GR L 74834; (November, 1988) (Digest)
G.R. No. L-74834 November 17, 1988
INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPING COMMERCIAL INTERNATIONAL BANK), petitioner, vs. HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA, respondents.
FACTS
Respondent spouses Mendoza obtained loans from respondent Philam Life, secured by two irrevocable standby letters of credit issued by petitioner IBAA. The Mendozas, in turn, secured these letters of credit with a real estate mortgage in favor of IBAA. Upon the Mendozas’ default on loan amortizations, Philam Life demanded payment from IBAA under the letters of credit. IBAA contested the full amount claimed, arguing its liability was reduced by payments already made by the Mendozas to Philam Life. Subsequently, IBAA extrajudicially foreclosed on the Mendoza’s mortgaged property.
The Regional Trial Court ruled that IBAA, as a surety, was discharged from liability to the extent of the Mendozas’ payments to Philam Life, ordering the Mendozas to pay Philam Life and Philam Life to refund an overpayment to IBAA. The Intermediate Appellate Court reversed, holding IBAA’s liability under the letters of credit was not reduced by the Mendozas’ payments, making IBAA and the Mendozas jointly and severally liable to Philam Life.
ISSUE
Whether the liability of IBAA under the irrevocable standby letters of credit was reduced by the payments made by the principal debtors, the Mendozas, to the creditor, Philam Life.
RULING
No. The Supreme Court affirmed the Appellate Court’s ruling that IBAA’s liability under the letters of credit was independent and not reduced by the Mendozas’ payments. The legal logic is anchored on the nature of a letter of credit as a distinct and absolute undertaking. The Court emphasized that a letter of credit is separate from the underlying contract between the beneficiary (Philam Life) and the account party (the Mendozas). The bank’s obligation is primary and irrevocable, payable upon the presentation of specified documents, regardless of the performance of the underlying loan agreement.
The Court rejected IBAA’s claim of acting as a mere guarantor or surety, whose liability would be subsidiary and subject to reduction by the principal’s payments. Instead, the standby letters of credit constituted direct promises by the bank to pay upon Philam Life’s demand, as stipulated. The payments made by the Mendozas did not extinguish IBAA’s direct contractual commitment to Philam Life under the letters of credit. The foreclosure by IBAA on the Mendoza’s property was a separate transaction securing IBAA’s recourse against the Mendozas, but it did not alter IBAA’s absolute liability to Philam Life. Consequently, IBAA remained solely responsible to Philam Life for the unpaid loan balance. The Court modified the award, capping the penalty interest and affirming attorney’s fees.