FAR EAST BANK & TRUST COMPANY, Petitioner, v. DIAZ REALTY INC., respondent.

Facts

Sometime in August 1973, Diaz and Company got a loan from the former PaBC [Pacific Banking
Corporation]. The loan was secured by a real estate mortgage over two parcels of land owned by the
plaintiff Diaz Realty. In 1981, Allied Banking Corporation rented an office space in the building
constructed on the properties covered by the mortgage contract, with the conformity of mortgagee PaBC,
whereby the parties agreed that the monthly rentals shall be paid directly to the mortgagee for the lessors
account, either to partly or fully pay off the aforesaid mortgage indebtedness. Pursuant to such contract,
Allied Bank paid the monthly rentals to PaBC instead of to the plaintiffs. On July 5, 1985, the Central Bank
closed PaBC, placed it under receivership, and appointed Renan Santos as its liquidator. Sometime in
December 1986, appellant FEBTC purchased the credit of Diaz & Company in favor of PaBC, but it was
not until March 23, 1988 that Diaz was informed about it.

According to the plaintiff as alleged in the complaint and testified to by Antonio Diaz, he went to office of
PaBC which by then housed FEBTC and was told that the latter had acquired PaBC; that Cashier Ramon
Lim told him that as of such date, his loan was P1,447,142.03; that he (Diaz) asked the defendant to
make an accounting of the monthly rental payments made by Allied Bank; that on December 14,
1988,6 Diaz tendered to FEBTC the amount of P1,450,000.00 through an Interbank check, in order to
prevent the imposition of additional interests, penalties and surcharges on its loan; that FEBTC did not
accept it as payment; that instead, Diaz was asked to deposit the amount with the defendants Davao City
Branch Office, allegedly pending the approval of Central Bank Liquidator Renan Santos; that in the
meantime, Diaz wrote the defendant, asking that the interest rate be reduced, that subsequently, the
defendant told him to change the P1,450,000.00 deposit into a money market placement, which he did;
that the money market placement expired on April 14, 1989; that when there was still no news from the
defendant whether or not it [would] accept his tender of payment, he filed this case at the Regional Trial
Court of Davao City.

In its responsive pleading, the defendant set up the following special/affirmative defenses: FEBTC
purchased from the PaBC the account of the plaintiffs; that despite such purchase, PaBC Davao Branch
continued to collect interests and penalty charges on the loan; that it was therefore not FEBTC which
collected the interest rates mentioned in the complaint, but PaBC; that it is not true that FEBTC was trying
to impose [exorbitant] rates of interest; that as a matter of fact, after the transfer of plaintiffs account, it
sought to negotiate with the plaintiffs, and in fact, negotiations were made for a settlement and possible
reduction of charges; that FEBTC has no knowledge of the rates of interest imposed and collected by
PaBC prior to the purchase of the account from the latter, hence it could not be held responsible for those
transactions which transpired prior to the purchase; and that the defendant acted at the opportune time
for the settlement of the account, albeit exercising prudence in the handling of such account.

The CA affirmed the trial courts finding that there was a valid tender of payment in the sum of P1,450,000,
made by Diaz Realty Inc. in favor of Far East Bank and Trust Company. The appellate court reasoned
that petitioner failed to effectively rebut respondent’s evidence that it so tendered the check to liquidate its
indebtedness, and that petitioner had unilaterally treated the same as a deposit instead.

The CA further ruled that in the computation of interest charges, the legal rate of 12 percent per annum
should apply, reckoned from July 9, 1988, until full and final payment of the whole indebtedness. It
explained that while petitioners purchase of respondents account from Pacific Banking Corporation
(PaBC) was valid, the 20 percent interest stipulated in the Promissory Note should not apply, because the
account transfer was without the knowledge and the consent of respondent-obligor.

