SECOND DIVISION

HERMAN C. CRYSTAL, LAMBERTO G.R. No. 172428

C. CRYSTAL, ANN GEORGIA C.
SOLANTE, and DORIS C. Present:
MAGLASANG, as Heirs of
Deceased SPOUSES RAYMUNDO QUISUMBING, J.,
I. CRYSTAL and DESAMPARADOS Chairperson,
C. CRYSTAL, CARPIO MORALES,
Petitioners, TINGA,
VELASCO, JR., and
BRION, JJ.
- versus -
Promulgated:
November 28, 2008
BANK OF THE PHILIPPINE ISLANDS,
Respondent.

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DECISION

TINGA, J.:

Before us is a Petition for Review[1] of the Decision[2] and Resolution[3] of the

Court of Appeals dated 24 October 2005 and 31 March 2006, respectively, in CA
G.R. CV No. 72886, which affirmed the 8 June 2001 decision of the Regional Trial
Court, Branch 5, of Cebu City.[4]

The facts, as culled from the records, follow.

On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained

a P300,000.00 loan in behalf of the Cebu Contractors Consortium Co. (CCCC)
from the Bank of the Philippine Islands-Butuan branch (BPI-Butuan). The loan
was secured by a chattel mortgage on heavy equipment and machinery of
CCCC. On the same date, the spouses executed in favor of BPI-Butuan a
Continuing Suretyship[5] where they bound themselves as surety of CCCC in the
aggregate principal sum of not exceeding P300,000.00.Thereafter, or on 29 March
1979, Raymundo Crystal executed a promissory note[6] for the amount
of P300,000.00, also in favor of BPI-Butuan.

Sometime in August 1979, CCCC renewed a previous loan, this time from
BPI, Cebu City branch (BPI-Cebu City). The renewal was evidenced by a
promissory note[7] dated 13 August 1979, signed by the spouses in their personal
capacities and as managing partners of CCCC. The promissory note states that the
spouses are jointly and severally liable with CCCC. It appears that before the
original loan could be granted, BPI-Cebu City required CCCC to put up a security.

However, CCCC had no real property to offer as security for the loan; hence, the
spouses executed a real estate mortgage[8] over their own real property on 22
September 1977.[9] On 3 October 1977, they executed another real estate
mortgage over the same lot in favor of BPI-Cebu City, to secure an additional loan
of P20,000.00 of CCCC.[10]

CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they
became due. CCCC, as well as the spouses, failed to pay their obligations despite
demands. Thus, BPI resorted to the foreclosure of the chattel mortgage and the real
estate mortgage. The foreclosure sale on the chattel mortgage was initially stalled
with the issuance of a restraining order against BPI.[11] However,
following BPIs compliance with the necessary requisites of extrajudicial
foreclosure, the foreclosure sale on the chattel mortgage was consummated on 28
February 1988, with the proceeds amounting to P240,000.00 applied to the loan
from BPI-Butuan which had then reached P707,393.90.[12] Meanwhile, on 7 July
1981, Insular Bank of Asia and America (IBAA), through its Vice-President for
Legal and Corporate Affairs, offered to buy the lot subject of the two (2) real
estate mortgages and to pay directly the spouses indebtedness in exchange for the
release of the mortgages. BPI rejected IBAAs offer to pay.[13]

BPI filed a complaint for sum of money against CCCC and the spouses before
the Regional Trial Court of Butuan City (RTC Butuan), seeking to recover the
deficiency of the loan of CCCC and the spouses with BPI-Butuan. The trial court
ruled in favor of BPI. Pursuant to the decision, BPI instituted extrajudicial
foreclosure of the spouses mortgaged property.[14]

