MANILA — The Supreme Court (SC) has ruled that banks are not permitted to unreasonably refuse payment from their borrowers who risk facing higher interest rates and additional charges.

In a decision of the 3rd Division, the court ordered Premiere Development Bank to pay spouses Engracio and Lourdes Castañeda a total amount of P4 million for moral and exemplary damages.

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The court said it was unreasonable for the bank to refuse to apply the P2.6 million payment of the spouses to fully settle their personal loan.

The court further emphasized that the bank incorrectly treated the spouses and the companies they own, which also have loans with the bank, as a single borrower.

“Creditors cannot be allowed to unreasonably refuse payment, to the prejudice of debtors who run the risk of incurring higher interest fees and other charges,” the court said in the decision penned by Associate Justice Alfredo Benjamin Caguioa.

Engracio was also the President of Casent Realty and Development Corporation and Vice President of Central Surety and Insurance Company, Inc.

The companies also had three other corporate loans with the bank in the total amount of P86.8 million.

The  bank applied the total amount of P2.6 million paid by the couple to the total amount of all four loans.

The Supreme Court noted that both the Regional Trial Court and the Court of Appeals ruled that the bank should have applied the P2.6 million check solely to the personal loans and not to the companies’ loans.

The court noted that according to Article 1252 of the Civil Code, when a borrower has multiple loans with the same lender, the borrower has the right to choose how to allocate their payments among the different loans.

“It is indeed a basic doctrine in corporation law that corporations have separate and distinct personality from their officers and stockholders,” the SC said.

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