Guarantee Suretyship
Globe
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.
MERCANTILE INSURANCE CO., INC., plaintiff-appellee, vs. FELIPE
YSMAEL, JR., & CO. INC., defendants-appellants.
Beltran, Evangelista & Cuasay for plaintiff-appellee.
Abraham F. Sarmiento Law Office for defendants-appellants.
SYLLABUS
1. CIVIL LAW; CREDIT TRANSACTION; INDEMNITY AGREEMENT;
STIPULATION ALLOWING SURETY TO RECOVER EVEN BEFORE THE
CREDITOR IS PAID, ENFORCEABLE. — The question as to whether or not
under the Indemnity Agreement of the parties, the Surety can demand
indemnification from the principal, upon the latter's default, even before the
former has paid to the creditor, has long been settled by this Court in the
affirmative. The stipulation in the indemnity agreement allowing the surety to
recover even before it paid the creditor is enforceable. In accordance therewith,
the surety may demand from the indemnitors even before paying the creditors."
(Cosmopolitan Ins. Co., Inc. v. Reyes, 15 SCRA 528 [1965] citing; Security Bank
v. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; Alto Surety and Ins. Co.,
v. Aguilar, et al., G.R. No. L-5625, March 16, 1954).
2. ID.; OBLIGATIONS AND CONTRACTS CONSIDERED LAW
BETWEEN THE CONTRACTING PARTIES SO LONG AS THEY ARE NOT
CONTRARY TO LAW; MORALS, GOOD CUSTOMS. — Contracts are
respected as the law between the contracting parties (Henson v. IAC, 148 SCRA
11 [1987], citing Castro v. CA, 99 SCRA 722 [1980] and Escano v. CA, 100
SCRA 197 [1980]) It is settled that the parties may establish such stipulations,
clauses, terms and conditions as they may want to include, and as long as such
agreements are not contrary to law, morals, good customs, public policy or public
order, they shall have the force of law between them (Herrera v. Petrophil Corp.,
146 SCRA [1986].
3. ID.; ID.; CONTRACTS INTERPRETED ACCORDING TO THEIR
LITERAL MEANING. — Contracts should be interpreted according to their
literal meaning and should not be interpreted beyond their obvious intendment. It
is a basic and fundamental rule in the interpretation of contracts that if the terms
thereof are clear and leave no doubt as to the intention of the contracting parties,
the literal meaning of the stipulation shall control.
4. ID.; ID.; OBLIGATIONS OF THE PARTIES UNDER AN INDEMNITY
AGREEMENT. — The indemnity agreement was not executed for the benefit of
the creditors; it was rather for the benefit of the surety and if the latter thought it
necessary in its own interest to impose this stipulation, and the indemnitors
voluntarily agreed to the same, the court should respect the agreement of the
parties and require them to abide by their contract. (Security Bank v.
Assurance, 107 Phil. 733 [1960].
5. ID.; ID.; PRINCIPAL DEBTOR IN INDEMNITY AGREEMENT,
JOINTLY AND SEVERALLY LIABLE. — It must be stressed that in the case at
bar, the principal debtors, defendants-appellants herein, are simultaneously the same
persons who executed the Indemnity Agreement. Thus, the position occupied by
them is that of a principal debtor and indemnitor at the same time, and their liability
being joint and several with the plaintiff-appellee's, the Philippine National Bank
may proceed against either for fulfillment of the obligation as covered by the Surety
bonds. There is, therefore, no principle of guaranty involved and, therefore, the
provision of Article 2071 of the Civil Code does not apply.
6. ID.; ID.; ATTORNEYS FEES; AWARD OF 15% IN INDEMNITY
AGREEMENT, RULED REASONABLE. — As to the attorney's fees, it has been
squarely ruled by this Court that the award of fifteen (15) per cent for cases of this
nature is not unreasonable (Cosmopolitan Insurance Co., Inc. v. Reyes, 15 SCRA
528 [1965]).
PHILIPPINE NATIONAL BANK, petitioner, vs. THE HONORABLE COURT
OF APPEALS and the PHILIPPINE PHOENIX SURETY AND INSURANCE,
INC., respondents.
Conrado E. Medina, Eduardo M. Magtalas, Andres L. Africa & Pablito D. Reynaldo
for petitioner.
Manuel O. Chan for private respondent.
RESOLUTION
Marino P. Rubin obtained from the Binalbagan Branch of petitioner Philippine
National Bank (Bank, for short) a 1954-1955 sugar crop loan in the amount of
P40,200.00, secured by a chattel mortgage executed by Rubin as debtor-mortgagor
and Jose A. Campos as mortgagor. As additional security, private respondent
Philippine Phoenix Surety and Insurance, Inc. (Phoenix for short) issued Surety
Bond No. 88 for P10,000.00 in favor of petitioner Bank. Liability under said bond
was to expire one (1) year from the date thereof, unless within ten (10) days from its
expiration, the surety is notified of any existing obligations thereunder.
Three months later, petitioner Bank increased the loan from P40,200.00 to
P56,800.00, without the knowledge and consent of private respondent Phoenix.
LibLex
When Rubin failed to liquidate said loan, petitioner Bank demanded of private
respondent Phoenix that it make good its undertaking as surety for Rubin up to the
stated amount of P10,000.00. Private respondent Phoenix denied liability, resulting
in petitioner instituting a collection case against Rubin, his guarantors and sureties,
including private respondent Phoenix.
The trial court ruled in favor of petitioner Bank, ordering, among others, private
respondent Phoenix to pay petitioner the sum of P10,000 upon failure of the
principal debtor Rubin and his guarantors to pay the judgment amount. On
appeal, the Court of Appeals modified the trial court's decision by exonerating
private respondent Phoenix from liability under its surety bond. Hence, the
instant petition for review.
The discharge of private respondent Phoenix from liability under Surety Bond
No. 88 is correct. Contrary to petitioner's thinking, the contract in question is not
a continuing chattel mortgage for which consent and knowledge of the surety is
unnecessary for an increase in the amount of the principal obligation. The
contract of chattel mortgage itself fixed the credits, loans, overdrafts, etc. and
other valuable consideration received thereunder at Forty Thousand Two Hundred
Pesos [P40,200.00]. The undertaking under said contract was "for the purpose of
securing their payment including the interest thereon, the cost of collection and
other obligations owing by the Debtor-Mortgagor to the mortgagee, whether
direct or indirect, principal or secondary as appears in the accounts, books and
records of the mortgagee . . ." [p. 179, Record on Appeal]. Applying the principle
of ejusdem generis, the term "other obligations" must be limited to such as are of
the same nature as interest and costs of collection. The term cannot be enlarged to
include future additional advances to debtor-mortgagor, much less be interpreted
as a previous authorization from the surety to increase the principal amount fixed
in the contract. prLL
The increase in the indebtedness from P40,200.00 to P56,800.00 is material and
prejudicial to private respondent Phoenix. While the liability of private
respondent under the bond is limited to P10,000.00, the increase in the amount of
the debt proportionally decreased the probability of the principal debtor being
able to liquidate the debt; thus, increasing the risk undertaken by the surety to
answer for the failure of the debtor to pay. "A material alteration of the principal
contract, effected by the creditor and principal debtor without the knowledge and
consent of the surety, completely discharges the surety from all liability in the
contract of suretyship." [Asiatic Petroleum Co. vs. Hizon and David, 45 Phil.