On 10 April 1985, the spouses filed an action for Injunction With Damages,
With A Prayer For A Restraining Order and/ or Writ of Preliminary
Injunction.[15] The spouses claimed that the foreclosure of the real estate mortgages
is illegal because BPI should have exhausted CCCCs properties first, stressing that
they are mere guarantors of the renewed loans. They also prayed that they be
awarded moral and exemplary damages, attorneys fees, litigation expenses and
cost of suit. Subsequently, the spouses filed an amended complaint, [16] additionally
alleging that CCCC had opened and maintained a foreign currency savings account
(FCSA-197) with bpi, Makati branch (BPI-Makati), and that said FCSA was used
as security for a P450,000.00 loan also extended by BPI-Makati. The P450,000.00
loan was allegedly paid, and thereafter the spouses demanded the return of the
FCSA passbook. BPI rejected the demand; thus, the spouses were unable to
withdraw from the said account to pay for their other obligations to BPI.
The trial court dismissed the spouses complaint and ordered them to pay moral and
exemplary damages and attorneys fees to BPI.[17] It ruled that since the spouses
agreed to bind themselves jointly and severally, they are solidarily liable for the
loans; hence, BPI can validly foreclose the two real estate mortgages. Moreover,
being guarantors-mortgagors, the spouses are not entitled to the benefit of
exhaustion. Anent the FCSA, the trial court found that CCCC originally had FCDU
SA No. 197 with BPI, Dewey Boulevard branch, which was transferred to BPI-
Makati as FCDU SA 76/0035, at the request of Desamparados Crystal. FCDU SA
76/0035 was thus closed, but DesamparadosCrystal failed to surrender the
passbook because it was lost. The transferred FCSA in BPI-Makati was the one
used as security for CCCCs P450,000.00 loan from BPI-Makati. CCCC was no
longer allowed to withdraw from FCDU SA No. 197 because it was already closed.
The spouses appealed the decision of the trial court to the Court of Appeals, but
their appeal was dismissed.[18] The spouses moved for the reconsideration of the
decision, but the Court of Appeals also denied their motion for
reconsideration.[19] Hence, the present petition.

Before the Court, petitioners who are the heirs of the spouses argue that the failure
of the spouses to pay the BPI-Cebu City loan of P120,000.00 was due
to BPIs illegal refusal to accept payment for the loan unless the P300,000.00 loan
from BPI-Butuan would also be paid. Consequently, in view of BPIs unjust refusal
to accept payment of the BPI-Cebu City loan, the loan obligation of the spouses
was extinguished, petitioners contend.

The contention has no merit. Petitioners rely on IBAAs offer to purchase the
mortgaged lot from them and to directly pay BPI out of the proceeds thereof to
settle the loan.[20]BPIs refusal to agree to such payment scheme cannot extinguish
the spouses loan obligation. In the first place, IBAA is not privy to the loan
agreement or the promissory note between the spouses and BPI. Contracts, after
all, take effect only between the parties, their successors in interest, heirs

and assigns.[21] Besides, under Art. 1236 of the Civil Code, the creditor is not
bound to accept payment or performance by a third person who has no interest in
the fulfillment of the obligation, unless there is a stipulation to the contrary. We
see no stipulation in the promissory note which states that a third person may fulfill
the spouses obligation. Thus, it is clear that the spouses alone bear responsibility
for the same.

In any event, the promissory note is the controlling repository of the obligation of
the spouses. Under the promissory note, the spouses defined the parameters of their
obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and
severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu
Philippines, the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,0000.00),
Philippine Currency, subject to periodic installments on the principal as follows: P30,000.00
quarterly amortization starting September 28, 1979. x x x [22]
A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. [23] A liability is solidary only when
the obligation expressly
so states, when the law so provides or when the nature of the

obligation so requires.[24] Thus, when the obligor undertakes to be jointly and

severally liable, it means that the obligation is solidary,[25] such as in this case. By
stating I/we promise to pay, jointly and severally, to the BANK OF THE
PHILIPPINE ISLANDS, the spouses agreed to be sought out and be demanded
payment from, by BPI. BPI did demand payment from them, but they failed to
comply with their obligation, prompting BPIs valid resort to the foreclosure of the
chattel mortgage and the real estate mortgages.

