G.R. No. 45656. May 5, 1989.
PACIFIC BANKING CORPORATION and CHESTER G. BABST, petitioners, vs. THE COURT OF APPEALS, JOSEPH C. HART and ELEANOR HART, respondents.

FACTS

Private respondents Joseph and Eleanor Hart organized Insular Farms, Inc., which obtained a lease for tidewater land. They secured a P250,000 loan from petitioner Pacific Banking Corporation (PBC) in July 1956, guaranteed by John Clarkin. The promissory note required annual installments, with the entire balance due upon default of any installment. The business failed, and the first installment due in July 1957 was not paid. PBC, through its Executive Vice-President Chester Babst, did not demand payment but instead sought more collateral. On February 19, 1958, Hart agreed to pledge all shares of Insular Farms to PBC to secure an extension for the unpaid installment.
Less than a month later, Pacific Farms, Inc., a corporation with the same business purpose, was organized. On March 4, 1958, PBC, through Babst, demanded full payment within 48 hours. On March 7, Hart was notified of a public auction of the pledged shares on March 10. The Harts filed a complaint and secured a preliminary injunction on March 8, but it was lifted on March 19. The next day, they received a new notice for an auction on March 21. PBC, through its lawyer-notary, sold the 1,000 shares to Pacific Farms for P285,126.99. Pacific Farms then sold the shares to its stockholders, who reconstituted Insular Farms and sold all its assets back to Pacific Farms.

ISSUE

Whether the foreclosure sale of the pledged shares was valid and whether petitioners are liable for damages.

RULING

The Supreme Court affirmed the Court of Appeals’ finding of liability but modified the personal liability of Babst. The foreclosure sale was declared premature and done in bad faith. The pledge agreement on February 19, 1958 constituted a novation of the original promissory note, substituting the obligation with a new one that provided security for an indefinite extension of time to pay the first installment. Consequently, PBC could not arbitrarily accelerate the maturity of the entire debt and foreclose on the pledge without granting the debtor a reasonable period to comply. The immediate demand and rapid foreclosure, coupled with the pre-arranged sale to a newly formed corporation (Pacific Farms) with identical business objectives, demonstrated a scheme to divest the Harts of their enterprise. This constituted a breach of the bank’s contractual obligation of good faith.
Petitioners are thus liable for damages arising from a quasi-delict due to the bad faith foreclosure. However, the Court set aside the order for Babst to reimburse PBC. While an employer (PBC) may recover from an employee (Babst) for damages paid under Article 2181 of the Civil Code, such a right is not automatically enforceable. PBC did not file a cross-claim against Babst in the proceedings. In the absence of such a proper pleading asserting this right, the court had no basis to order reimbursement. The matter of internal liability between the bank and its officer was left to their own arrangements.