RCBC vs. Court of Appeals

A mortgagee is entitled to the proceeds of insurance policies taken out by the mortgagor on the mortgaged property when the parties' intention to designate the mortgagee as beneficiary is established by their contemporaneous acts, even absent the mortgagor's signature on the endorsement documents, the mortgagor being estopped from disowning the endorsements after having caused their preparation and benefited from the credit facilities conditioned thereon.

Goyu & Sons, Inc. (GOYU) obtained credit facilities from Rizal Commercial Banking Corporation (RCBC), initially in the amount of P30 million and ultimately increased to P117 million. As security, GOYU executed two real estate mortgages and two chattel mortgages in favor of RCBC, each containing a stipulation that GOYU would insure the mortgaged property with an insurance company acceptable to RCBC and endorse and deliver the insurance policies to RCBC. GOYU obtained ten insurance policies from Malayan Insurance Company, Inc. (MICO), a sister company of RCBC. Alchester Insurance Agency, Inc., MICO's underwriter, prepared nine endorsement documents in favor of RCBC, copies of which were delivered to GOYU, RCBC, and MICO. The endorsements did not bear the signature of any GOYU officer.

Goyu & Sons, Inc. (GOYU) applied for credit facilities with Rizal Commercial Banking Corporation (RCBC) at its Binondo Branch. After evaluation by RCBC officers Uy Chun Bing and Eli D. Lao, a credit facility of P30 million was initially granted, subsequently increased to P50 million, then P90 million, and finally P117 million upon GOYU's application and the officers' recommendation to RCBC's executive committee. As security, GOYU executed two real estate mortgages and two chattel mortgages in favor of RCBC, registered with the Registry of Deeds at Valenzuela, Metro Manila. Each mortgage contract stipulated that GOYU would insure the mortgaged property with an insurance company acceptable to RCBC and thereafter endorse and deliver the insurance policies to RCBC.

GOYU obtained ten insurance policies from Malayan Insurance Company, Inc. (MICO), a sister company of RCBC. In February 1992, Alchester Insurance Agency, Inc., the insurance agent through whom GOYU procured the MICO policies, prepared nine endorsement documents in favor of RCBC, seemingly upon instructions of GOYU. Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared the nine endorsements in quadruplicate on February 11, 1992. Original copies were sent to GOYU, with duplicates to RCBC and MICO, and the fourth retained for Alchester's files. GOYU did not deny receiving the originals. The endorsements, however, bore no signature of any GOYU officer.

On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. GOYU submitted its claim for indemnity to MICO, which denied the claim on the ground that the insurance policies were either attached pursuant to writs of attachment or garnishment issued by various courts, or that the proceeds were claimed by other creditors of GOYU alleging better rights. RCBC likewise filed a formal claim over the proceeds with MICO, which was denied for the same reasons. GOYU's other creditors — Urban Bank, Alfredo Sebastian, and Philippine Trust Company — had obtained writs of attachment from various courts covering an aggregate amount of P14,938,080.23. In an interlocutory order dated October 12, 1993, the RTC of Manila (Branch 3) ordered that the proceeds of the ten insurance policies be deposited with the court minus that amount. On January 7, 1994, MICO deposited P50,505,594.60 with the court. Another notice of garnishment for P8,696,838.75 was subsequently issued by another Manila RTC branch (Branch 28).

GOYU filed a complaint for specific performance and damages against MICO and RCBC, docketed as Civil Case No. 93-65442. After trial, the RTC rendered judgment in favor of GOYU, ordering MICO to pay fire loss claims of P74,040,518.58, RCBC to pay P2,000,000.00 as actual and compensatory damages, both MICO and RCBC solidarily liable for P1,000,000.00 exemplary damages and P1,000,000.00 attorney's fees, and GOYU to pay RCBC P68,785,069.04 with stipulated interest but without surcharges and penalties. All parties appealed. The Court of Appeals partly granted GOYU's appeal, increasing the damages awards and imposing 37% per annum interest on MICO's liability, while deleting interest on GOYU's obligation to RCBC. RCBC and MICO separately petitioned the Supreme Court, and their petitions were consolidated. A third petition, G.R. No. 128834, concerned RCBC's right to intervene in the action between Alfredo C. Sebastian and GOYU, where the insurance policies were attached in favor of Sebastian.

