G.R. No. 176246 February 13, 2009
PREMIERE DEVELOPMENT BANK, Petitioner, vs. CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent.

FACTS

Respondent Central Surety obtained an industrial loan of ₱6,000,000.00 from petitioner Premiere Bank, evidenced by Promissory Note (PN) No. 714-Y, with a maturity date of August 14, 2000. The loan was secured by a Deed of Assignment with Pledge covering Central Surety’s membership share in Wack Wack Golf and Country Club. Central Surety also had a separate commercial loan with Premiere Bank for ₱40,898,000.00, secured by a real estate mortgage. On August 22, 2000, Premiere Bank demanded payment of the ₱6,000,000.00 loan. Central Surety responded on August 24, 2000, indicating its intention to settle the account by the end of September. On September 20, 2000, Central Surety issued a check for ₱6,000,000.00 payable to Premiere Bank, received by the bank’s officer with the notation “full payment of loan-Wack Wack.” Premiere Bank returned the check and, in a letter dated September 28, 2000, demanded payment for both the ₱6,000,000.00 loan and the ₱40,898,000.00 loan, threatening foreclosure. On September 29, 2000, Central Surety, through counsel, re-tendered payment of the ₱6,000,000.00 check. On October 13, 2000, Premiere Bank accepted the check but applied the ₱8,600,000.00 (which included another check for a separate personal loan) not solely to the PN No. 714-Y loan, but also to other obligations: a loan of Casent Realty and Development Corporation and Central Surety’s loan originally covered by PN No. 367-Z. Central Surety objected and demanded the application of the check payment to its ₱6,000,000.00 loan and the release of the pledged Wack Wack membership. Premiere Bank refused, invoking its discretion under the promissory note. Central Surety filed a complaint for damages and release of security collateral.

ISSUE

Whether Premiere Bank correctly applied the payment tendered by Central Surety to obligations other than the ₱6,000,000.00 loan covered by PN No. 714-Y.

RULING

No. The Supreme Court ruled that Premiere Bank’s application of the payment was improper. The Court held that when the obligation has become due and demandable, as in this case where the ₱6,000,000.00 loan had matured and was demanded, the right and duty to exercise the application of payment belongs to the debtor, Central Surety. Central Surety clearly intended the ₱6,000,000.00 check to be full payment for its specific loan under PN No. 714-Y, as evidenced by its notation and correspondence. Premiere Bank’s unilateral application of the payment to other obligations, including those of a different debtor (Casent Realty), was invalid. The Court affirmed the Court of Appeals’ decision declaring the ₱6,000,000.00 loan fully paid and ordering Premiere Bank to release the pledged Wack Wack membership to Central Surety.