rental acceptable to the bank — or a total of P2,800. On August 10, 1956, Tuazon informed the branch manager that he was agreeable to the P2.80 rate and that he was ready to pay, as the funds were available through an approved loan from the bank kept in his folder. The branch manager submitted the contract to the Head Office on September 7, 1956, with a recommendation for approval, which was concurred in by Vice-President J. V. Buenaventura.

Notwithstanding these recommendations, the Board of Directors of PNB required that the consideration be raised to P3.00 per picul. Tuazon sought reconsideration, and on November 19, 1956, the branch manager again recommended approval at P2.80 per picul, but the Board returned the recommendation unacted upon, citing that the prevailing price at the time was P3.00 per picul. The parties were notified of the refusal. On February 22, 1957, Tuazon wrote to the bank stating he was no longer interested in continuing the deal. The crop year 1956-1957 ended, and Tapnio failed to utilize her sugar quota, losing the P2,800 she would have received from Tuazon — an amount more than sufficient to pay her outstanding obligation to the bank.

Meanwhile, Tapnio had failed to pay her debt to PNB despite demands. PNB demanded payment from Philamgen as surety, and on September 18, 1957, Philamgen paid PNB the full amount due of P2,379.91 on behalf of Tapnio. Philamgen, in turn, made several demands upon Tapnio and Gueco for reimbursement, but to no avail. Tapnio admitted the facts but claimed she did not consider herself indebted to the bank because the lease agreement with Tuazon, had it been approved, would have yielded P2,800 — more than her obligation — and that PNB had placed obstacles to the consummation of the lease, forcing Tuazon to rescind. She filed a third-party complaint against PNB to recover any sums adjudged against her, plus moral damages, attorney's fees, and costs. Both the Court of First Instance and the Court of Appeals found that the failure of the lease negotiation was due to the fault of PNB's Board of Directors, whose insistence on P3.00 per picul — a difference of only P200 — was unreasonable given that all of Tapnio's accounts were secured by chattel mortgage, assignment of leasehold rights, and surety bonds, and that she had been granted sugar crop loans totaling almost P80,000 for the agricultural years 1952 to 1956.

• Authority to Approve or Disapprove Lease: Petitioner argued that as assignee of the sugar quota, it had the right under its own Charter and the Corporation Law to safeguard and protect its rights and interests under the deed of assignment, which included the right to approve or disapprove the lease of sugar quota, and that in the exercise of that authority, its Board of Directors necessarily had the authority to determine and fix the rental price per picul.
• Policy Determination on Rental Price: Petitioner maintained that both under its Charter and the Corporation Law, acting through its Board of Directors, it had the perfect right to adopt a policy with respect to fixing rental prices of export sugar quota allocations, and in fixing the rental at P3.00 per picul, it did not act arbitrarily, as the Board was guided by statistics of sugar prices and prices of sugar quotas prevailing at the time.
• Non-Substitutability of Judgment: Petitioner argued that since the fixing of rental was a function lodged with the Board of Directors and was a matter of policy, the Court of Appeals could not substitute its own judgment for that of the Board, which acted in good faith based on prevailing market prices as shown by statistics in its possession.
• Injustice to Creditor: Petitioner emphasized that under the appealed judgment, it would suffer great injustice because as a creditor it would be deprived of a just claim against its debtor, being required to return to Philamgen the sum of P2,379.71 plus interest previously paid to it by the insurance company on behalf of Tapnio, without recourse against Tapnio.

• Bank's Fault Caused Loss of Lease: Respondent Tapnio claimed that she did not consider herself indebted to the bank because she had a lease agreement with Tuazon for her unused export sugar quota at P2.80 per picul, totaling P2,800 — already in excess of her guaranteed obligation — and that the bank placed obstacles to the consummation of the lease, forcing Tuazon to rescind, causing her to lose the P2,800 she could have used to pay her debt.

• Unjustified Refusal: Whether the rescission of the lease contract of 1,000 piculs of sugar quota allocation by Tuazon was due to the unjustified refusal of PNB to approve said lease contract and its unreasonable insistence on P3.00 instead of P2.80 per picul.
• Correctness of Rental Fixation: Whether PNB's Board of Directors correctly fixed the rental at P3.00 per picul based on statistics of sugar prices and prices of sugar quotas in its possession.

• Unjustified Refusal: Yes. The rescission of the lease was due to PNB's unjustified refusal to approve the lease at P2.80 per picul and its unreasonable insistence on P3.00, a difference of only P200, which caused Tuazon to withdraw and Tapnio to lose P2,800.
• Correctness of Rental Fixation: No. The Board of Directors did not act correctly; the fixation at P3.00 per picul was unreasonable given the surrounding circumstances, the security already covering Tapnio's accounts, and the absence of proof of any other willing lessee at a higher price.

