Sinamban vs. China Banking Corporation

Solidary co-makers who bind themselves "jointly and severally" with principal debtors are directly and primarily liable for the proportionate share of any loan deficiency resulting from foreclosure of security, calculated according to the ratio of the specific note's outstanding balance to the total aggregate indebtedness, where the creditor opts to apply the foreclosure proceeds to the total debt rather than to specific obligations.

Spouses Danilo and Magdalena Manalastas obtained a revolving credit line from China Banking Corporation (Chinabank) beginning in 1990 to finance their rice milling business, secured by a real estate mortgage over two properties in Pampanga. The credit line was progressively increased from ₱700,000.00 to ₱2,450,000.00. Spouses Estanislao and Africa Sinamban, relatives of the Manalastas, signed as solidary co-makers in two promissory notes executed under this credit facility. All notes contained acceleration clauses, penalty provisions of 1/10 of 1% per day on overdue amounts, and 10% attorney's fees. Paragraph 5 of the notes authorized Chinabank to apply any payments to "this note and/or any other particular obligation or obligations" as the bank might select.

• The Credit Line and Mortgage: Spouses Danilo and Magdalena Manalastas obtained a credit line from Chinabank beginning February 19, 1990, secured by a real estate mortgage over two properties covered by Transfer Certificate of Title Nos. 173532-R and 173533-R. The credit line was increased progressively from ₱700,000.00 to ₱2,450,000.00 by March 23, 1994.
• The Three Promissory Notes: Three promissory notes were executed under this facility: (1) PN No. CLF 5-93 dated February 26, 1991, for ₱1,300,000.00 at 22.5% interest per annum, with Estanislao Sinamban as solidary co-maker; (2) PN No. OACL 636-95 dated May 23, 1995, for ₱325,000.00 at 21% interest per annum, with both Sinambans as solidary co-makers; and (3) PN No. OACL 634-95 dated April 24, 1995, for ₱1,800,000.00 at 23% interest per annum, signed solely by the Manalastas.
• Outstanding Balances: As of May 18, 1998, the outstanding balances were: PN No. CLF 5-93 at ₱369,258.50 (reduced from original principal of ₱1,300,000.00); PN No. OACL 636-95 at ₱767,729.00; and PN No. OACL 634-95 at ₱4,264,987.50. The aggregate amount due was ₱5,401,975.00, inclusive of principal, cumulative interest, and penalties.
• Foreclosure Sale: Chinabank conducted an extrajudicial foreclosure sale on May 18, 1998, bidding ₱4,600,000.00. After deducting auction expenses of ₱416,255.37 (including documentary stamps, capital gains tax, and publication fees), the net proceeds were ₱4,183,744.63, leaving a deficiency of ₱1,758,427.87.
• Procedural Posture: The spouses Manalastas were declared in default. The Sinambans denied executing the notes and claimed lack of notice of the foreclosure, but admitted signing some forms as co-makers upon the Manalastas' request without receiving benefits. The RTC initially held all defendants solidarily liable for the entire deficiency, then completely exonerated the Sinambans, and finally modified its decision to impose liability on the Sinambans limited to their proportionate share of the deficiency on the two notes they co-signed.

• Surety Status and Article 1254: The Sinambans maintained that as mere sureties (co-makers), their obligations were more onerous than those of the principal debtors. They argued that under Article 1254 of the Civil Code, the foreclosure proceeds should first satisfy the obligations of the solidary co-makers before being applied to the sole obligation of the Manalastas.
• Debtor's Right to Apply Payment: Petitioner argued that Article 1252 of the Civil Code grants the debtor, not the creditor, the right to declare to which debt payment must be applied. They contended that as debtors, they chose to have the proceeds applied to the two notes they co-signed (totaling ₱1,625,000.00 in principal), which were fully covered by the foreclosure proceeds, thereby exonerating them from any deficiency liability.
• Lack of Notice: The Sinambans asserted they were not notified of the auction sale and that Chinabank manipulated the foreclosure to exclude them.

• Solidary Liability: Chinabank countered that the Sinambans expressly bound themselves to be "jointly and severally" liable with the Manalastas, making them directly and primarily liable on the debts without reference to the principal debtors' solvency, pursuant to Articles 1207 and 2047 of the Civil Code.
• Creditor's Option Under Article 1216: Respondent argued that under Article 1216 of the Civil Code, the creditor may proceed against any one or all solidary debtors simultaneously and has the right to determine the application of payments. Paragraph 5 of the promissory notes explicitly authorized Chinabank to apply payments to any obligation as it selected.
• Pro Rata Liability: Chinabank maintained that the deficiency should be apportioned pro rata among the three notes based on their outstanding balances, with the Sinambans liable only for their proportionate share of the deficiency on the two notes they co-signed, consistent with the RTC's December 8, 1999 order.

• Application of Foreclosure Proceeds: Whether the Court of Appeals erred in applying the foreclosure proceeds first to PN No. OACL 634-95 (signed solely by the Manalastas) rather than distributing the deficiency pro rata among all three promissory notes.
• Extent of Solidary Liability: Whether the Sinambans, as solidary co-makers, are liable for the full deficiency amounts on the two notes they co-signed or only for their proportionate shares based on the total indebtedness.
• Applicability of Article 1252: Whether Article 1252 of the Civil Code (application of payment by debtor) applies to the application of foreclosure proceeds by the creditor.

