[G.R. No. 123793.

June 29, 1998]

ASSOCIATED BANK, petitioner, vs. COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.
DECISION
PANGANIBAN, J.:

In a merger, does the surviving corporation have a right to enforce a contract entered into by the absorbed
company subsequent to the date of the merger agreement, but prior to the issuance of a certificate of merger by the Securities and
Exchange Commission?
The Case
This is a petition for review under Rule 45 of the Rules of Court seeking to set aside the Decision [1] of the Court of Appeals[2] in CAGR CV No. 26465 promulgated on January 30, 1996, which answered the above question in the negative. The challenged Decision
reversed and set aside the October 17, 1986 Decision[3] in Civil Case No. 85-32243, promulgated by the Regional Trial Court of Manila,
Branch 48, which disposed of the controversy in favor of herein petitioner as follows:[4]

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated Bank. The defendant Lorenzo
Sarmiento, Jr. is ordered to pay plaintiff:
1.

The amount of P4,689,413.63 with interest thereon at 14% per annum until fully paid;

2.

The amount of P200,000.00 as and for attorneys fees; and

3.

The costs of suit.

On the other hand, the Court of Appeals resolved the case in this wise:[5]

WHEREFORE, premises considered, the decision appealed from, dated October 17, 1986 is REVERSED and
SET ASIDE and another judgment rendered DISMISSING plaintiff-appellees complaint, docketed as Civil Case
No. 85-32243. There is no pronouncement as to costs.

The Facts
The undisputed factual antecedents, as narrated by the trial court and adopted by public respondent, are as follows:[6]

x x x [O]n or about September 16, 1975 Associated Banking Corporation and Citizens Bank and Trust Company
merged to form just one banking corporation known as Associated Citizens Bank, the surviving bank. On or
about March 10, 1981, the Associated Citizens Bank changed its corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation. On September 7, 1977, the defendant executed in favor of Associated
Bank a promissory note whereby the former undertook to pay the latter the sum of P2,500,000.00 payable on or
before March 6, 1978. As per said promissory note, the defendant agreed to pay interest at 14% per annum,
3% per annum in the form of liquidated damages, compounded interests, and attorneys fees, in case of litigation
equivalent to 10% of the amount due. The defendant, to date, still owes plaintiff bank the amount
of P2,250,000.00 exclusive of interest and other charges. Despite repeated demands the defendant failed to pay
the amount due.
xxx xxx

xxx

x x x [T]he defendant denied all the pertinent allegations in the complaint and alleged as affirmative and[/]or
special defenses that the complaint states no valid cause of action; that the plaintiff is not the proper party in
interest because the promissory note was executed in favor of Citizens Bank and Trust Company; that the
promissory note does not accurately reflect the true intention and agreement of the parties; that terms and
conditions of the promissory note are onerous and must be construed against the creditor-payee bank; that
several partial payments made in the promissory note are not properly applied; that the present action is
premature; that as compulsory counterclaim the defendant prays for attorneys fees, moral damages and
expenses of litigation.
On May 22, 1986, the defendant was declared as if in default for failure to appear at the Pre-Trial Conference
despite due notice.
A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986 was filed by defendants
counsel which was denied by the Court in [an] order dated September 16, 1986 and the plaintiff was allowed to
present its evidence before the Court ex-parte on October 16, 1986.
At the hearing before the Court ex-parte, Esteban C. Ocampo testified that x x x he is an accountant of the
Loans and Discount Department of the plaintiff bank; that as such, he supervises the accounting section of the
bank, he counterchecks all the transactions that transpired during the day and is responsible for all the accounts
and records and other things that may[ ]be assigned to the Loans and Discount Department; that he knows the
[D]efendant Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as per their records; that
Lorenzo Sarmiento, Jr. executed a promissory note No. TL-2649-77 dated September 7, 1977 in the amount
of P2,500,000.00 (Exhibit A); that Associated Banking Corporation and the Citizens Bank and Trust Company
merged to form one banking corporation known as the Associated Citizens Bank and is now known as
Associated Bank by virtue of its Amended Articles of Incorporation; that there were partial payments made but
not full; that the defendant has not paid his obligation as evidenced by the latest statement of account (Exh. B);
that as per statement of account the outstanding obligation of the defendant is P5,689,413.63

less P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a demand letter dated June 6, 1985 was sent by the
bank thru its counsel (Exh. C) which was received by the defendant on November 12, 1985 (Exh. C, C-1, C-2, C3); that the defendant paid only P1,000,000.00 which is reflected in the Exhibit C.
Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento to pay the bank his remaining
balance plus interests and attorneys fees. In his appeal, Sarmiento assigned to the trial court several errors, namely:[7]

