G.R. No. 91494 July 14, 1995
The Consolidated Bank and Trust Corporation (Solidbank), petitioner, vs. The Honorable Court of Appeals, George and George Trade, Inc., George King Tim Pua and Pua Ke Seng, respondents.

FACTS

Respondent George King Tim Pua obtained several personal loans from petitioner Solidbank. To secure these, he assigned the proceeds of a fire insurance policy to the bank. The corporation, George and George Trade, Inc., with Pua and Pua Ke Seng as co-makers, also obtained three separate loans from Solidbank. The insurance proceeds, when paid, were more than sufficient to cover Pua’s personal obligations. Solidbank applied the entire insurance amount first to extinguish Pua’s personal loans, and then applied the remaining balance of P383,302.42 to partially settle the corporate loans. Solidbank then filed a collection suit for the alleged unpaid balance on the corporate loans.
Private respondents contended that the loans had been fully extinguished by the insurance proceeds and that Solidbank, in fact, owed them the leftover balance. The trial court ruled in favor of Solidbank, ordering respondents to pay the balance. The Court of Appeals reversed, holding that Solidbank improperly applied the excess insurance proceeds to the corporate debt and was instead liable to reimburse Pua.

ISSUE

Whether Solidbank was legally authorized to apply the excess insurance proceeds, which were an assignment for Pua’s personal loans, to satisfy the separate corporate obligations.

RULING

The Supreme Court affirmed the Court of Appeals with modification. The legal logic centers on the nature of an assignment as a security agreement. The fire insurance proceeds were assigned specifically to secure the personal loans of George King Tim Pua. This created a creditor-debtor relationship solely between Pua and Solidbank for that specific purpose. The corporate loans, incurred by a different entity (the corporation) with different co-makers, constituted a separate and distinct obligation.
Consequently, upon payment of the insurance proceeds, Solidbank’s right was limited to applying them to the secured personal debts. Any surplus belonged to the assignor, Pua. The bank had no legal right to unilaterally appropriate the excess to satisfy the unsecured, separate corporate loans without the express consent of the debtor-assignor. The application of payment must respect the source and purpose of the funds. Therefore, Solidbank’s act constituted an unjust enrichment at the expense of Pua. The Court ordered Solidbank to reimburse Pua the amount it improperly applied, with legal interest. However, it recalculated the reimbursable amount to P3,616.65 based on the evidence. The award of attorney’s fees to respondents was upheld as they were compelled to litigate to protect their rights.