532; Phil. National Bank vs. Veraguth, 50 Phil. 253].
ACCORDINGLY, the decision of the Court of Appeals under review is hereby
affirmed. Costs against petitioner.
PEOPLES BANK AND TRUST COMPANY, plaintiff-appellee, vs. JOSE
MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and FRANCISCO
D. SANTANA, defendants. FRANCISCO D. SANTANA, defendant-
appellant.
Araneta, Mendoza & Papa for plaintiff-appellee.
Paredes, Poblador, Nazareno, Asada, & Tomacruz for defendant-appellant.
SYLLABUS
1. CIVIL LAW; GUARANTY; ADVANCE WAIVER OF RELEASE OF
SECURITY; VALID EVEN WITHOUT PRIOR NOTICE TO GUARANTOR. —
The contract of absolute guaranty . . . expressly authorized the plaintiff bank to
extend the time of payment and to release or surrender any security or part thereof
held by it without notice to, or the consent of, Santana. He had consented in advance
to the release of the guaranty which the bank might make, Santana cannot now
complain that the release of the pledge was without his consent, and that it deprived
him of the right to be subrogated to the rights of the creditor. The waiver is not
contrary to law, nor is it contrary to public policy. The law does not prohibit the
debtor-guarantor from agreeing in advance and without notice to the release of any
security which had been given to assure payment of the obligation. The waiver is not
contrary to public policy, because the right is purely personal, and does not affect
public interest nor does it violate any public policy. Neither does the return of the
shares of stocks novate the original contract for the obligation remains the same; and
if it is a novation, it is a novation made with the consent of Santana. Moreover, the
pledge is merely an accessory obligation, and its release does not vary the terms of
the principal obligation.
2. ID.; ID.; ID.; CONTRACT BINDING UPON PARTIES. — The contract of
absolute guaranty executed by appellant Santana is the measure of his rights and
duties. As it is with him, so it is with the plaintiff bank. What was therein stipulated
had to be complied with by both parties. Nor could appellant have any valid cause
for complaint. He had given his word; he must live up to it. Once the validity of its
terms conceded, he cannot be indulged in his unilateral determination to disregard
his commitment. A promise to which the law accords binding force must be fulfilled.
It is as simple as that. So the Civil Code explicitly requires: "Obligations arising
from contracts have the force of law between the contracting parties and should be
complied with in good faith.
3. ID.; WAIVER OF RIGHTS; WHEN VALID. — A right may be waived
unless it would be contrary to law, public order, public policy, morals or good
customs. There is no occasion here for the exceptions coming into play. It has been
traditional in the Philippines for parents to extend all available aid and assistance to
their children. That is a custom of long standing. Nor is there anything offensive to
morals by an assumption of contingent liability as thus worded. The law has not
been thwarted. Neither is public order nor public policy disregarded.
DECISION
FERNANDO, J p:
Appellant Francisco D. Santana was sued by plaintiff, now appellee, Peoples Bank
& Trust Company, along with the other defendants, Jose Maria Tambunting and
Maria Paz Tambunting, his son-in-law and his daughter, for the recovery of the sum
of money due in an overdraft agreement, with the Tambunting couple as principal
debtors and appellant as surety. The judgment went against him notwithstanding his
plea based on Article 2080 of the Civil Code, releasing guarantors, even if they
solidary if by some act of the creditor subrogation is thereby precluded. 1 The
lower court, presided by the then Judge, now Justice of the Court of Appeals, Jose
N. Leuterio, in a well-written decision, found such a defense untenable as in what
was characterized by the lower courts as the "contract of absolute guaranty",
appellant had waived his rights to the benefit conferred by such a provision. In
this appeal, he would vigorously contend that what was thus agreed to by him
was bereft of a binding force. The law in its wisdom does not lend its approval to
such an ill-disguised attempt to turn one's back to an obligation arising from a
valid contract. We have to affirm.
The decision, now on appeal, after stating the nature of the action which as noted
is for the recovery of a sum of money due on an overdraft agreement set forth the
undisputed facts thus: "On September 9, 1963, plaintiff and defendants executed
a contract denominated 'overdraft agreement and pledge' wherein the plaintiff
granted to the spouses Jose Maria Tambunting and Maria Paz Tambunting an
overdraft from time to time on their current account with the plaintiff bank not to
exceed P200,000.00, with interest at the rate of 9% per annum until September
10, 1964, . . . , the proceeds of which were to be used by the Tambuntings in their
logging operations. Defendant Francisco D. Santana, as guarantor, and the
spouses Tambuntings, conveyed to the bank shares of capital stock of the
International Sports Development Corporation as collateral security for the
payment of any and all indebtedness incurred or arising from the overdraft, and
all extensions, renewals, amendments or applications thereof. On the same day,
defendant Francisco D. Santana executed a document denominated as absolute
guaranty in which, in consideration of the 'overdraft agreement and pledge,' he
bound himself to the bank, jointly and severally, with the Tambunting spouses for
the full and prompt payment of all the indebtedness incurred or to be incurred by
said spouses on account of the overdraft line. On July 24, 1964, Jose Maria
Tambunting wrote to the plaintiff bank [a] latter, . . ., requesting renewal of the
overdraft agreement. Plaintiff bank, in a letter dated September 21, 1964, . . .,
granted the Tambunting spouses an extension of the over, draft line for six (6)
months from September 10, 1964, but reducing the overdraft line to P185,000.00
with the understanding that other terms and conditions of the overdraft agreement
would be in full force and effect. Before the expiration of the six (6) months
period, or on March 5, 1965, Jose Maria Tambunting asked for another renewal
of the overdraft line for another year, . . . . Apparently, this letter was granted by
the plaintiff on March 15, 1965, for in another letter of Jose Maria Tambunting to
the bank, . . . the defendant, on March 29, 1965, assured the bank that he would
comply with the requirements of the plaintiff. In a letter dated May 11, 1965, . . .
