De La Salle University - Graduate School of Business

A Case Analysis on

Zepeda vs China Banking

Gr. No. 172175

Submitted by:

Vidar Halvorsen

Submitted to:

Dean Atty. Joe-Santos B. Bisquera

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Table of Contents

1.0 Background of the Case ....................................................................................... 3

2.0 Statement of the Problem ..................................................................................... 6

3.0 Objectives ………………………………………………………..……………………6

4.0 Areas of Consideration ......................................................................................... 7

5.0 Alternative Courses of Action …. …………………………………………………… 7

6.0 Conclusion ...........................................................................................................13

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1.0BACKGROUND

In February 1995 spouses Zepeda obtained a loan from China Bank to the amount of
5,800,000 php.
They later ran into financial problems, and subsequently failed to uphold their
obligations with said loan. Allegedly they approached the bank and negotiated a
restructuring of the loan, which was said to have been granted. However; there were
no documents to prove this. The Zepedas was surprised when the bank then
proceeded to extrajudicially foreclose their property, and auctioned off the real
estate , where itself emerged as the highest bidder. China bank was issued a
Provisional certificate of sale when the Zepedas failed to redeem the property within
the legal time, and ownership consolidated in the name of China Bank.

In the first instance of courts, the Zepedas argued the foreclosure proceedings
should have been annulled due to the bank failing to comply with the posting and
publication requirements of the law.
Additionally, the Zepedas claimed the real estate mortgage and promissory note was
signed in blank, with no copy furnished to them. Interests were then later unilaterally
fixed by China bank.

China Banks motion for dismissal was denied, hence it filed a special answer with
affirmative defences, including a set of 20 questions to be answered by the Zepedas.
These questions were never answered by the Zepedas.

The Trial Court denied China Banks affirmative defences for lack of merits, as well as
its motion to expunge the complaint for being premature.
The case was elevated to the Appelate Courts, where China bank won. The CA ruled
in favour of China bank on the reasons of Zepedas acting in bad faith when ignoring
the hearings of the court, and China Banks affirmative defences, failed to answer
China Banks 20 questions, and that the complaint failed to show cause of action.
Consequently the case went to the Supreme Court, where it in the end was ruled in
favour of the Zepedas, nullifying the former rulings of courts, and sending it back to
RTC.

2.0STATEMENT OF THE PROBLEM.

The question of this case revolves around the legality of the contract itself; were
there indeed a contract to speak of?

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3.0OBJECTIVES

This report will attempt to look at the case, using the provisions of the law to see
whether or not China bank has a case to speak of, and as such, what laws and
provisions governs this case.
Furthermore – were there a legal basis for China Bank to foreclose the property ?
Lastly , the student will look at alternative ways for the Supreme Court to have ruled
on the case.

4.0ANALYSIS / ALTERNATIVE COURSES OF ACTIONS

In this case there has been many laws and provisions mentioned, in regards to the
zepedas not answering the questions of the bank, and other provisions mentioned on
the procedures of court. Based on the events taking place previous to the trials,
those seem to be irrelevant.
Instead, the provisions on contracts and obligations come into effect.
Art. 1305 of the Civil code states:
“A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.”
Therefore, the requisites of a contact, as enumerated in Article 1318, are as follows:
(1) consent of the contracting parties; (2) object certain which is the subject matter of
the contract; and (3) cause of the obligation which is established – without which
there is no contract.

On the subject of a contract unilaterally imposed and determined is illegal

according to article 1308, which tell us that such unilateral decisions are in
violation to the principle of mutuality. “thus one-sided impositions do not have the
force of law between parties, because such impositions are not based on the
parties’ essential equality1. “

In addition to this, whenever a loan is entered into, the “truth in lending

act,” Republic act nr. 3765 come into action.

Supreme Court deemed in United Coconut Planters Bank vs. Spouses

Samuel and Odette Beluso2: ““In such transactions, the debtor and the lending
institutions do not deal on an equal footing and this law was intended to protect

1
New Sampaguita Construction Builders, Inc., Petitioner, vs. Philippine National Bank, Respondent [G.R. No. 148753. July 30,
2004]. Retrieved from http://sc.judiciary.gov.ph/jurisprudence/2004/jul2004/148753.htm
2
United Coconut Planters Bank, Petitioner, vs. Sps. Samuel and Odette Beluso, Respondents [G.R. No. 159912. August 17,
2007]. Retrieved from http://sc.judiciary.gov.ph/jurisprudence/2007/august2007/159912.htm

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 the public from hidden or undisclosed charges on their loan obligations, requiring
a full disclosure thereof by the lender.”

Detailed in the republic act 1765 we find: “any creditor [to] furnish to each
person to whom credit is extended, prior to the consummation of the transaction,
a clear statement in writing set forth, to the extent applicable and in accordance
with rules and regulations prescribed by the Board, the following information: (6)
the finance charge expressed in terms of pesos and centavos and (7) the
percentage that the finance bears to the total amount to be financed expressed as
a simple annual rate on the outstanding unpaid balance of the obligation." In the
current case, there was no such information given to the Zepedas. As reality has
it, they were asked to sign a blank contract where the said interest rates and
conditions were entered unilaterally later by China Bank.
Regardless thou; it is a fact a loan was entered into, and the principal of this has
to be paid. However; as the contract itself is void, the interest should be, unless
so ordered by the court(s) 12% per annum only.
AS for the banks obligation in this, it is also regulated in the republic act 1765.
According to that act, the bank would be liable for between 100- 2000 php per
misinformed transaction. Also, it states that any person willfully violating a
provision off that act or any regulation issued under it, shall be fined 1000-5000
php, or incarceration for 6-12 months ( or both fines and imprisonment)

Taking this information into consideration, it seems prudent also to look at the issues
of fraud and bad faith. Articles 1338 state: Art. 1338. There is fraud when, through
insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed
to. (1269)

Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confidential relations, constitutes fraud. (n)

Art. 1344. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)

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Given this, this student deems China bank to have acted deliberately in bad faith.
Regardless of the actions taken later, the preceding actions made deliberately and
inbad faith by the bank, violates the concept of a contract entered into by mutual
agreement and a meeting of minds as stipulated in art 1475:

Art. 1475. The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price.

Therefore, the whole case of foreclosure and the other points mentioned in the case
are irrelevant as the contract of restructuring is void and fraudulent from the
beginning.

5.0CONCLUSION

Based on the information given above, the courts should have, even on RTC level
have addressed the issue of the validity of the contract itself. The mere information of
a unilateral fixed contract should have directed the courts in this direction.
It has been established through this case, that China bank withheld vital information
for its client, and as such are liable according to the law.

However; it is still a fact that the zepedas has a mortgage to take care of, though
due to the invalidity of the contract unilaterally fixed by China Bank, the interest
therein should be only 12% until addressed by the court(s).
This being said, it should subsequently be necessary for the court to look at de
installments made by the Zepedas to offset against the 12% interest they should
have paid as to the void contract. There might be a void contract in action, but there
is still an obligation for the Zepedas to take care of – in the interest of fairness and
equity.
As to the restructuring of the loan, there obviously haven’t been a legal restructuring
of the said loan, so this is also something the courts have to address and order China
Bank to set up in an orderly and legal fashion. Should the Zepedas still not be able to
pay that said restructuring, the bank will have the rights to pursue foreclosure through
the correct procedures.

6.0BIBLIOGRAPHY

ChanRobles Virtual Law Library:

http:www.ChanRobles.com

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Supreme Court online library:

http://sc.judiciary.gov.ph

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