G.R. No. L-43766 February 26, 1988
PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. COURT OF APPEALS (SPECIAL THIRD DIVISION), IGNACIO DESIDERIO AND VICTORIA F. DESIDERIO, respondents.

FACTS

On January 10, 1963, respondents-spouses Ignacio and Victoria Desiderio obtained a retailers’ loan from petitioner Philippine National Bank (PNB). The loan was secured by a chattel mortgage over their store inventory. As required by PNB, the mortgaged goods were insured with Cosmopolitan Insurance Co. for P4,000.00, with PNB named as the beneficiary. On August 1, 1964, a fire totally destroyed the insured building and merchandise. The respondents had already made a partial loan payment of P1,089.60. PNB sent demand letters to the insurance company but took no further legal action to collect the proceeds. The insurance company eventually went into liquidation in 1966.
Seven years after the fire, in 1971, PNB filed a collection suit against the respondents for the unpaid loan balance of P3,855.60. The City Court of Zamboanga dismissed PNB’s complaint, a decision affirmed by the then Court of First Instance and subsequently by the Court of Appeals. PNB elevated the case to the Supreme Court.

ISSUE

Whether the Court of Appeals erred in holding that PNB, as attorney-in-fact and beneficiary under the insurance policy, was obligated to successfully collect the insurance proceeds, thereby exonerating the respondents from the loan balance.

RULING

The Supreme Court dismissed the petition and affirmed the lower courts’ rulings. The legal logic is anchored on PNB’s dual role and consequent duties under the contractual arrangements. First, the chattel mortgage contract appointed PNB as the respondents’ attorney-in-fact, granting it full authority to collect any benefits from the mortgaged property and apply them to the loan obligation. Second, PNB was the named beneficiary of the insurance policy, which was endorsed to it.
Given this position, the primary duty to actively pursue the insurance claim fell upon PNB. The Court found PNB negligent in fulfilling this duty. It had ample time and resources to take decisive legal steps to collect from the insurer but limited itself to sending demand letters. It failed to institute a judicial action for recovery before or even during the insurance company’s liquidation. By allowing seven years to lapse without vigorous action, PNB’s negligence rendered the collection of the proceeds impossible. Consequently, the respondents’ obligation was deemed extinguished. The Court emphasized that the respondents, as small store owners, could not have been expected to initiate the collection, a responsibility PNB expressly assumed. The petition was dismissed for lack of merit.