of the bank to Tambunting, the Manager of the Credit Department advised Jose
Maria Tambunting that the Board of Directors of the plaintiff bank approved his
request for an extension of the overdraft line in the amount of P185,000.00 for
another year, or until March 10, 1965, but with interest at the rate of 10% per
annum, that in the same meeting, the Board also approved the release of the pledge
of 135 shares of stocks of the International Sports Development Corporation. The
defendants failed to pay the indebtedness on the date due and demand for payment
was made upon Francisco Santana and Tambunting as per letters dated December
14, 1965, January 24, 1966 and March 4,1966, . . . . As of December 27, 1966, the
total amount due from the defendants, including interests, was P219,165.18, . . . ." 2
The decision went on to state: "The Tambunting spouses failed to answer the
complaint and were declared in default. The defendant Santana does not dispute the
indebtedness. However, it is the contention that he had been released from the
guaranty for several reasons. Defendant Santana contends that he was released from
his obligation on the overdraft line because the plaintiff had extended the time of
payment and released to the Tambuntings without his consent, the 135 shares of
stocks of the International Sports Development Corporation which had been pledged
to the bank to secure the overdraft line. It is argued that, in accordance with Article
2080 of the New Civil Code, 'The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages and preferences of the latter.'" 3
Why such a contention was held devoid of merit was explained in such decision
thus: "The contract of absolute guaranty, . . . , expressly authorized the plaintiff bank
to extend the time of payment and to release or surrender any security or part thereof
held by it without notice to, or the consent of, Santana. He had consented in advance
to the release of the guaranty which the bank might make, Santana cannot now
complain that the release of the pledge was without his consent, and that it deprived
him of the right to be subrogated to the rights of the creditor. The waiver is not
contrary to law, nor is it contrary to public policy. The law does not prohibit the
debtor-guarantor from agreeing in advance and without notice to the release of any
security which had been given to assure payment of the obligation. The waiver is not
contrary to public policy, because the right is purely personal, and does not affect
public interest nor does it violate any public policy. Neither does the return of the
shares of stocks novate the original contract for the obligation remains the same; and
if it is a novation, it is a novation made with the consent of Santana. Moreover, the
pledge is merely an accessory obligation, and its release does not vary the terms of
the principal obligation." 4
The appealed decision speaks for itself. It cannot, as was made plain in the opening
paragraph of this opinion, be overturned.
1. It is thus obvious that the contract of absolute guaranty executed by
appellant Santana is the measure of his rights and duties. As it is with him, so it is
with the plaintiff bank. What was therein stipulated had to be complied with by both
parties. Nor could appellant have any valid cause for complaint. He had given his
word; he must live up to it. Once the validity of its terms is conceded, he cannot be
indulged in his unilateral determination to disregard his commitment. A promise to
which the law accords binding force must be fulfilled. It is as simple as that. So
the Civil Code explicitly requires: "Obligations arising from contracts have the
force of law between the contracting parties and should be complied with in good
faith." 5
2. It could have been different if there were no such contract of absolute
guaranty to which appellant was a party under the aforesaid Article 2080. He
would have been freed from the obligation as a result of plaintiff releasing to the
Tambuntings without his consent the 135 shares of the International Sports
Development Corporation pledged to plaintiff bank to secure the overdraft line.
For thereby subrogation became meaningless. Such a provision is intended for the
benefit of a surety. That was a right he could avail of. He is not precluded
however from waiving it. That was what appellant did precisely when he agreed
to the contract of absolute guaranty. Again the law is clear. A right may be waived
unless it would be contrary to law, public order, public policy, morals or good
customs. 6 There is no occasion here for the exceptions coming into play. It has
been traditional in the Philippines for parents to extend all available aid and
assistance to their children. That is a custom of long standing. Nor is there
anything offensive to morals by an assumption of contingent liability as thus
worded. The law has not been thwarted. Neither is public order nor public policy
disregarded. The lower court was right therefore in yielding full assent to the
waiver in question. 7 The vigor with which counsel for appellant impugned the
lower court decision cannot therefore be attended with success. It can stand its
ground notwithstanding such a sustained and spirited attack.
WHEREFORE, the decision of October 30, 1967, as modified on January 8,
1969, is affirmed. With costs against appellant Francisco D. Santana.
PHILIPPINE NATIONAL BANK, petitioner, vs. MANILA SURETY &
FIDELITY CO., INC., and THE COURT OF APPEALS (Second Division),
respondents.
Besa, Galang and Medina for petitioner.
De Santos & Delfino for respondents.
SYLLABUS
1. AGENCY; DUTY OF AGENT TO ACT WITH THE CASE OF A
GOOD FATHER OF A FAMILY. — An agent is required to act with the care of a
good father of a family and becomes liable for the damages which the principal
may suffer through his non-performance.
2. ID.; ID.; BANK LIABLE FOR NEGLECT IN COLLECTING SUMS
DUE ITS DEBTOR. — A bank is answerable for negligence in failing to collect
the sums due its debtor from the latter's own debtor, contrary to said bank's duty
as holder of an exclusive and irrevocable power of attorney to make such
collections.
3. SURETYSHIP; SURETY RELEASED WHEN ASSIGNED FUNDS
PERMITTED BY CREDITOR TO BE EXHAUSTED WITHOUT NOTIFYING
FORMER. — By allowing the assigned funds to be exhausted without notifying the
surety, the creditor deprives the surety of any possibility of recoursing against that
security, and therefore the surety is released.
DECISION
REYES, J.B.L., J p:
The Philippine National Bank petitions for the review and reversal of the decision
rendered by the Court of Appeals (Second Division), in its case CA-G.R. No. 24232-
R, dismissing the Bank's complaint against respondent Manila Surety & Fidelity
Co., Inc., and modifying the judgment of the Court of First Instance of Manila in its
Civil Case No. 11263.
The material facts of the case, as found by the appellate Court, are as follows:
The Philippine National Bank had opened a letter of credit and advanced thereon
$120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount,
2,000 tons worth P279,000.00 were released and delivered to Adams & Taguba
Corporation (known as ATACO) under a trust receipt guaranteed by Manila Surety
& Fidelity Co. up to the amount of P75,000.00. To pay for the asphalt, ATACO
constituted the Bank its assignee and attorney-in-fact to receive and collect from the
Bureau of Public Works the amount aforesaid out of funds payable to the assignor
under Purchase Order No. 71947. This assignment (Exhibit "A") stipulated that:
"The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit accommodation is
fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-
in-fact for us and in our name, place and stead, to collect and to receive the
payments to be made by virtue of the aforesaid Purchase Order, with full power and
authority to execute and deliver on our behalf, receipt for all payments made to it; to
endorse for deposit or encashment checks, money order and treasury warrants which
said Bank may receive, and to apply said payments to the settlement of said credit
accommodation.