More importantly, the promissory note, wherein the spouses undertook to be

solidarily liable for the principal loan, partakes the nature of a suretyship and
therefore is an additional security for the loan. Thus we held in one case that if
solidary liability was instituted to guarantee a principal obligation, the law deems
the contract to be one of suretyship.[26] And while a contract of a surety is in
essence secondary only to a valid principal obligation, the suretys liability to the
creditor or promisee of the principal is said to be direct, primary, and absolute; in
other words, the surety is directly and equally bound with the principal. The surety
therefore becomes liable for the debt or duty of another even if he possesses no
direct or personal interest over the obligations nor does he receive any
benefit therefrom.[27]

Petitioners contend that the Court of Appeals erred in not granting their
counterclaims, considering that they suffered moral damages in view of the unjust
refusal of BPI to accept the payment scheme proposed by IBAA and the allegedly
unjust and illegal foreclosure of the real estate mortgages on their
property.[28] Conversely, they argue that the Court of Appeals erred in awarding
moral damages to BPI, which is a corporation, as well as exemplary damages,
attorneys fees and expenses of litigation.[29]
We do not agree. Moral damages are meant to compensate the claimant for any
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injuries unjustly
caused.[30] Such damages, to be recoverable, must be the proximate result of a
wrongful act or omission the factual basis for which is satisfactorily established by
the aggrieved party.[31] There being no wrongful or unjust act on the part of BPI in
demanding payment from them and in seeking the foreclosure of the chattel and
real estate mortgages, there is no lawful basis for award of damages in favor of
the spouses.

Neither is BPI entitled to moral damages. A juridical person is generally not

entitled to moral damages because, unlike a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety, mental
anguish or moral shock.[32] The Court of Appeals found BPI as being famous and
having gained its familiarity and respect not only in the Philippines but also in the
whole world because of its good will and good reputation must protect and defend
the same against any unwarranted suit such as the case at bench.[33] In holding that
BPI is entitled to moral damages, the Court of Appeals relied on the case of People
v. Manero,[34] wherein the Court ruled that [i]t is only when a juridical person has a
good reputation that is debased, resulting in social humiliation, that moral damages
may be awarded.[35]

We do not agree with the Court of Appeals. A statement similar to that made by
the Court in Manero can be found in the case of Mambulao Lumber Co. v. PNB, et
al.,[36] thus:

x x x Obviously, an artificial person like herein appellant corporation cannot

experience physical sufferings, mental anguish, fright, serious anxiety, wounded
feelings, moral shock or social humiliation which are basis of moral damages. A
 corporation may have good reputation which, if besmirched may also be a
ground for the award of moral damages. x x x (Emphasis supplied)

Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et

al.,[37] and Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC-BCCM),[38] the Court held that
the statements in Manero and Mambulao were mere obiter dicta, implying that the
award of moral damages to corporations is not a hard and fast rule. Indeed, while
the Court may allow the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the existence of the factual basis
of the damage and its causal relation to the defendants acts. This is so because
moral damages, though incapable of pecuniary estimation, are in the category of an
award designed to compensate the claimant for actual injury suffered and not to
impose a penalty on the wrongdoer.[39]

The spouses complaint against BPI proved to be unfounded, but it does not
automatically entitle BPI to moral damages. Although the institution of a clearly
unfounded civil suit can at times be a legal

justification for an award of attorney's fees, such filing, however, has almost
invariably been held not to be a ground for an award of moral damages. The
rationale for the rule is that the law could not have meant to impose a penalty on
the right to litigate. Otherwise, moral damages must every time be awarded in
favor of the prevailing defendant against an unsuccessful plaintiff.[40] BPI may
have been inconvenienced by the suit, but we do not see how it could have
possibly suffered besmirched reputation on account of the single suit alone. Hence,
the award of moral damages should be deleted.

The awards of exemplary damages and attorneys fees, however, are

proper. Exemplary damages, on the other hand, are imposed by way of example or
correction for the public good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner, while attorneys fees are allowed
when exemplary damages are awarded and when the party to a suit is compelled to
incur expenses to protect his interest.[41] The spouses instituted their complaint
against BPI notwithstanding the fact that they were the ones who failed to pay their
obligations. Consequently, BPI was forced to litigate and defend its interest. For
these reasons, BPI is entitled to the awards of exemplary damages and attorneys
fees.

WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court
of Appeals dated 24 October 2005 and 31 March 2006, respectively, are hereby
AFFIRMED, with the MODIFICATION that the award of moral damages to Bank
of the Philippine Islands is DELETED.

Costs against the petitioners.

SO ORDERED.

DANTE O. TINGA Associate

Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CONCHITA CARPIO MORALES PRESBITERO J. VELASCO, JR.
Associate Justice Associate Justice

ARTURO D. BRION
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, it is hereby certified that the conclusions in the
above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

[1]
Rollo, pp. 4-21.
[2]
Id. at 23-31. Penned by Associate Justice Vicente L. Yap. with Associate Justices Arsenio J. Magpale and
Apolinario D. Bruselas, Jr. concurring.
[3]
Id. at 48-49.
[4]
CA rollo, pp. 41-48. Penned by Judge Ireneo Lee Gako, Jr.
[5]
Records, pp. 26-29.
[6]
Defendants Folder of Exhibits, Exhibit 50.
[7]
Records, p. 25.
[8]
Records, p. 10.
[9]
A parcel of land identified as Lot 6098-B-2 covered by TCT NO. T-16118.
[10]
Records, p. 11.
[11]
In Civil Case No. 31972, the CFI of Rizal Branch CLIII issued a restraining order.
[12]
Supra note 2.
[13]
Plaintiffs Folder of Exhibits. The offer was contained in a letter dated 7 July 1981. It reads:

Gentlemen:
We are buying that parcel of land covered by Transfer Certificate of Title No. T-16118 at
present securing a loan of Cebu Contractors Consortium with you.

Please lend us the Certificate of Title so that the same can be transferred to us. Your lien
will, of course, continue to be annotated upon said title even when it has already been transferred to
us.

As soon as we procure the Certificate of Title in our name, we will pay directly to you the
amount needed to wipe off the indebtedness of Cebu Contractors Consortium, in exchange for your
release of the mortgage.
[14]
Exhibits 27, 28 and 29, Defendants Folder of Exhibits.
[15]
Records, pp. 1-9.
[16]
Id. at 43-53.
[17]
RTC records, pp. 353-362.
[18]
Rollo, pp. 23-31.
[19]
Id. at 48-49.
[20]
Exhibit P, Plaintiffs Folder of Exhibits.
[21]
CIVIL CODE, Art. 1311.
[22]
RTC records, p. 25.
[23]
PH Credit Corp. v. Court of Appeals, 421 Phil. 821, 832 (2001).
[24]
Inciong, Jr. v. CA, 327 Phil. 364, 373 (1996).
[25]
International Finance Corporation v. Imperial Textile Mills, Inc., 15 November 2005, 475 SCRA 149.
[26]
Id. at 159.
[27]
Garcia, Jr. v. Court of Appeals, G.R. No. 80201, 20 November 1990, 191 SCRA 493, 496.
[28]
Rollo, p. 16.
[29]
Id.
[30]
Samson, Jr. v. Bank of the Philippine Islands, 453 Phi. 577, 583 (2003).
[31]
Expertravel and Tours, Inc. v. Court of Appeals, 368 Phil. 444, 448 (1999).
[32]
People v. Manero, Jr., G.R. Nos. 86883-85, 29 January 1993, 218 SCRA 85, 96-97.
[33]
Rollo, p. 30.
[34]
G.R. Nos. 86883-8529, 29 January 1993, 218 SCRA 85.
[35]
Id. at 97.
[36]
130 Phil. 366 (1968).
[37]
ABS-CBN Broadcasting Corp. v. Court of Appeals, 361 Phil. 499 (1999).
[38]
G.R. No. 141994, 17 January 2005, 448 SCRA 413.
[39]
Development Bank of The Philippines v. Court of Appeals, 451 Phil. 563, 587 (2003).
[40]
Expertravel and Tours, Inc. v. Court of Appeals, 368 Phil. 444, 449-450 (1999).
[41]
Spouses Paguyo v. Astorga, G.R. No. 13098, 16 September 2005, 470 SCRA 33, 35.