G.R. No. 60705 & G.R. No. 60907, June 28, 1989
Integrated Realty Corporation and Raul L. Santos vs. Philippine National Bank, Overseas Bank of Manila and the Hon. Court of Appeals; Overseas Bank of Manila vs. Court of Appeals, Integrated Realty Corporation, and Raul L. Santos.

FACTS

Raul L. Santos made time deposits with Overseas Bank of Manila (OBM) totaling P700,000.00. To secure a loan of the same amount from the Philippine National Bank (PNB), Santos, as president of Integrated Realty Corporation (IRC), executed an irrevocable Deed of Assignment of these time deposit certificates in favor of PNB, to which OBM gave its conformity. Upon maturity, OBM failed to pay PNB. Consequently, PNB filed a complaint to collect the loan from IRC and Santos, and to compel OBM to pay the assigned time deposits.
IRC and Santos argued their obligation to PNB was extinguished by the irrevocable assignment, making OBM solely liable. They filed a cross-claim against OBM for reimbursement. OBM, in its defense, acknowledged the deposits but cited its distressed financial condition and closure by the Central Bank since August 1, 1968, arguing it could not pay and that interest ceased to accrue during its closure. The trial court held IRC and Santos solidarily liable to PNB for the loan, and ordered OBM to reimburse them. It also ordered OBM to pay Santos the deposit principal with interest, except during the period of closure.

ISSUE

The core issues were: (1) Whether the irrevocable assignment of the time deposits extinguished the loan obligation of IRC and Santos to PNB; and (2) Whether OBM remained liable for interest on the time deposits during the period it was closed by the Central Bank.

RULING

The Supreme Court affirmed the Court of Appeals with modifications. On the first issue, the assignment did not constitute payment. An assignment for security, such as a pledge, does not extinguish the principal obligation unless the assigned property is actually applied to it. Here, the Deed of Assignment was a security transaction, a pledge of the certificates to guarantee the loan. Since OBM failed to pay, the pledge was not liquidated, and the debt to PNB remained unpaid. Thus, IRC and Santos were correctly held liable as principal debtors.
On the second issue, OBM’s liability for interest during its closure was deleted. The Court ruled that a bank legally prohibited from operating by the Central Bank, due to insolvency, is excused from fulfilling its obligations during the period of such closure. This is based on the principle that obligors are not liable for fortuitous events or legal prohibitions that prevent compliance. The closure order constituted a legal prohibition that rendered OBM unable to pay, suspending its obligation to pay interest for that duration. However, OBM’s liability for the principal and for interest accrued outside the closure period remained enforceable. The Court emphasized that the cessation of interest was only for the period of actual closure, not a permanent forgiveness of the debt.