I
The [trial court] erred in denying appellants motion to dismiss appellee banks complaint on the
ground of lack of cause of action and for being barred by prescription and laches.
II
The same lower court erred in admitting plaintiff-appellee banks amended complaint while
defendant-appellants motion to dismiss appellee banks original complaint and using/availing [itself of] the
new additional allegations as bases in denial of said appellants motion and in the interpretation and
application of the agreement of merger and Section 80 of BP Blg. 68, Corporation Code of the Philippines.
III
The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in default orders
dated May 22, 1986 and September 16, 1986 and in not reconsidering the same upon technical grounds
which in effect subvert the best primordial interest of substantial justice and equity.
IV
The court a quo erred in issuing the orders dated May 22, 1986 and September 16, 1986 declaring
appellant as if in default due to non-appearance of appellants attending counsel who had resigned from the
law firm and while the parties [were] negotiating for settlement of the case and after a one million peso
payment had in fact been paid to appellee bank for appellants account at the start of such negotiation on
February 18, 1986 as act of earnest desire to settle the obligation in good faith by the interested parties.
V
The lower court erred in according credence to appellee banks Exhibit B statement of account which
had been merely requested by its counsel during the trial and bearing date of September 30, 1986.
VI
The lower court erred in accepting and giving credence to appellee banks 27-year-old witness
Esteban C. Ocampo as of the date he testified on October 16, 1986, and therefore, he was merely an
eighteen-year-old minor when appellant supposedly incurred the foisted obligation under the subject PN No.
TL-2649-77 dated September 7, 1977, Exhibit A of appellee bank.
VII
The [trial court] erred in adopting appellee banks Exhibit B dated September 30, 1986 in its decision
given in open court on October 17, 1986 which exacted eighteen percent (18%) per annum on the foisted
principal amount of P2.5 million when the subject PN, Exhibit A, stipulated only fourteen percent (14%) per
annum and which was actually prayed for in appellee banks original and amended complaints.
VIII
The appealed decision of the lower court erred in not considering at all appellants affirmative
defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated September 7, 1977, is merely an
accommodation pour autrui bereft of any actual consideration to appellant himself and (2) the subject PN is
a contract of adhesion, hence, [it] needs [to] be strictly construed against appellee bank -- assuming for
granted that it has the right to enforce and seek collection thereof.
IX
The lower court should have at least allowed appellant the opportunity to present countervailing
evidence considering the huge amounts claimed by appellee bank (principal sum ofP2.5 million which
including accrued interests, penalties and cost of litigation totaled P4,689,413.63) and appellants affirmative
defenses -- pursuant to substantial justice and equity.
The appellate court, however, found no need to tackle all the assigned errors and limited itself to the question of whether [herein
petitioner had] established or proven a cause of action against [herein private respondent]. Accordingly, Respondent Court held that
the Associated Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note
executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger between the two
banks could not have vested Associated Bank with any interest arising from the promissory note executed in favor of CBTC after such
merger.
Thus, as earlier stated, Respondent Court set aside the decision of the trial court and dismissed the complaint. Petitioner now
comes to us for a reversal of this ruling.[8]

Issues
In its petition, petitioner cites the following reasons:[9]

I The Court of Appeals erred in reversing the decision of the trial court and in declaring that petitioner has no
cause of action against respondent over the promissory note.
II The Court of Appeals also erred in declaring that, since the promissory note was executed in favor of Citizens
Bank and Trust Company two years after the merger between Associated Banking Corporation and Citizens
Bank and Trust Company, respondent is not liable to petitioner because there is no privity of contract between
respondent and Associated Bank.
III The Court of Appeals erred when it ruled that petitioner, despite the merger between petitioner and Citizens
Bank and Trust Company, is not a real party in interest insofar as the promissory note executed in favor of the
merger.
In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may enforce the promissory note made by
private respondent in favor of CBTC, the absorbed company, after the merger agreement had been signed.