This power of attorney shall also remain irrevocable until our total indebtedness to
the said Bank have been fully liquidated. (Exhibit E)"
ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to
the total value of P431,466.52. Of this amount the Bank regularly collected, from
April 21, 1948 to November 18, 1948, P106,382.01. Thereafter, for unexplained
reasons, the Bank ceased to collect, until in 1952 its investigators found that more
moneys were payable to ATACO from the Public Works office, because the latter
had allowed another creditor to collect funds due to ATACO under the same
purchase order, to a total of P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the Bank
sued both in the Court of First Instance of Manila to recover the balance of
P158,563.18 as of February 15, 1950, plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive portion of
which reads:
"WHEREFORE, judgment is hereby rendered as follows:
"1. Ordering defendants, Adams & Taguba Corporation and Manila Surety &
Fidelity Co., Inc., to pay plaintiff, Philippine National Bank, the sum of
P174,462.34 as of February 24, 1956, minus the amount of P8,000 which
defendant, Manila Surety Co., Inc. paid from March, 1956 to October, 1956, with
interest at the rate of 5% per annum from February 25, 1956, until fully paid
provided that the total amount that should be paid by defendant Manila Surety
Co., Inc., on account of this case shall not exceed P75,000.00, and to pay the
costs;
"2. Ordering cross-defendant, Adams & Taguba Corporation, and third-party
defendant, Pedro A. Taguba, jointly and severally, to pay cross and third-party
plaintiff, Manila Surety & Fidelity Co., Inc., whatever amount the latter has paid
or shall pay under this judgment;
3. Dismissing the complaint insofar as the claim for 17% special tax is
concerned; and
"4. Dismissing the counterclaims of defendants Adams & Taguba
Corporation and Manila Surety & Fidelity Co., Inc.
From said decision, only the defendant Surety Company has duly perfected its
appeal. The Central Bank of the Philippines did not appeal, while defendant
ATACO failed to perfect its appeal.
The Bank recoursed to the Court of Appeals, which rendered an adverse decision
and modified the judgment of the court of origin as to the surety's liability. Its
motions for reconsideration having proved unavailing, the Bank appealed to this
Court.
The Court of Appeals found the Bank to have been negligent in having stopped
collecting from the Bureau of Public Works the moneys falling due in favor of the
principal debtor, ATACO, from and after November 18, 1948, before the debt was
fully collected, thereby allowing such funds to be taken and exhausted by other
creditors, to the prejudice of the surety, and held that the Bank's negligence
resulted in the exoneration of respondent Manila Surety & Fidelity Company.
This holding is now assailed by the Bank. It contends that the power of attorney
obtained from ATACO was merely an additional security in its favor, and that it
was the duty of the surety, and not that of the creditor, to see to it that the obligor
fulfills his obligation, and that the creditor owed the surety no duty of active
diligence to collect any sum from the principal debtor, citing Judge Advocate
General vs. Court of Appeals, G. R. No. L-10671, October 23, 1958.
This argument of appellant Bank misses the point. The Court of Appeals did not
hold the Bank answerable for negligence in failing to collect from the principal
debtor but for its neglect in collecting the sums due to the debtor from the Bureau of
Public Works, contrary to its duty as holder of an exclusive and irrevocable power of
attorney to make such collections, since an agent is required to act with the care of a
good father of a family (Civ. Code, Art. 1887) and becomes liable for the damages
which the principal may suffer through his non-performance (Civ. Code, Art. 1884).
Certainly, the Bank could not expect either ATACO or the surety to collect from the
Bureau of Public Works the moneys it had failed to demand. Not only because these
parties had the right to expect that the Bank would diligently perform its duty under
its power of attorney, but because they could not have collected from the Bureau
even if they had attempted to do so. It must not be forgotten that the Bank's power to
collect was expressly made irrevocable, so that the Bureau of Public Works could
very well refuse to make payments to the principal debtor itself, and a fortiori reject
any demands by the surety.
Even if the assignment with power of attorney from the principal debtor were
considered as more additional security, still, by allowing the assigned funds to be
exhausted without notifying the surety, the Bank deprived the former of any
possibility of recoursing against that security. The Bank thereby exonerated the
surety, pursuant to Article 2080 of the Civil Code:
"Art. 2080. — The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they can not be subrogated to the
rights, mortgages and preferences of the latter." (Emphasis supplied.)
The appellant points out to its letter of demand, Exhibit "K", addressed to the
Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit "G",
informing the debtor that as of its date, October 31, 1949, its outstanding balance
was P156,374.83. Said Exhibit "G" has no bearing on the issue whether the Bank
has exercised due diligence in collecting from the Bureau of Public Works, since the
letter was addressed to ATACO, and the funds were to come from elsewhere. As to
the letter of demand on the Public Works office, it does not appear that any reply
thereto was made; nor that the demand was pressed, nor that the debtor or the surety
were ever apprised that payment was not being made. The fact remains that because
of the Bank's inactivity the other creditors were enabled to collect P173,870.31,
when the balance due to appellant Bank was only P158,563.18. The finding of
negligence made by the Court of Appeals is thus not only conclusive on us but fully
supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in support of
the decision now under appeal, because the rules on application of payments, giving
preference to secured obligations, are only operative in cases where there are several
distinct debts, and not where there is only one that is partially secured, the error is of
no importance, since the principal reason based on the Bank's negligence
furnishes adequate support to the decision of the Court of Appeals that the surety
was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against appellant
Philippine National Bank.
EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners, vs. THE
HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL
BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO, partners
of the defunct partnership Concepcion & Tamayo Construction Company,
JOSE TORIBIO, Atty.-in-Fact of Concepcion & Tamayo Construction
Company, and THE DISTRICT ENGINEER, Puerto Princesa, Palawan,
respondents.
Fernando R. Mangubat, Jr. for respondent PNB.
DECISION
GUTIERREZ, JR., J p:
This is a petition for review seeking to annul and set aside the decision of the
Court of Appeals, now the Intermediate Appellate Court, affirming the order of
the trial court which dismissed the petitioners' complaint for cancellation of their
real estate mortgage and held them jointly and severally liable with the principal
debtors on a promissory note which they signed as accommodation makers.
The factual background of this case is stated in the decision of the appellate court:
"Appellants are the registered owners of a parcel of land located in Sampaloc,
Manila, and covered by T.C.T. 35161 of the Register of Deeds of Manila. On
October 7, 1954, this property was mortgaged by the appellants to the Philippine
National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00 extended
to one Domingo Prudencio.
"Sometime in 1955, the Concepcion & Tamayo Construction Company,
hereinafter called Company, had a pending contract with the Bureau of Public
Works, hereinafter called the Bureau, for the construction of the municipal
building in Puerto Princesa, Palawan, in the amount of P36,800.00 and, as said
Company needed funds for said construction, Jose Toribio, appellants' relative,
and attorney-in-fact of the Company, approached the appellants asking them to
mortgage their property to secure the loan of P10,000.00 which the Company was
negotiating with the PNB.