• RCBC — Right to Insurance Proceeds: RCBC maintained that, as mortgagee, it had a right to the insurance proceeds by virtue of the mortgage contracts and the endorsement documents prepared by Alchester upon GOYU's instructions, and that GOYU was estopped from disowning the endorsements after having caused their preparation and continued to enjoy the credit facilities conditioned thereon.
• RCBC — Amount of GOYU's Obligation: RCBC argued that the lower courts erred in excluding Promissory Notes No. 420-92 and 421-92, which were mere renewals of prior notes whose proceeds GOYU had admittedly received, and that GOYU's judicial admission of P116,301,992.60 as its past due account should be given full force and effect.
• RCBC — Interest and Surcharges: RCBC contended that the Court of Appeals committed gross error in deleting the payment of stipulated interest, as interest constitutes the cost of money essential to the banking business, distinct from surcharges and penalties which might be equitably reduced.
• RCBC — Right to Foreclose: RCBC argued that the Court of Appeals erred in barring its foreclosure suit on the ground of splitting a single cause of action, as the foreclosure case was still pending appeal before the same appellate court and was not properly before the division that ruled on it.
• MICO — Liability for Damages: MICO argued that it should not be held liable for damages for withholding payment of insurance proceeds, as the delay was not wanton, oppressive, or malevolent but was justified by the competing claims of GOYU's creditors and the unresolved question of who was the actual beneficiary of the policies.

• GOYU — Defective Endorsements: GOYU argued that the endorsement documents were defective because they did not bear the signature of any GOYU officer, and therefore no valid transfer of the insurance policies to RCBC was effected.
• GOYU — Amount of Obligation: GOYU contended that Promissory Notes No. 420-92 and 421-92 should be excluded because they were dated after the fire and lacked GOYU's signatures, suggesting they were pre-signed documents of questionable validity.
• GOYU — Bar of Foreclosure: GOYU argued that RCBC could not pursue both specific performance and foreclosure simultaneously, and that the foreclosure suit was barred by splitting a single cause of action.
• GOYU — Insurer's Liability for Delay: GOYU maintained that MICO was liable for unreasonably delaying and withholding payment of the insurance proceeds, entitling GOYU to damages and the statutory penalty interest.

• Beneficiary Designation: Whether RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss, notwithstanding the absence of GOYU's signature on the endorsement documents.
• Amount of GOYU's Obligation: Whether GOYU's outstanding obligation to RCBC should include the amounts represented by Promissory Notes No. 420-92 and 421-92, which were renewals of prior notes dated after the fire.
• Interest on GOYU's Obligation: Whether the Court of Appeals erred in deleting the payment of stipulated interest on GOYU's loan obligation to RCBC.
• Surcharges and Penalties: Whether the surcharges and penalties imposed by RCBC on GOYU's defaulted loans should be entirely deleted or equitably reduced.
• MICO's Liability for Damages: Whether MICO should be held liable in damages for withholding payment of the insurance proceeds to GOYU.
• RCBC's Right to Foreclose: Whether the Court of Appeals erred in barring RCBC's foreclosure suit on the ground of splitting a single cause of action.
• Priority of RCBC over Attaching Creditors: Whether RCBC's right as first mortgagee is superior to the attachment rights of GOYU's other creditors, particularly Alfredo Sebastian.