• Unjustified Refusal: The Court's appellate jurisdiction in certiorari proceedings is limited to reviewing errors of law, the factual findings of the Court of Appeals being conclusive. The evidence showed that the branch manager required the parties to raise the consideration from P2.50 to P2.80 per picul, and both parties readily agreed; Tuazon even offered to use his approved loan from PNB to pay the full P2,800. The branch manager recommended approval, concurred in by Vice-President Buenaventura, yet the Board of Directors required P3.00 per picul. When the branch manager again recommended approval at P2.80 upon Tuazon's motion for reconsideration, the Board returned it unacted. Time is of the essence in sugar quota leases because any unfilled allotment during the milling season may be reallocated by the Sugar Quota Administration. There was no proof of any other person willing to lease at a price higher than P2.80; isolated transactions at P3.00 did not establish ready takers. The difference of P200 was negligible compared to the P2,800 Tapnio stood to receive, which was more than enough to pay her debt. All of Tapnio's accounts were secured by chattel mortgage, assignment of leasehold rights, and surety bonds, and she had been granted crop loans totaling almost P80,000 from 1952 to 1956. While PNB had ultimate authority to approve or disapprove the lease, it could not escape its responsibility to observe the degree of care, precaution, and vigilance the circumstances demanded. Article 19 of the Civil Code requires every person to act with justice, give everyone his due, and observe honesty and good faith in the exercise of rights and performance of duties. PNB failed to do so: it knew the agricultural year was about to expire and that its disapproval would prevent Tapnio from utilizing her sugar quota. Under Article 21, any person who willfully causes loss or injury to another in a manner contrary to morals, good customs, or public policy must compensate the latter for the damage. The provisions on human relations were intended to expand the concept of torts by granting adequate legal remedy for moral wrongs impossible to specifically provide in statutes. A corporation is civilly liable in the same manner as natural persons for torts, because a principal or master is liable for every tort expressly directed or authorized by the directors as the governing body.

• Correctness of Rental Fixation: The Board's reliance on statistics of prevailing market prices did not justify its action, because the fixation at P3.00 per picul was unreasonable in light of all the circumstances: the negligible P200 difference, the security already covering Tapnio's accounts, her demonstrated capacity to pay (evidenced by almost P80,000 in crop loans from 1952 to 1956), the absence of any other willing lessee at a higher price, and the time-sensitive nature of sugar quota utilization. The Board's position was not a bona fide exercise of policy discretion but an unreasonable insistence that caused unnecessary prejudice to Tapnio, rendering PNB liable for the resulting damages.

• Article 19, Civil Code (Principle of Human Relations) — 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. Applied here: PNB, while possessing authority to approve or disapprove the lease of mortgaged sugar quota, was required to observe the degree of care, precaution, and vigilance the circumstances demanded; its unreasonable refusal constituted a violation of this provision.

• Article 21, Civil Code (Tort Liability for Willful Loss or Injury) — Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs, or public policy shall compensate the latter for the damage. Applied here: PNB's insistence on P3.00 per picul, causing the rescission of the lease and the loss of P2,800 to Tapnio, constituted willful causation of loss contrary to good faith and public policy. The Court noted that the human relations provisions were intended to expand the concept of torts in the jurisdiction by granting adequate legal remedy for the untold number of moral wrongs impossible for human foresight to specifically provide in statutes.

• Corporate Liability for Torts — A corporation is civilly liable in the same manner as natural persons for torts. A principal or master is liable for every tort expressly directed or authorized by the stockholders or members acting as a body, or from the directors as the governing body. Applied here: PNB was held liable for the tortious act of its Board of Directors in unreasonably refusing to approve the lease.

• "While petitioner had the ultimate authority of approving or disapproving the proposed lease since the quota was mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for the protection of the interest of private respondents, that degree of care, precaution and vigilance which the circumstances justly demand in approving or disapproving the lease of said sugar quota." — This passage articulates the ratio decidendi: that the possession of a right or authority does not dispense with the duty to exercise it with justice and good faith under Article 19.

• "The afore-cited provisions on human relations were intended to expand the concept of torts in this jurisdiction by granting adequate legal remedy for the untold number of moral wrongs which is impossible for human foresight to specifically provide in the statutes." — This passage explains the legislative purpose behind Articles 19 and 21 and is frequently cited in subsequent jurisprudence on the expansion of tort liability under the Civil Code.

• "A corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or, generally, from the directors as the governing body." — This passage establishes the doctrine of corporate civil liability for torts committed by its Board of Directors, applied here to hold PNB accountable for its Board's unreasonable refusal.

• Evangelista & Co. vs. Abad Santos, 51 SCRA 416 (cited as G.R. No. 31684, June 28, 1913) — Cited for the rule that the Supreme Court's appellate jurisdiction in certiorari proceedings is limited to reviewing errors of law, the factual findings of the Court of Appeals being conclusive.

• Article 19, New 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. Applied as the primary basis for holding PNB liable: the bank's authority to approve or disapprove the lease did not exempt it from the duty to exercise that authority with justice and good faith.
• Article 21, New Civil Code — Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs, or public policy shall compensate the latter for the damage. Applied to hold PNB liable for the P2,800 loss caused by its unreasonable refusal to approve the lease.
• Section 8-A, Act No. 4166, as amended — Cited in footnote 3 regarding the time-sensitive nature of sugar quota allotments, which must be utilized during the milling season or may be reallocated by the Sugar Quota Administration to other holders.

Fernando, Aquino, Concepcion Jr., and Santos, JJ., concurred.

Barredo, J., concurred on the basis of Article 19 of the Civil Code, or at least of equity, but reserved his opinion on the matter of torts relied upon in the main opinion.