G.R. No. 224235 , June 28, 2021
Richardson Steel Corporation, Ayala Integrated Steel Manufacturing, Co., Inc., Asian Footwear and Rubber Corp., and Spouses Ricardo O. Cheng and Eleanor S. Cheng, Petitioners, vs. Union Bank of the Philippines, Respondent.

FACTS

Petitioner corporations (sister companies) and the spouses Cheng (their principal stockholders/officers) filed a Complaint for Specific Performance and Damages against respondent Union Bank of the Philippines (UBP). Petitioners alleged that in 1996, UBP proposed a financing arrangement including a P240M credit accommodation and a P600M working capital for Richardson Steel Corporation’s (RSC) new Continuous Galvanizing Line (CGL) plant. While the credit accommodation was released, the promised working capital was not. Despite this, RSC completed the plant but could not fully operate it due to insufficient funds. In December 1999, petitioners negotiated for loan restructuring and entered into Memorandum of Agreements (MOAs) and Credit Line Agreements (CLAs) for working capital (P150M for RSC, P30M for AISMC). Petitioners alleged that from December 1999 to November 2000, UBP failed to release the credit line amounts despite execution of Promissory Notes, and instead unilaterally applied the proceeds to pay the monthly interests on the restructured loans. During the RTC proceedings, UBP extrajudicially foreclosed on the Real Estate Mortgages (REMs), with the properties sold at auction in November 2003. UBP countered that it complied with its obligations, and the non-release of the full working capital was due to petitioners’ failure to meet equity and collateral requirements from participating banks in a syndicated financing. UBP also asserted the foreclosure was valid due to petitioners’ default.

ISSUE

The core issue was whether UBP was obligated under the Credit Line Agreements (CLAs) to release the agreed credit lines for the petitioners’ working capital, or whether it could legally apply those proceeds to pay the interest on the separate restructured loans. A related issue was the validity of the foreclosure proceedings.

RULING

The Supreme Court ruled in favor of the petitioners, reversing the Court of Appeals and reinstating the RTC decision with modifications. The Court held that the Credit Line Agreements (CLAs) and the Restructuring Agreements (RAs) were distinct contracts with different purposes. The CLAs were specifically for providing working capital, as clearly stated in their terms. Applying the parol evidence rule, UBP could not introduce evidence of an alleged contemporaneous agreement to use the CLA proceeds for interest payments, as this would alter the written terms of the CLA. The Court found UBP in breach of the CLAs for failing to release the working capital funds. Regarding damages, the Court awarded temperate damages of P5,000,000.00 to RSC and AISMC due to the difficulty in proving exact pecuniary loss, but deleted the awards for moral and exemplary damages for lack of basis. Attorney’s fees were reduced to P300,000.00. The Court also declared the foreclosure proceedings null and void, as petitioners were not in default at the time they were instituted, and ordered UBP to release the credit line amounts (P150M to RSC, P30M to AISMC) for working capital upon execution of required documents. All interest charges resulting from the non-release were declared void, with interest on obligations to accrue only upon the release of the working capital.