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

[G.R. No. 123793. June 29, 1998]

FACTS:
1. September 16, 1975 - Associated Banking Corporation (ABC) and Citizens Bank and Trust
Company (CBTC) merged to form one banking corporation = Associated Citizens Bank (ACB as
surviving bank --- later changed its name to Associated Bank in 1981 through an amendment in its
AOI).
2. After the merger agreement had been signed, but before a certificate of merger was issued,
(September 7, 1977) Lorenzo Sarmiento Jr. (SARMIENTO) executed in favor of CBTC a promissory
note whereby SARMIENTO undertook to pay CBTC P2,500,000.00 payable on or before March 6,
1978 (plus interest at 14% per annum, 3% per annum in the form of liquidated damages,
compounded interests, and attorney’s fees) --- SARMIENTO made partial payments.
3. Despite repeated demands, SARMIENTO still failed to pay his remaining balance.
4. AB filed a collection suit against SARMIENTO.
5. RTC – SARMIENTO to pay AB his remaining balance plus interests and attorney’s fees.
6. SARMIENTO appealed.
7. CA – dismissed and set aside RTC decision
- AB had no cause of action against SARMIENTO, since said bank was not privy to the
promissory note executed by SARMIENTO in favor of 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.
8. AB appealed.

ISSUE: WON AB (surviving corp.) may enforce the promissory note made by SARMIENTO in favor of CBTC
(absorbed company) after the merger agreement had been signed. – YES!

RATIO:
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.

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 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 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.

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.

The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks. the same must be given its literal meaning. as if such reference [was a] direct reference to the latter for all intents and purposes. Assuming that the effectivity date of the merger was the date of its execution. under the very provisions of the merger agreement. Since. to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. all references to [CBTC] in any deed. 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. DOCTRINE: The fact that the promissory note was executed after the effectivity of the merger does not militate against the petitioner where the agreement clearly provides that all contracts entered into in the name of CBTC shall be understood as pertaining to the surviving bank. references to [ABC]. or other papers of whatever kind or nature and wherever found shall be deemed for all intents and purposes. Thus. in Civil Case No. as a reference to petitioner bank. plain and free of ambiguity. the reference to CBTC in the note shall be construed. A closer perusal of the merger agreement leads to a different conclusion. the SURVIVING BANK.irrespective of the date of execution -. the petition is GRANTED. specifically. HELD: WHEREFORE. 26465 is hereby REINSTATED.entered into in the name of CBTC shall be understood as pertaining to the surviving bank. and that to let the private respondent enjoy the fruits of his loan without liability is unfair and unconscionable. The assailed Decision is SET ASIDE and the Decision of RTC-Manila. that the merger provision being clear. we still cannot agree that petitioner no longer has any interest in the promissory note. Branch 48. amounting to unjust enrichment . The agreement itself clearly provides that all contracts -. in contrast to the earlier aforequoted provision. no distinction should be made. herein petitioner. documents. as if such references were direct references to [ABC]. The provision quoted earlier has this other clause: Upon the effective date of the [m]erger. although the subject promissory note names CBTC as the payee. the latter clause no longer specifically refers only to contracts existing at the time of the merger.