MANILA, Philippines — The Supreme Court (SC) has ruled that banks are prohibited from unreasonably refusing payments made by borrowers, stressing that such actions risk burdening borrowers with unnecessary interest and additional charges.

In a decision penned by Associate Justice Alfredo Benjamin S. Caguioa, the SC’s Third Division ordered Premiere Development Bank to accept a check for P2.6 million tendered by Spouses Engracio and Lourdes Castañeda as full payment for their personal loan.

The case stemmed from a dispute over the allocation of payments. The Castañedas secured a P2.6 million personal loan from the bank. 

Engracio, who also served as President of Casent Realty and Development Corporation and Vice President of Central Surety and Insurance Company, Inc., had guaranteed three corporate loans totaling P86.8 million for these companies.

Both the personal and corporate loans included a waiver permitting the bank to allocate payments across any loans of the borrower, whether due or not.

When the personal loan matured, the spouses issued two checks—P2.6 million for their personal loan and P6 million for one of the corporate loans. 

However, the bank combined the payments and applied the total P8.6 million across all four loans, refusing to consider the personal loan as fully paid, the court said.

The Castañedas challenged the bank’s decision in court, seeking proper allocation of the P2.6 million payment exclusively to their personal loan. Both the Regional Trial Court (RTC) and the Court of Appeals (CA) ruled in their favor.

The SC upheld the lower courts’ decisions, citing Article 1252 of the Civil Code, which grants borrowers the right to allocate payments when they have multiple loans with the same lender. 

The high court likewise said that the provision applies only to loans held by the same borrower and that the bank erred by treating the spouses and the companies as a single entity.

“The spouses and the companies are distinct legal entities,” the Court ruled, adding that Engracio’s roles in Casent Realty and Central Surety did not merge the legal personalities of the individuals and the corporations.

The SC also admonished the bank for acting in bad faith by refusing to allocate the P2.6 million payment solely to the spouses’ personal loan, thereby allowing interest and charges to accrue unnecessarily.

“Lenders cannot unreasonably refuse payment, as this unjustly burdens borrowers with higher fees,” the Court said, reminding banks of their duty to uphold integrity and diligence in their dealings.

As part of the decision, the SC ordered the bank to allocate the P2.6 million payment exclusively to the personal loan and awarded the spouses P4 million in damages.