G.R. No. L-8947; February 20, 1957
The spouses JULIAN F. GONZAGA and MERCEDES HERNANDEZ, plaintiffs-appellees, vs. THE REHABILITATION FINANCE CORPORATION, defendant-appellant.

FACTS

On May 30, 1940, spouses Julian F. Gonzaga and Mercedes Hernaez executed a mortgage on their properties and a deed of assignment of 1,000 piculs of sugar annually for nine years to secure a P37,000 loan from the Agricultural and Industrial Bank (AIB). The loan was released on February 4, 1941, via a promissory note payable in eight annual installments at the AIB office in Manila. The AIB’s Iloilo Branch managed this account. The first amortization was due on February 3, 1942, but the spouses failed to pay due to the Japanese invasion. During the Japanese occupation, Dr. Gonzaga was summoned by a Japanese liquidator and later by a pre-war bank manager, Jose Buenaventura, to pay the obligation. On January 16, 1945, Dr. Gonzaga bought a check for P50,000 in Japanese war notes, endorsed it to the AIB, and delivered it to the Bacolod Branch of the Philippine National Bank (PNB). The PNB Bacolod manager sent the check to the PNB Iloilo manager, who, finding no AIB representative to receive it, credited the amount to the AIB’s current account with the PNB Iloilo on February 20, 1945. After liberation, Dr. Gonzaga sought cancellation of the mortgage from the AIB’s Manila office without success. In 1946, he even applied for and was granted an additional P8,000 loan from the AIB, secured by a second mortgage on the same properties, subject to the existing P37,000 mortgage. The Rehabilitation Finance Corporation (RFC), as the AIB’s successor, refused to recognize the wartime payment and demanded payment of the pre-war loan.

ISSUE

Whether the payment made by the spouses Gonzaga in Japanese war notes in January 1945 to the Philippine National Bank, as agent of the AIB, constituted valid and effective payment of their pre-war loan obligation, thereby extinguishing the debt and requiring the cancellation of the mortgage.

RULING

No. The payment was not valid and effective. The court ruled that the Philippine National Bank was not authorized to accept payment for the AIB at that time. The AIB’s Iloilo Branch, which handled the account, had been closed since December 31, 1944. Furthermore, Executive Order No. 25 (issued November 18, 1944) had prohibited transactions in Japanese currency. The check for P50,000 in Japanese war notes was therefore tendered after such transactions were outlawed. The crediting of the amount by the PNB Iloilo manager to the AIB’s account was an unauthorized act that did not bind the AIB. The subsequent act of the spouses in applying for and obtaining a new loan in 1946, which expressly recognized the subsistence of the original P37,000 mortgage, constituted an admission that the original debt was still outstanding. The court affirmed the liability of the spouses for the P37,000 principal. However, the decision was amended to incorporate the benefits of Republic Act No. 1596 , which condoned interests if the entire pre-war principal obligation was paid within sixty days from the finality of a judgment against the debtor. The court ordered that should the plaintiff spouses fully pay the P37,000 within 60 days after the judgment becomes final, all interests on said amount would be condoned. The obligation to pay attorney’s fees was not eliminated.