"After some persuasion appellants signed on December 23, 1955 the 'Amendment
of Real Estate Mortgage', mortgaging their said property to the PNB to guaranty
the loan of P10,000.00 extended to the Company. The terms and conditions of the
original mortgage for P1,000.00 were made integral part of the new mortgage for
P10,000.00 and both documents were registered with the Register of Deeds of
Manila. The promissory note covering the loan of P10,000.00 dated December 29,
1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of
the Company, and by the appellants. Appellants also signed the portion of the
promissory note indicating that they are requesting the PNB to issue the Check
covering the loan to the Company. On the same date (December 23, 1955) that the
'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as
attorney-in-fact of the Company, executed also the 'Deed of Assignment' assigning
all payments to be made by the Bureau to the Company on account of the contract
for the construction of the Puerto Princesa building in favor of the PNB.
"This assignment of credit to the contrary notwithstanding, the Bureau, with
approval, of the PNB, conditioned, however that they should be for labor and
materials, made three payments to the Company on account of the contract price
totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20, 1956,
however, was denied by the PNB for the reason that since the loan was already
overdue as of April 28, 1956) the remaining balance of the contract price should be
applied to the loan.
"The Company abandoned the work, as a consequence of which on June 30, 1956,
the Bureau rescinded the construction contract and assumed the work of completing
the building. On November 14. 1958, appellants wrote the PNB contending that
since the PNB authorized payments to the Company instead of on account of the
loan guaranteed by the mortgage there was a change in the conditions of the contract
without the knowledge of appellants, which entitled the latter to a cancellation of
their mortgage contract.
"Failing in their bid to have the real estate mortgage cancelled, appellants filed on
June 27, 1959 this action against the PNB, the Company, the latter's attorney-in-fact
Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the
cancellation of their real estate mortgage. The complaint was amended to exclude
the Company as defendant, it having been shown that its life as a partnership had
already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo,
partners of the defunct Company, were impleaded in their private capacity as
defendants."
After hearing, the trial court rendered judgment, denying the prayer in the complaint
that the petitioners be absolved from their obligation under the mortgage contract
and that the said mortgage be released or cancelled. The petitioners were ordered to
pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel
M. Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from
the date of the filing of the complaint on June 27, 1959 until fully paid and
P1,000.00 attorney's fees.
The decision also provided that if the judgment was not satisfied within 90 days
from its receipt, the mortgaged properties together with all the improvements
thereon belonging to the petitioners would be sold at public auction and applied
to the judgment debt.
The Court of Appeals affirmed the trial court's decision in toto stating that, as
accommodation makers, the petitioners' liability is that of solidary co-makers and
that since "the amounts released to the construction company were used therein
and, therefore, were spent for the successful accomplishment of the work
constructed for, the authorization made by the Philippine National Bank of partial
payments to the construction company which was also one of the solidary debtors
cannot constitute a valid defense on the part of the other solidary debtors.
Moreover, those who rendered services and furnished materials in the
construction are preferred creditors and have a lien on the price of the contract."
The appellate court further held that PNB had no obligation whatsoever to notify
the petitioners of its authorizing the three payments in the total amount of
P11,234.00 in favor of the Company because aside from the fact that the
petitioners were not parties to the deed of assignment, there was no stipulation in
said deed making it obligatory on the part of the PNB to notify the petitioners
everytime it authorizes payment to the Company. It ruled that the petitioners
cannot ask to be released from the real estate mortgage.
In this petition, the petitioners raise the following issues which they present in the
form of errors:
I. First Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
HEREIN PETITIONERS WERE SOLIDARY CO-DEBTORS INSTEAD OF
SURETIES:
II. Second Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE NOT RELEASED FROM THEIR OBLIGATION TO
THE RESPONDENT PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE
AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND
CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE
PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION
COMPANY; AND RELEASED TO SUCH PRINCIPAL DEBTOR PAYMENTS
FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN
ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.
The petitioners contend that as accommodation makers, the nature of their
liability is only that of mere sureties instead of solidary co-debtors such that "a
material alteration in the principal contract, effected by the creditor without the
knowledge and consent of the sureties, completely discharges the sureties from
all liability on the contract of suretyship." They state that when respondent PNB
did not apply the initial and subsequent payments to the petitioners' debt as provided
for in the deed of assignment, they were released from their obligation as sureties
and, therefore, the real estate mortgage executed by them should have been
cancelled.
Section 29 of the Negotiable Instrument Law provides:
"Liability of accommodation party. — An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder
at the time of taking the instrument knew him to be only an accommodation party."
In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we
held that ". . . in lending his name to the accommodated party, the accommodation
party is in effect a surety. . . ." However, unlike in a contract of suretyship, the
liability of the accommodation party remains not only primary but also
unconditional to a holder for value such that even if the accommodated party
receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such
extension does not release him because as far as a holder for value is concerned, he
is a solidary co-debtor.
Expounding on the nature of the liability of an accommodation party under the
aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716):
"3. That the appellant, again assuming him to be an accommodation indorser,
may obtain security from the maker to protect himself against the danger of
insolvency of the latter, cannot in any manner affect his liability to the appellee, as
the said remedy is a matter of concern exclusively between accommodation indorser
and accommodated party. So that the appellant stands only as a surety in relation to
the maker, granting this to be true for the sake of argument, is immaterial to the
claim of the appellee, and does not a whit diminish nor defeat the rights of the latter
who is a holder for value. The liability of the appellant remains primary and
unconditional. To sanction the appellant's theory is to give unwarranted legal
recognition to the patent absurdity of a situation where an indorser, when sued on an
instrument by a holder in due course and for value, can escape liability on his
indorsement by the convenient expedient of interposing the defense that he is a mere
accommodation indorser."
There is, therefore, no question that as accommodation makers, petitioners would be
primarily and unconditionally liable on the promissory note to a holder for value,
regardless of whether they stand as sureties or solidary co-debtors since such
distinction would be entirely immaterial and inconsequential as far as a holder for
value is concerned. Consequently, the petitioners cannot claim to have been released
from their obligation simply because the time of payment of such obligation was
temporarily deferred by PNB without their knowledge and consent. There has to be
another basis for their claim of having been freed from their obligation. The question
which should be resolved in this instant petition, therefore, is whether or not PNB
can be considered a holder for value under Section 29 of the Negotiable
Instruments Law such that the petitioners must be necessarily barred from setting
up the defense of want of consideration or some other personal defenses which
may be set up against a party who is not a holder in due course.
A holder for value under Section 29 of the Negotiable Instruments Law is one
who must meet all the requirements of a holder in due course under Section 52 of
the same law except notice of want of consideration.
(Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he does not
qualify as a holder in due course then he holds the instrument subject to the same
defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law).