The Courts Ruling

The petition is impressed with merit.

The Main Issue:

Associated Bank Assumed
All Rights of CBTC
Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the
combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation.
[10]
Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets,
because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities.[11]
The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure to be
followed is prescribed under the Corporation Code. [12] Section 79 of said Code requires the approval by the Securities and Exchange
Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders
of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the
SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation
ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of Merger,[13] which Associated Banking
Corporation (ABC) and Citizens Bank and Trust Company (CBTC) entered into, provided that its effectivity shall, for all intents and
purposes, be the date when the necessary papers to carry out this [m]erger shall have been approved by the Securities and Exchange
Commission.[14] As to the transfer of the properties of CBTC to ABC, the agreement provides:

10. Upon effective date of the Merger, all rights, privileges, powers, immunities, franchises, assets and
property of [CBTC], whether real, personal or mixed, and including [CBTCs] goodwill and tradename,
and all debts due to [CBTC] on whatever act, and all other things in action belonging to [CBTC] as of
the effective date of the [m]erger shall be vested in [ABC], the SURVIVING BANK, without need of
further act or deed, unless by express requirements of law or of a government agency, any separate
or specific deed of conveyance to legally effect the transfer or assignment of any kind of property [or]
asset is required, in which case such document or deed shall be executed accordingly; and all
property, rights, privileges, powers, immunities, franchises and all appointments, designations and
nominations, and all other rights and interests of [CBTC] as trustee, executor, administrator, registrar
of stocks and bonds, guardian of estates, assignee, receiver, trustee of estates of persons mentally ill
and in every other fiduciary capacity, and all and every other interest of [CBTC] shall thereafter be
effectually the property of [ABC] as they were of [CBTC], and title to any real estate, whether by deed
or otherwise, vested in [CBTC] shall not revert or be in any way impaired by reason thereof; provided,
however, that all rights of creditors and all liens upon any property of [CBTC] shall be preserved and
unimpaired and all debts, liabilities, obligations, duties and undertakings of [CBTC], whether
contractual or otherwise, expressed or implied, actual or contingent, shall henceforth attach to [ABC]
which shall be responsible therefor and may be enforced against [ABC] to the same extent as if the
same debts, liabilities, obligations, duties and undertakings have been originally incurred or
contracted by [ABC], subject, however, to all rights, privileges, defenses, set-offs and counterclaims
which [CBTC] has or might have and which shall pertain to [ABC]. [15]
The records do not show when the SEC approved the merger. Private respondents theory is that it took effect on the date of the
execution of the agreement itself, which was September 16, 1975. Private respondent contends that, since he issued the promissory
note to CBTC on September 7, 1977 -- two years after the merger agreement had been executed -- CBTC could not have conveyed or
transferred to petitioner its interest in the said note, which was not yet in existence at the time of the merger. Therefore, petitioner, the
surviving bank, has no right to enforce the promissory note on private respondent; such right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has
any interest in the promissory note. A closer perusal of the merger agreement leads to a different conclusion. The provision quoted
earlier has this other clause:

Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or other papers of
whatever kind or nature and wherever found shall be deemed for all intents and purposes, references to [ABC],
the SURVIVING BANK, as if such references were direct references to [ABC]. x x x[16] (Underscoring supplied)
Thus, the fact that the promissory note was executed after the effectivity date of the merger does not militate against
petitioner. The agreement itself clearly provides that all contracts -- irrespective of the date of execution -- entered into in the name of
CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision,
the latter clause no longer specifically refers only to contracts existing at the time of the merger, no distinction should be made. The
clause must have been deliberately included in the agreement in order to protect the interests of the combining banks; specifically, to
avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed,
under the very provisions of the merger agreement, as a reference to petitioner bank, as if such reference [was a] direct reference to
the latter for all intents and purposes.
No other construction can be given to the unequivocal stipulation. Being clear, plain and free of ambiguity, the provision must be
given its literal meaning[17] and applied without a convoluted interpretation. Verba legis non est recedendum.[18]

In light of the foregoing, the Court holds that petitioner has a valid cause of action against private respondent. Clearly, the failure
of private respondent to honor his obligation under the promissory note constitutes a violation of petitioners right to collect the proceeds
of the loan it extended to the former.

Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration

No Prescription
or Laches
Private respondents claim that the action has prescribed, pursuant to Article 1149 of the Civil Code, is legally
untenable. Petitioners suit for collection of a sum of money was based on a written contract and prescribes after ten years from the
time its right of action arose. [19] Sarmientos obligation under the promissory note became due and demandable on March 6,
1978. Petitioners complaint was instituted on August 22, 1985, before the lapse of the ten-year prescriptive period. Definitely,
petitioner still had every right to commence suit against the payor/obligor, the private respondent herein.
Neither is petitioners action barred by laches. The principle of laches is a creation of equity, which is applied not to penalize
neglect or failure to assert a right within a reasonable time, but rather to avoid recognizing a right when to do so would result in a clearly
inequitable situation[20] or in an injustice.[21] To require private respondent to pay the remaining balance of his loan is certainly not
inequitable or unjust. What would be manifestly unjust and inequitable is his contention that CBTC is the proper party to proceed
against him despite the fact, which he himself asserts, that CBTCs corporate personality has been dissolved by virtue of its merger with
petitioner. To hold that no payee/obligee exists and to let private respondent enjoy the fruits of his loan without liability is surely most
unfair and unconscionable, amounting to unjust enrichment at the expense of petitioner. Besides, this Court has held that the doctrine
of laches is inapplicable where the claim was filed within the prescriptive period set forth under the law.[22]

No Contract
Pour Autrui
Private respondent, while not denying that he executed the promissory note in the amount of P2,500,000 in favor of CBTC, offers
the alternative defense that said note was a contract pour autrui.
A stipulation pour autrui is one in favor of a third person who may demand its fulfillment, provided he communicated his
acceptance to the obligor before its revocation. An incidental benefit or interest, which another person gains, is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third person.[23]
Florentino vs. Encarnacion Sr.[24] enumerates the requisites for such contract: (1) the stipulation in favor of a third person must be
a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or compensated by any kind of
obligation; and (3) neither of the contracting parties bears the legal representation or authorization of the third party. The fairest test in
determining whether the third persons interest in a contract is a stipulation pour autrui or merely an incidental interest is to examine the
intention of the parties as disclosed by their contract.[25]
We carefully and thoroughly perused the promissory note, but found no stipulation at all that would even resemble a provision in
consideration of a third person. The instrument itself does not disclose the purpose of the loan contract. It merely lays down the terms
of payment and the penalties incurred for failure to pay upon maturity. It is patently devoid of any indication that a benefit or interest
was thereby created in favor of a person other than the contracting parties. In fact, in no part of the instrument is there any mention of
a third party at all. Except for his barefaced statement, no evidence was proffered by private respondent to support his
argument. Accordingly, his contention cannot be sustained. At any rate, if indeed the loan actually benefited a third person who
undertook to repay the bank, private respondent could have availed himself of the legal remedy of a third-party complaint. [26] That he
made no effort to implead such third person proves the hollowness of his arguments.

Consideration
Private respondent also claims that he received no consideration for the promissory note and, in support thereof, cites petitioners
failure to submit any proof of his loan application and of his actual receipt of the amount loaned. These arguments deserve no
merit. Res ipsa loquitur. The instrument, bearing the signature of private respondent, speaks for itself. Respondent Sarmiento has not
questioned the genuineness and due execution thereof. No further proof is necessary to show that he undertook to pay P2,500,000,
plus interest, to petitioner bank on or before March 6, 1978. This he failed to do, as testified to by petitioners accountant. The latter
presented before the trial court private respondents statement of account [27] as of September 30, 1986, showing an outstanding balance
of P4,689,413.63 after deducting P1,000,000.00 paid seven months earlier. Furthermore, such partial payment is equivalent to an
express acknowledgment of his obligation. Private respondent can no longer backtrack and deny his liability to petitioner bank. A
person cannot accept and reject the same instrument.[28]
WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the Decision of RTC-Manila, Branch 48, in
Civil Case No. 26465 is hereby REINSTATED.
SO ORDERED.
Davide Jr. (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.