The appellate court, however, sustained petitioner’s assertion that the trial court should not have
cancelled the real estate mortgage contract, inasmuch as the principal obligation upon which it was
anchored was yet to be extinguished. As to the lease contract, the CA held that the same was subject to
renegotiation by the parties.

ISSUE: Whether or not the Court of Appeals correctly ruled on the efficacy of the alleged tender of
payment made by respondent.

RULING: [YES]

Petitioner resolutely argues that the CA erred in upholding the validity of the tender of payment made by
respondent. What the latter had tendered to settle its outstanding obligation, it points out, was a check
which could not be considered legal tender.

We disagree. The records show that petitioner bank purchased respondents account from PaBC in
December 1986, and that the latter was notified of the transaction only on March 23, 1988. Thereafter,
Antonio Diaz, president of respondent corporation, inquired from petitioner on the status and the amount
of its obligation. He was informed that the obligation summed up to P1,447,142.03. On November 14,
1988, petitioner received from respondent Interbank Check No. 81399841 dated November 13, 1988,
bearing the amount of P1,450,000, with the notation Re: Full Payment of Pacific Bank Account now
turn[ed] over to Far East Bank.  The check was subsequently cleared and honored by Interbank, as
shown by the Certification it issued on January 20, 1992. 

True, jurisprudence holds that, in general, a check does not constitute legal tender, and that a creditor
may validly refuse it. It must be emphasized, however, that this dictum does not prevent a creditor from
accepting a check as payment. In other words, the creditor has the  option and the discretion  of refusing
or accepting it.

In the present case, petitioner bank did not refuse respondents check. On the contrary, it accepted the
check which, it insisted, was a deposit. As earlier stated, the check proved to be fully funded and was in
fact honored by the drawee bank. Moreover, petitioner was in possession of the money for several
months.

Roman Catholic Bishop of Malolos, Inc. v. Intermediate Appellate Court emphasizes:

Tender of payment involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the formers obligation and demanding that the latter accept the
same.

xxx

Thus, tender of payment cannot be presumed by a mere inference from surrounding circumstances. At
most, sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his
part of the bargain. But whether or not the obligor avails himself of such funds to settle his outstanding
account remains to be proven by independent and credible evidence. Tender of payment presupposes
not only that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab
posse ad actu non vale illatio. A proof that an act could have been done is no proof that it was actually
done.

In other words, tender of payment  is the definitive act of offering the creditor what is due him or her,
together with the demand that the creditor accept the same. More important, there must be a fusion
of intent, ability and capability  to make good such offer, which must be absolute and must cover the
amount due. 
That respondent intended to settle its obligation with petitioner is evident from the records of the case.
After learning that its loan balance was P1,447,142.03, it presented to petitioner a check in the amount
of P1,450,000, with the specific notation that it was for full payment of its Pacific Bank account that had
been purchased by petitioner. The latter accepted the check, even if it now insists that it considered the
same as a mere deposit. The check was sufficiently funded, as in fact it was honored by the drawee bank.
When petitioner refused to release the mortgage, respondent instituted the present case to compel the
bank to acknowledge the tender of payment, accept payment and cancel the mortgage. These acts
demonstrate respondents’ intent, ability and capability to fully settle and extinguish its obligation to
petitioner.

That respondent subsequently withdrew the money from petitioner-bank is of no moment because such
withdrawal would not affect the efficacy or the legal ramifications of the tender of payment made on
November 14, 1988. As already discussed, the tender of payment to settle respondent’s obligation as
computed by petitioner was accepted, the check given in payment thereof converted into money, and the
money kept in petitioners possession for several months.

To iterate, the tender was made by respondent for the purpose of settling its obligation. It was incumbent
upon petitioner to refuse or accept it as payment. The latter did not have the right or the option to accept
and treat it as a deposit. Thus, by accepting the tendered check and converting it into money, petitioner is
presumed to have accepted it as payment. To hold otherwise would be inequitable and unfair to the
obligor.

WHEREFORE , the Petition is hereby DENIED.