• Beneficiary Designation: Yes. RCBC is entitled to the insurance proceeds of the eight endorsed policies, GOYU being estopped from disowning the endorsements it caused to be prepared and under which it continued to enjoy the credit facilities conditioned upon such endorsement.
• Amount of GOYU's Obligation: Yes. GOYU's obligation to RCBC is P107,246,887.90 as of January 21, 1993, the lower courts having erred in excluding Promissory Notes No. 420-92 and 421-92, which were mere renewals of prior notes whose proceeds GOYU admittedly received.
• Interest on GOYU's Obligation: Yes. The Court of Appeals erred in deleting stipulated interest, as interest constitutes the cost of money essential to the banking business, distinct from surcharges and penalties which may be equitably reduced.
• Surcharges and Penalties: Partly. The surcharges (ranging from 9% to 27%) and penalty charges (36%) were tempered to 2% and 3% respectively as iniquitous and unconscionable under the circumstances, and no additional interest, surcharges, or penalties were to be charged after March 9, 1993, when GOYU offered to pay.
• MICO's Liability for Damages: No. MICO was not liable for damages, as its withholding of payment was justified by the competing claims over the proceeds and the unresolved question of the true beneficiary, and was not shown to be wanton, oppressive, or malevolent.
• RCBC's Right to Foreclose: Yes. The Court of Appeals erred in barring the foreclosure suit, as it pre-empted the resolution of a case not properly before it, the foreclosure case being pending appeal before a different division.
• Priority of RCBC over Attaching Creditors: Yes. RCBC's preferential right as first mortgagee is superior to the attachment rights of GOYU's other creditors, including Sebastian, whose petition for intervention was dismissed as moot and academic.

• Beneficiary Designation: A mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged property, such that each may insure the property for his own benefit. Although GOYU obtained the policies naming itself as sole payee, the parties' contemporaneous acts must be given due consideration to serve justice and equity. The preparation of nine endorsement documents by Alchester — MICO's underwriter — could not have occurred without GOYU's specific disclosure that the properties were mortgaged to RCBC and its intention to obtain coverage in compliance with the mortgage contracts. GOYU voluntarily procured the policies from MICO, RCBC's sister company, and would not have done so absent the mortgage relationship. GOYU received the original copies of the endorsements without objection, continued to enjoy the credit facilities conditioned upon the endorsement, and only disowned the endorsements after the fire occurred. Under the doctrine of estoppel, GOYU is forbidden from speaking against its own acts and representations to the injury of RCBC, which relied in good faith on the endorsements. Section 53 of the Insurance Code — providing that proceeds shall exclusively apply to the interest of the person in whose name or for whose benefit the policy is made — does not bar RCBC's claim, because the peculiar circumstances establish that it was the intention of the parties to designate RCBC as beneficiary. Article 2127 of the Civil Code further supports this conclusion by expressly extending the mortgage to the amount of indemnity granted to the proprietor from the insurers of the property mortgaged. Of the ten policies, only eight were endorsed to RCBC; the proceeds of those eight, aggregating P89,974,488.36, are payable to RCBC to the extent of GOYU's outstanding obligation, and may not be attached by GOYU's other creditors. The two unendorsed policies, amounting to P19,646,224.92, remain subject to attachment by other creditors.

• Amount of GOYU's Obligation: The lower courts excluded Promissory Notes No. 420-92 and 421-92 because they were dated after the fire and lacked GOYU's signatures. This was error. The fact that the notes bear dates posterior to the fire does not necessarily mean they are spurious, as it is presumed that the ordinary course of business was followed. The obligor, not the holder, bears the burden of proving that the obligation no longer exists. More decisively, GOYU's representative, Go Song Hiap, judicially admitted receiving all amounts stated in Exhibits 1 to 29-RCBC, which include the proceeds of the 29 promissory notes. Furthermore, GOYU's own letter dated March 9, 1993 offered to pay P116,301,992.60 as its past due account as of January 21, 1993, expressly stating that it accepted and confirmed this amount as true and correct. The excluded notes were mere renewals of Promissory Notes No. 908-91 and 952-91 — loans already availed of prior to the fire — and their proceeds were admittedly received by GOYU. After deducting proceeds from Seaboard Eastern Insurance (P6,095,145.81), Equitable Insurance (P2,756,373.00), and a foreign department negotiation payment (P203,584.89), GOYU's net obligation is P107,246,887.90 as of January 21, 1993.

• Interest on GOYU's Obligation: The Court of Appeals deleted the payment of stipulated interest without any factual or legal justification. The essence of interest — the cost of money — is separate and distinct from surcharges and penalties. While a court may be justified in declining to allow surcharges and penalties, the same rationale does not extend to interest, which forms an essential and fundamental element of the banking business. It is inconceivable for a bank to grant loans without charging interest. Pursuant to the framework in Eastern Shipping Lines, Inc. vs. Court of Appeals, where there are written stipulations as to the rate of interest, such agreed rates must be followed, and the interest due shall itself earn legal interest from the time of judicial demand. The trial court correctly awarded interest at the stipulated rates; the Court of Appeals' deletion constituted gross error.