• Solidary Nature of Co-Maker Liability: Solidary liability attaches to co-makers who bind themselves "jointly and severally" with the principal debtor, rendering them directly and primarily liable on the debt pursuant to Articles 1207 to 1222 and 2047 of the Civil Code. The Sinambans expressly assumed such liability in the promissory notes.
• Creditor's Choice and Pro Rata Distribution: Pursuant to Article 1216 of the Civil Code and Paragraph 5 of the promissory notes, the creditor may proceed against any or all solidary debtors simultaneously and has the right to select which obligations payments shall apply. Chinabank's Statement of Account dated May 18, 1998, evidenced its choice to apply the entire auction proceeds to the aggregate amount of all three loans (₱5,401,975.00), implying a pro rata distribution of the resulting deficiency. The deficiency of ₱1,758,427.87 was therefore apportioned as follows: ₱1,388,320.55 for PN No. OACL 634-95 (Manalastas solely liable); ₱249,907.87 for PN No. OACL 636-95 (Sinambans solidarily liable with Manalastas); and ₱120,199.45 for PN No. CLF 5-93 (Estanislao Sinamban solidarily liable with Manalastas).
• Non-Applicability of Articles 1252 and 1254: Article 1252 does not apply where the situation involves one creditor with several debtors (solidary obligation), rather than one debtor with several debts. Article 1254 (application to most onerous debt) has no application where the debts are of the same nature and burden, secured by the same mortgage, and obtained under a single credit line.
• Interest Rate Modification: Pursuant to Monetary Board Circular No. 799, the legal rate of interest for the loan deficiency is reduced to 6% per annum from July 1, 2013, rather than the 12% prayed for by Chinabank.

• Solidary Liability of Co-Makers — A co-maker who signs a promissory note binding himself "jointly and severally" with the principal maker renders himself directly and primarily liable on the debt, not merely secondarily liable as a surety. Such a co-maker is subject to the same obligations and liabilities as the principal debtor under Articles 1207 to 1222 and 2047 of the Civil Code.
• Application of Payment in Solidary Obligations — Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The creditor has the right to determine to which specific debt or debts partial payments shall be applied, and this choice is binding unless exercised capriciously or in bad faith. Where the creditor applies payment to the aggregate of several solidary obligations, the deficiency is distributed pro rata among the debts based on their respective outstanding balances.
• Distinction Between Articles 1216 and 1252 — Article 1216 governs the rights of creditors against multiple solidary debtors, allowing the creditor to choose against whom to enforce payment. Article 1252 governs the right of a debtor with multiple debts to declare which debt is being paid. These provisions operate in distinct contexts and are not interchangeable.
• Effect of Monetary Board Circular No. 799 — Effective July 1, 2013, the legal rate of interest for the loan or forbearance of money, goods, or credits, and the rate allowed in judgments in the absence of stipulation, is six percent (6%) per annum, replacing the previous twelve percent (12%) rate under Central Bank Circular No. 905.

• "A co-maker of a PN who binds himself with the maker 'jointly and severally' renders himself directly and primarily liable with the maker on the debt, without reference to his solvency."
• "A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith."
• "Pursuant to Article 1216 of the Civil Code, as well as Paragraph 5 of the PNs, Chinabank opted to proceed against the co-debtors simultaneously, as implied in its May 18, 1998 statement of account when it applied the entire amount of its auction bid to the aggregate amount of the loan obligations."
• "Article 1252 of the Civil Code does not apply, as urged by the petitioners, because in the said article the situation contemplated is that of a debtor with several debts due, whereas the reverse is true, with each solidary debt imputable to several debtors."

• Sierra v. Court of Appeals, G.R. No. 90270, July 24, 1992 — Cited for the principle that a promissory note is a solemn acknowledgment of debt and that signatories are bound to honor their commitments.
• Crystal v. Bank of the Philippine Islands, G.R. No. 172428, November 28, 2008 — Cited for the rule that "jointly and severally" creates solidary liability under Article 1207 of the Civil Code.
• Escaño v. Ortigas, Jr., 553 Phil. 24 (2007) — Cited in conjunction with Crystal regarding solidary obligations.
• S.C. Megaworld Construction and Development Corporation v. Parada, G.R. No. 183804, September 11, 2013 — Cited regarding the effectivity of Monetary Board Circular No. 799 reducing the legal interest rate to 6%.
• Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013 — Cited regarding the application of the 6% interest rate under Monetary Board Circular No. 799.

• Article 1207, Civil Code — Defines solidary liability as existing only when the obligation expressly so states or when the law or nature of the obligation requires solidarity.
• Article 1216, Civil Code — Grants the creditor the right to proceed against any one or all solidary debtors simultaneously.
• Article 1252, Civil Code — Governs the debtor's right to declare which of several debts of the same kind is being paid.
• Article 1253, Civil Code — Provides that payment of principal shall not be deemed made until interest is covered.
• Article 1254, Civil Code — Mandates that when payment cannot be applied according to preceding rules, the most onerous debt is deemed satisfied, or if debts are of the same nature and burden, payment is applied proportionately.
• Article 2047, Civil Code — Defines suretyship and provides that if a person binds himself solidarily with the principal debtor, the provisions on joint and solidary obligations apply.
• Monetary Board Circular No. 799 — Reduces the legal rate of interest from 12% to 6% per annum effective July 1, 2013.

Presbitero J. Velasco, Jr. (Chairperson), Diosdado M. Peralta, Martin S. Villarama, Jr., and Francis H. Jardeleza.