FIRST DIVISION

G.R. No. 123793 June 29, 1998

ASSOCIATED BANK, petitioner, 
vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

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   of the Court of Appeals   in CA-GR CV No. 26465 promulgated on January 30,
1 2

1996, which answered the above question in the negative. The challenged Decision
reversed and set aside the October 17, 1986 Decision   in Civil Case No. 85-32243,
3

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 attorney's 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-appellee's 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

. . . [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 attorney's 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.

x x x           x x x          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 attorney's 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 defendant's 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 . . . 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, C-3); 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 attorney's fees. In his
appeal, Sarmiento assigned to the trial court several errors, namely:  7

I The [trial court] erred in denying appellant's motion to dismiss appellee

bank's 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 bank's

amended complaint while defendant-appellant's motion to dismiss appelle
bank's original complaint and using/availing [itself of] the new additional
allegations as bases in denial of said appellant's 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 appellant's 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
appellant's 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 bank's 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

bank's 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 bank's 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 bank's original and amended complaints.

VIII The appealed decision of the lower court erred in not considering at all
appellant's 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 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 of P2.5 million which including accrued
interests, penalties and cost of litigation totaled P4,689,413.63) and
appellant's 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 Court's 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.   Although there is a dissolution of the absorbed corporations, there is no
10
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.   Section 79 of said Code requires the approval by the Securities and
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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,   which Associated Banking Corporation (ABC) and Citizens Bank and Trust
13

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."   As to the transfer of the
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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 [CBTC's] 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 respondent's 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]. . . .   (Emphasis supplied)
6

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   and applied without a convoluted interpretation. Verba lelegis non est
17

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 petitioner's 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 respondent's claim that the action has prescribed, pursuant to Article 1149 of the
Civil Code, is legally untenable. Petitioner's 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.   Sarmiento's obligation under the promissory note became due and demandable
19

on March 6, 1978. Petitioner's 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 petitioner's 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   or in an injustice.   To require private respondent to pay the
20 21

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 CBTC's 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.   enumerates the requisites for such contract: (1) the
24

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
person's 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.   That he made no effort to implead such third person proves the hollowness
26

of his arguments.

Consideration

Private respondent also claims that he received no consideration for the promissory note
and, in support thereof, cites petitioner's 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 petitioner's accountant. The latter presented before the trial court
private respondent's statement of account   as of September 30, 1986, showing an
27

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.