• Surcharges and Penalties: Surcharges and penalties agreed to be paid by a debtor in case of default partake of the nature of liquidated damages, governed by Article 2227 of the Civil Code, which provides that liquidated damages shall be equitably reduced if they are iniquitous and unconscionable. The determination of what is iniquitous and unconscionable depends on the circumstances of each case. Given GOYU's situation after the fire, the surcharge rates ranging from 9% to 27% and the penalty charges of 36% were deemed definitely iniquitous and unconscionable, and were tempered to 2% and 3% respectively. Furthermore, in light of GOYU's offer to pay P116,301,992.60 in March 1993, which RCBC refused, it was more in keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time onward. Assurances of assistance by RCBC officers after the fire did not, however, constitute an ipso facto waiver of the right to collect surcharges and penalties.

• MICO's Liability for Damages: GOYU lost its standing as beneficiary of the insurance policies by virtue of the mortgage contracts and the endorsements, having assigned its rights to RCBC. For an insurer to be held liable for unreasonably delaying payment, the delay must be wanton, oppressive, or malevolent. An insurer may in good faith entertain a difference of opinion as to its liability, and the statutory penalty for vexatious refusal should not be inflicted unless the refusal was willful and without reasonable cause. MICO's withholding was justified by the competing claims of GOYU's various creditors and the unresolved question of the true beneficiary — a question now resolved in favor of RCBC. MICO's conduct was not shown to be in bad faith.

• RCBC's Right to Foreclose: The Court of Appeals held that RCBC could not pursue both specific performance and foreclosure, ruling that the second action was barred as a splitting of a single cause of action. However, the foreclosure suit was still pending appeal before the same Court of Appeals in CA-G.R. CV No. 46247, and the Fifteenth Division's ruling on the foreclosure's merits pre-empted the resolution of a case not properly before it. This constituted reversible error, if not grave abuse of discretion. An appellate court has no jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself which was not on appeal before it.

• Priority of RCBC over Attaching Creditors: Having determined that RCBC has the right to the insurance proceeds, the subject matter of RCBC's intervention in the Sebastian case was rendered moot and academic. Sebastian's rights as attaching creditor must yield to the preferential right of RCBC over the MICO insurance policies, as it is basic and fundamental that the first mortgagee has superior rights over junior mortgagees or attaching creditors.

• Doctrine of Estoppel — Estoppel is based upon the grounds of public policy, fair dealing, good faith, and justice, and its purpose is to forbid one to speak against his own act, representations, or commitments to the injury of one to whom they were directed and who reasonably relied thereon. It springs from equitable principles and is designed to aid the law in the administration of justice where without its aid injustice might result. In this case, GOYU was estopped from disowning the endorsement documents it caused to be prepared through Alchester, having received copies without objection and continued to enjoy the credit facilities conditioned upon such endorsement, while RCBC relied in good faith on the endorsements pursuant to the mortgage contracts.

• Separate and Distinct Insurable Interests of Mortgagor and Mortgagee — A mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged property, such that each may insure the same property for his own sole benefit. However, where the parties' contemporaneous acts demonstrate an intention to designate the mortgagee as beneficiary, the proceeds may be applied exclusively to the mortgagee, notwithstanding that the policy names the mortgagor as payee.

• Good Faith Defense of Insurer — An insurer may in good faith and honesty entertain a difference of opinion as to its liability without incurring liability for vexatious refusal. The statutory penalty for vexatious refusal should not be inflicted unless the evidence shows that the refusal was willful and without reasonable cause as the facts appear to a reasonable and prudent man.

• Equitable Reduction of Liquidated Damages (Article 2227, Civil Code) — Liquidated damages, whether intended as indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. The court must consider the circumstances of each case; what may be iniquitous in one case may be totally just and equitable in another. Surcharges and penalties partake of the nature of liquidated damages and are subject to equitable reduction.