In the case at bar, can PNB, the payee of the promissory note be considered a
holder in due course?
Petitioners contend that the payee PNB is an immediate party and, therefore, is
not a holder in due course and stands on no better footing than a mere assignee.
In those cases where a payee was considered a holder in due course, such payee
either acquired the note from another holder or has not directly dealt with the
maker thereof. As was held in the case of Bank of Commerce and Savings v.
Randell (186 NorthWestern Reporter 71):
"We conclude, therefore, that a payee who receives a negotiable promissory note,
in good faith, for value, before maturity, and without any notice of any infirmity,
from a holder, not the maker, to whom it was negotiated as a completed
instrument, is a holder in due course within the purview of a Negotiable
Instruments law, so as to preclude the defense of fraud and failure of
consideration between the maker and the holder to whom the instrument, was
delivered."
Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748)
on rehearing and quoting Daniel on Negotiable Instruments, it was held:
"It is a general principle of the law merchant that, as between the immediate
parties to a negotiable instrument — the parties between whom there is a privity
— the consideration may be inquired into; and as to them the only superiority of
a bill or note over other unsealed evidence of debt is that it prima facie imports a
consideration."
Although as a general rule, a payee may be considered a holder in due course we
think that such a rule cannot apply with respect to the respondent PNB. Not only
was PNB an immediate party or in privy to the promissory note, that is, it had
dealt directly with the petitioners knowing fully well that the latter only signed as
accommodation makers but more important, it was the Deed of Assignment
executed by the Construction Company in favor of PNB which principally moved
the petitioners to sign the promissory note also in favor of PNB. Petitioners were
made to believe and on that belief entered into the agreement that no other
conditions would alter the terms thereof and yet, PNB altered the same. The Deed of
Assignment specifically provided that Jose F. Toribio, on behalf of the Company,
"have assigned, transferred and conveyed and by these presents, do assign, transfer
and convey unto the said Philippine National Bank, its successors and assigns all
payments to be received from the Bureau of Public Works on account of contract for
the construction of the Puerto Princesa Municipal Building in Palawan, involving
the total amount of P36,000.00" and that "This assignment shall be irrevocable and
subject to the terms and conditions of the promissory note and or any other kind of
documents which the Philippine National Bank have required or may require the
assignor to execute to evidence the above-mentioned obligation."
Under the terms of the above Deed, it is clear that there are no further conditions
which could possibly alter the agreement without the consent of the petitioners such
as the grant of greater priority to obligations other than the payment of the loan due
to the PNB and part of which loan was guaranteed by the petitioners in the amount
of P10,000.00.
This, notwithstanding, PNB approved the Bureau's release of three payments
directly to the Company instead of paying the same to the Bank. This approval was
in violation of the Deed of Assignment and without any notice to the petitioners who
stood to lose their property once the promissory note falls due without the same
having been paid because the PNB, in effect, waived payments of the first three
releases. From the foregoing circumstances, PNB can not be regarded as having
acted in good faith which is also one of the requisites of a holder in due course under
Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory
note which it took from the accommodation makers was signed by the latter because
of full reliance on the Deed of Assignment, which, PNB had no intention to comply
with strictly. Worse, the third payment to the Company in the amount of P4,293.60
was approved by PNB although the promissory note was almost a month overdue,
an act which is clearly detrimental to the petitioners.
We, therefore, hold that respondent PNB is not a holder in due course. Thus, the
petitioners can validly set up their personal defense of release from the real estate
mortgage against PNB. The latter, in authorizing the third payment to the Company
after the promissory note became due, in effect, extended the term of the payment of
the note without the consent of the accommodation makers who stand as sureties to
the accommodated party and to all other parties who are not holders in due course or
who do not derive their right from the same, including PNB.
It may be argued that the Prudencios could have mortgaged their property even
without the promissory note. The records show, however, that they would not have
mortgaged the lot were it not for the sake of the Company whose attorney-in-fact
was their relative. The spouses did not need the money for themselves.
The attorney-in-fact tried twice to convince the Prudencios to mortgage their
property in order to secure a loan in favor of the Company but the Prudencios
refused. It was only when the deed of assignment was shown to the spouses that
they consented to the mortgage and signed the promissory note in the Bank's
favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage
contract. Petitioners do not dispute the validity of the mortgage. They only want
to have it cancelled because the Bank violated the deed of assignment and
extended the period of time of payment of the promissory note without the
petitioners' consent and to the latter's detriment.
The mortgage cannot be separated from the promissory note for it is the latter
which is the basis of determining whether the mortgage should be foreclosed or
cancelled. Without the promissory note which determines the amount of
indebtedness there would have been no basis for the mortgage.
True, if the Bank had not been the assignee, then the petitioners would be obliged
to pay the Bank as their creditor on the promissory note, irrespective of whether
or not the deed of assignment had been violated. However, the assignee and the
creditor in this case are one and the same — the Bank itself. When the Bank
violated the deed of assignment, it prejudiced itself because its very violation was
the reason why it was not paid on time in its capacity as creditor in the
promissory note. It would be unfair to make the petitioners now answer for the
debt or to foreclose on their property.
Neither can PNB justify its acts on the ground that the Bureau of Public Works
approved the deed of assignment with the condition that the wages of laborers
and materials needed in the construction work must take precedence over the
payment of the promissory note. In the first place, PNB did not need the approval
of the Bureau. But even if it did, it should have informed the petitioners about the
amendment of the deed of assignment. Secondly, the wages and materials have
already been paid. That issue is academic. What is in dispute is who should bear
the loss in this case. As between the petitioners and the Bank, the law and the
equities of the case favor the petitioners. And thirdly, the wages and materials
constitute a lien only on the constructed building but do not enjoy preference over
the loan unless there is a liquidation proceeding such as in insolvency or
settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476).
There were remedies available at the time if the laborers and the creditors had not
been paid. The fact is, they have been paid. Hence when the PNB accepted the
condition imposed by the Bureau without the knowledge or consent of the
petitioners, it amended the deed of assignment which, as stated earlier, was the
principal reason why the petitioners consented to become accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals
affirming the decision of the trial court is hereby REVERSED and SET ASIDE and
a new one entered absolving the petitioners from liability on the promissory note
and under the mortgage contract. The Philippine National Bank is ordered to release
the real estate mortgage constituted on the property of the petitioners and to pay the
amount of THREE THOUSAND PESOS (P3,000.00) as attorney's fees.
SO ORDERED.
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO
M. CUENCA, respondent.
De Borja, Medialdea, Bello, Guevarra & Gerodias for petitioner.
Carpio Villaraza & Cruz for respondent.
