Loans settlement

Dear Atty. Angela,

My wife and I made a personal loan amounting to P3 million pesos from our bank. Prior to this loan, I took out two corporate loans from the same bank for our business amounting to P2 million and P5 million. When the loans were due, we issued a P3 million check for the personal loan and P2 million check for the corporate loan to already pay off both loans. The bank refused to accept the P5 million checks as full payment for both loans and applied the two checks to all three loans of P10 million. We want to reject the bank’s application as we opt to fully settle the two loans. Do we have a legal ground for this?

Dindo

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Dear Dindo,

Yes. According to Article 1252 of the Civil Code, when a borrower has multiple loans with the same lender, the borrower has the right to choose how to allocate their payments among the different loans. If the borrower does not exercise this right, the lender may determine the allocation.

In the case of Premiere Development Bank v. Spouses Castañeda, G.R. No. 185110 (19 August 2024), the Supreme Court ruled that the bank incorrectly treated the spouses and the companies as a single borrower, combining payments for separate personal and corporate loans. They must be considered as completely different entities. As such, the loans of the spouses and the companies cannot be combined. Payments made by the spouses for their personal loan cannot be applied to the corporate loans and vice versa.

The Court likewise reminded the bank of its duty to act in good faith and uphold the high standards of integrity and diligence expected of financial institutions. By unreasonably refusing to apply the payment exclusively to fully settle their debt, the bank acted in bad faith. This allowed the loan intended to be paid off to remain outstanding, accruing interest and additional charges, effectively holding it hostage until the other loans were fully paid.

It was stressed that lenders cannot be allowed to unreasonably refuse payment as this unfairly burdens borrowers with higher interest fees and other charges.

Atty. Angela Antonio