• Eastern Shipping Lines Framework on Interest — When an obligation consisting in the payment of a sum of money (a loan or forbearance of money) is breached, the interest due should be that stipulated in writing, and the interest due shall itself earn legal interest from the time of judicial demand. In the absence of stipulation, the rate shall be 12% per annum from default. When the judgment awarding a sum of money becomes final and executory, the rate of legal interest shall be 12% per annum from such finality until satisfaction.

• "On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor RCBC." — This passage marks the Court's pivotal application of estoppel to uphold the mortgagee's right to insurance proceeds despite the mortgagor's unsigned endorsements.

• "To permit GOYU to capitalize on its non-confirmation of these endorsements while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good faith that there was due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction." — This articulates the ratio decidendi for the estoppel ruling, emphasizing that a mortgagor may not exploit its own failure to confirm endorsements it caused to be prepared while continuing to benefit from the credit facilities conditioned thereon.

• "The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite express stipulation therefor in a valid agreement, may not equally justify non-payment of interest." — This distinguishes interest as the cost of money from penal charges, establishing that equitable reduction of the latter does not warrant deletion of the former.

• "It is generally agreed, however, that an insurer may in good faith and honesty entertain a difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without reasonable cause as the facts appear to a reasonable and prudent man." — This defines the standard for insurer liability for delay in payment, requiring wanton, oppressive, or malevolent conduct rather than a mere good-faith dispute over entitlement to proceeds.

• Philippine National Bank vs. Court of Appeals, 94 SCRA 357 (1979) — Cited as controlling authority on the doctrine of estoppel, defining its basis in public policy, fair dealing, good faith, and justice, and its purpose to forbid one from speaking against his own acts to the injury of one who reasonably relied thereon.
• Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78 (1994) — Applied as the controlling framework for the computation and award of interest on monetary obligations, particularly the rule that where there are written stipulations as to the rate of interest, such agreed rates must be followed.
• Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 22 SCRA 486 (1993) — Cited for the presumption that the ordinary course of business has been followed, supporting the validity of promissory notes dated after the fire.
• Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 (1992) — Cited for the rule that the obligor, not the holder of a negotiable instrument, bears the burden of proving that the obligation no longer exists.
• Zenith Insurance Corporation vs. CA, 185 SCRA 403 (1990) — Cited for the standard that an insurer's delay must be wanton, oppressive, or malevolent to warrant liability for damages.
• Peña vs. Court of Appeals, 245 SCRA 691 (1995) — Applied to hold that the Court of Appeals erred in ruling on the merits of the foreclosure case, which was not on appeal before it, constituting reversible error.
• Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 (1981) — Cited for the principle that the first mortgagee has superior rights over junior mortgagees or attaching creditors.
• Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 (1928) — Cited alongside Alpha Insurance for the priority of the first mortgagee's rights over attaching creditors.

• Section 53, Insurance Code — Provides that the proceeds of insurance shall exclusively apply to the interest of the person in whose name or for whose benefit the policy is made. The Court held that this provision does not bar RCBC's claim, as the peculiar circumstances established that it was the parties' intention to designate RCBC as beneficiary, and the strict application of the provision was excepted on equitable grounds.
• Article 2127, Civil Code — Extends the mortgage to the amount of indemnity granted or owing to the proprietor from the insurers of the property mortgaged. The Court cited this provision as expressing the law's evident intention to protect the mortgagee's interest in the mortgaged property, including insurance indemnity.
• Article 2227, Civil Code — Provides that liquidated damages, whether intended as indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. Applied to temper the surcharge rates (9%–27%) and penalty charges (36%) to 2% and 3% respectively, given GOYU's circumstances after the fire.
• Article 1253, Civil Code — Provides that if a debt produces interest, payment of the principal shall not be deemed made until the interests have been covered. Cited in the computation of GOYU's net obligation, directing that certain amounts be deducted from interest payments due.
• Article 1169, Civil Code — Referenced through the Eastern Shipping Lines framework for the computation of legal interest from the time of judicial or extrajudicial demand.

Regalado, Puno, Mendoza, and Martinez, JJ., concurred.