SYNOPSIS
Petitioner Security Bank and Trust Co. (SBTC) granted Sta. Ines Melale Corporation
(SIMC) a credit line in the amount of eight million pesos (P8,000,000.00) to assist
the latter in meeting the additional capitalization requirements of its logging
operations. As additional security for the payment of the loan, respondent Rodolfo
M. Cuenca executed an Indemnity Agreement in favor of Petitioner SBTC whereby
he bound himself jointly and severally with SIMC in favor of the bank for the
payment, upon demand and without the benefit of excussion of whatever amount
SIMC may be indebted to the bank. In 1989, SIMC encountered difficulty in making
the amortization payments on its loans and requested SBTC for a complete
restructuring of its indebtedness. SBTC accommodated SIMC's request and signified
its approval to the restructuring of the loan. SIMC defaulted in the payment of its
restructured loan obligations to SBTC despite repeated demands made upon SIMC
and respondent Cuenca. SBTC filed a complaint for collection of sum of money,
resulting, after trial on the merits, in a decision by the court a quo, holding
respondent Cuenca solidarily liable with SIMC for the amount of the loan.
Respondent Cuenca appealed to the Court of Appeals. The appellate court released
Cuenca from liability, holding that the 1989 loan restructuring agreement novated
the prior Indemnity Agreement. Accordingly, such novation extinguished the
Indemnity Agreement. Hence, the present petition. Petitioner contended that the
1989 Loan Agreement did not change the original loan in respect to the parties
involved or the obligations incurred. It adds that the terms of the 1989 Contract were
"not more onerous." Since the original credit accommodation was not extinguished,
it concludes that Cuenca is still liable under the Indemnity Agreement.
The Supreme Court affirmed the judgment of the Court of Appeals. According to the
Court, the requisites of novation are present in the case at bar, and as a result thereof
the 1989 Loan Agreement extinguished the obligation obtained under the 1980
credit accommodation. Said fact is evident from its explicit provision to "liquidate"
the principal and the interest of the earlier indebtedness. The Court also found
some incompatibilities between the 1989 Agreement and the 1980 original
obligation which demonstrated that the two cannot co-exist. While the 1980
credit accommodation had stipulated that the amount of loan was not to exceed
P8 million, the 1989 Agreement provided that the loan was P12.2 million. The
Court stressed that a surety agreement, being an onerous undertaking, is strictly
construed against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the
consent of the surety to any material alteration in the principal loan agreement, or
at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent
liable for loans obtained in excess of the amount or beyond the period stipulated
in the original agreement, absent any clear stipulation showing that the latter
waived his right to be notified thereof, or to give consent thereto.
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; AGREEMENT
IS STRICTLY CONSTRUED AGAINST THE CREDITOR AND EVERY
DOUBT IS RESOLVED IN FAVOR OF THE SOLIDARY DEBTOR. — It has
been held that a contract of surety "cannot extend to more than what is stipulated.
It is strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety." Likewise, the Court has ruled that "it is a
well-settled legal principle that if there is any doubt on the terms and conditions
of the surety agreement, the doubt should be resolved in favor of the surety . . . .
Ambiguous contracts are construed against the party who caused the ambiguity."
In the absence of an unequivocal provision that respondent waived his right to be
notified of or to give consent to any alteration of the credit accommodation, we
cannot sustain petitioner's view that there was such a waiver.
2. REMEDIAL LAW; CIVIL PROCEDURE; MOTION FOR
RECONSIDERATION; NOT PRO FORMA JUST BECAUSE IT REITERATED
THE AGREEMENTS EARLIER PASSED UPON AND REJECTED BY THE
APPELLATE COURT. — Respondent contends that petitioner's Motion for
Reconsideration of the CA Decision, in merely rehashing the arguments already
passed upon by the appellate court, was pro forma; that as such, it did not toll the
period for filing the present Petition for Review. Consequently, the Petition was
filed out of time. We disagree. A motion for reconsideration is not pro forma just
because it reiterated the arguments earlier passed upon and rejected by the
appellate court. The Court has explained that a movant may raise the same
arguments, precisely to convince the court that its ruling was erroneous.
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo, the Court
explained that a pro forma motion had no other purpose than to gain time and to
delay or impede the proceedings. Hence, "where the circumstances of a case do
not show an intent on the part of the movant merely to delay the proceedings, our
Court has refused to characterize the motion as simply pro forma."
3. ID.; ID.; PLEADINGS; MODES OF SERVICES AND FILING; MAY BE
DONE BY REGISTERED MAIL WHEN PERSONAL SERVICE WAS NOT
PRACTICABLE. — Respondent maintains that the present Petition for Review does
not contain a sufficient written explanation why it was served by registered mail. We
do not think so. The Court held in Solar Entertainment v. Ricafort that the aforecited
rule was mandatory, and that "only when personal service or filing is not practicable
may resort to other modes be had, which must then be accompanied by a written
explanation as to why personal service or filing was not practicable to begin with."
In this case, the Petition does state that it was served on the respective counsels of
Sta. Ines and Cuenca "by registered mail in lieu of personal service due to
limitations in time and distance." This explanation sufficiently shows that personal
service was not practicable. In any event, we find no adequate reason to reject the
contention of petitioner and thereby deprive it of the opportunity to fully argue its
cause. HIAESC
4. CIVIL LAW; OBLIGATIONS; EXTINGUISHMENT OF; NOVATION;
REQUISITES. — Novation of a contract is never presumed. It has been held that
"[i]n the absence of an express agreement, novation takes place only when the old
and the new obligations are incompatible on every point." Indeed, the following
requisites must be established: (1) there is a previous valid obligation; (2) the parties
concerned agree to a new contract; (3) the old contract is extinguished; and (4) there
is a valid new contract.
5. ID.; SPECIAL CONTRACTS; SURETYSHIP; ALTERATION OF THE
PRINCIPAL CONTRACT WITHOUT THE CONSENT OF THE SURETY WILL
RELEASE HIM FROM LIABILITY. — Petitioner contends that Respondent
Cuenca "impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to give consent to,
the same." Respondent's consent or waiver thereof is allegedly found in the
Indemnity Agreement, in which he held himself liable for the "credit
accommodation including [its] substitutions, renewals, extensions, increases,
amendments, conversions and revival." It explains that the novation of the original
credit accommodation by the 1989 Loan Agreement is merely its "renewal," which
"connotes cessation of an old contract and birth of another one . . . ." At the outset,
we should emphasize that an essential alteration in the terms of the Loan Agreement
without the consent of the surety extinguishes the latter's obligation. As the Court
held in National Bank v. Veraguth, "[i]t is fundamental in the law of suretyship that
any agreement between the creditor and the principal debtor which essentially varies
the terms of the principal contract, without the consent of the surety, will release the
surety from liability."
6. ID.; ID.; ID.; SURETY CANNOT ASSUME AN OBLIGATION MORE
ONEROUS THAN THAT OF THE PRINCIPAL. — We reject petitioner's
submission that only Sta. Ines as the borrower, not respondent, was entitled to be
notified of any modification in the original loan accommodation. Following the
bank's reasoning, such modification would not be valid as to Sta. Ines if no notice
were given; but would still be valid as to respondent to whom no notice need be
given. The latter's liability would thus be more burdensome than that of the
former. Such untenable theory is contrary to the principle that a surety cannot
assume an obligation more onerous than that of the principal. cEHSTC
7. ID.; ID.; ID.; CONTINUING SURETY; DEFINED; NOT
APPLICABLE IN CASE AT BAR. — Contending that the Indemnity Agreement
was in the nature of a continuing surety, petitioner maintains that there was no
need for respondent to execute another surety contract to secure the 1989 Loan
Agreement. This argument is incorrect. That the Indemnity Agreement is a
continuing surety does not authorize the bank to extend the scope of the principal
obligation inordinately. In Dino v. CA, the Court held that "a continuing guaranty
is one which covers all transactions, including those arising in the future, which
are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof." To repeat, in the present case, the Indemnity
Agreement was subject to the two limitations of the credit accommodation: (1)
that the obligation should not exceed P8 million, and (2) that the accommodation
should expire not later than November 30, 1981. Hence, it was a continuing
surety only in regard to loans obtained on or before the aforementioned expiry
date and not exceeding the total of P8 million. Accordingly, the surety of Cuenca
secured only the first loan of P6.1 million obtained on November 26, 1991. It did
not secure the subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could not have
guaranteed the 1989 Loan Agreement, which was executed after November 30,
1981 and
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the
creditor, and every doubt is resolved in favor of the solidary debtor. The
fundamental rules of fair play require the creditor to obtain the consent of the
surety to any material alteration in the principal loan agreement, or at least to
notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for
loans obtained in excess of the amount or beyond the period stipulated in the
original agreement, absent any clear stipulation showing that the latter waived his
right to be notified thereof, or to give consent thereto. This is especially true
where, as in this case, respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later obligations were
incurred. He was thus no longer in a position to compel the debtor to pay the
creditor and had no more reason to bind himself anew to the subsequent
obligations.
The Case
This is the main principle used in denying the present Petition for
Review under Rule 45 of the Rules of Court. Petitioner assails the December 22,
1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the
dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby amended in the sense that
defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from
liability to pay any amount stated in the judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is
hereby DISMISSED for lack of merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioners
Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court
(RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as
follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale
Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security
Bank & Trust Company the sum of P39,129,124.73 representing the balance of the
loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum
of P100,000.00 as attorneys fees and litigation expenses and to pay the costs.
SO ORDERED.
The Facts
The facts are narrated by the Court of Appeals as follows:[5]
The antecedent material and relevant facts are that defendant-appellant Sta. Ines
Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of
a Timber License Agreement issued by the Department of Environment and Natural
Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant
Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion
[p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization
requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit Loan
Facility shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs)
valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings,
indicating therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained
at all times; in this connection, a Makati account shall be opened prior to availment
on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the above-
mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December
1980 (Exhibit A) over some of its machinery and equipment in favor of
[Petitioner] SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17
December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily
bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with
the client (SIMC) in favor of the bank for the payment, upon demand and without
the benefit of excussion of whatever amount x x x the client may be indebted to
the bank x x x by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x . (Emphasis supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of
effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first
drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said
drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said
amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of
the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the
shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold
at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs.
Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by
Adolfo Angala who was the highest bidder during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained
six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix
[m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100
[p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86,
and DLS/74/47/86 to cover the amounts of the abovementioned additional loans
against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the amortization
payments on its loans and requested [Petitioner] SBTC for a complete
restructuring of its indebtedness. SBTC accommodated appellant SIMCs request
and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein
SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of
[Respondent] Cuenca, agreed to restructure the past due obligations of defendant-
appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-
appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-
appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf.
P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et
Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion
of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank
(cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at
Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines
obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in
the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00),
which was the only loan incurred prior to the expiration of the P8M-Credit Loan
Facility on 30 November 1981 and the only one covered by the Indemnity
Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p.
331), was not segregated from, but was instead lumped together with, the other
loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86
(Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-
appellant Sta. Ines which were not secured by said Indemnity Agreement.
Pursuant to the agreement to restructure its past due obligations to [Petitioner]
Security Bank, defendant-appellant Sta. Ines thus executed the following promissory
notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
-------------------
TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of defendant-
appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines
executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente,
at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October
1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate
amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS
(P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in
two (2) tranches of P8,800,000.00 for the first tranche (the First Loan)
and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the
manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion
of the Borrowers present total outstanding indebtedness to the Lender (the
indebtedness) while the Second Loan shall be applied to liquidate the past due
interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p.
1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made
further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion
[s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8,
9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
Appellant SIMC defaulted in the payment of its restructured loan obligations to
[Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA,
the last of which were made through separate letters dated 5 June 1991 (Exhibit
K) and 27 June 1991 (Exhibit L), respectively.
Appellants individually and collectively refused to pay the [Petitioner]
SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June
1993, resulting after trial on the merits in a decision by the court a quo, x x
x from which [Respondent] Cuenca appealed.
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan
Agreement had novated the 1980 credit accommodation earlier granted by the
bank to Sta. Ines.Accordingly, such novation extinguished the Indemnity
Agreement, by which Cuenca, who was then the Board chairman and president of
Sta. Ines, had bound himself solidarily liable for the payment of the loans secured
by that credit accommodation. It noted that the 1989 Loan Agreement had been
executed without notice to, much less consent from, Cuenca who at the time was
no longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had
specified that the credit accommodation was for a total amount of P8 million, and
that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was
liable only for loans obtained prior to November 30, 1981, and only for an
amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor
without the consent of the surety. Under Article 2079 of the Civil Code, such
extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and
Sta. Ines decided to materially alter or modify the principal obligation after the
expiry date of the credit accommodation.
Hence, this recourse to this Court.[7]
The Issues
In its Memorandum, petitioner submits the following for our consideration:[8]
A. Whether or not the Honorable Court of Appeals erred in releasing Respondent
Cuenca from liability as surety under the Indemnity Agreement for the payment of
the principal amount of twelve million two hundred thousand pesos
(P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988
and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated
interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent
Cuencas liability under the Indemnity Agreement covered only availments on
SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made on
or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit accommodation
was tantamount to an extension granted to SIMC without Respondent Cuencas
consent, thus extinguishing his liability under the Indemnity Agreement pursuant to
Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit accommodation
constituted a novation of the principal obligation, thus extinguishing Respondent
Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied
with Section 11, Rule 13 of the 1997 Rules of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a) whether the
1989 Loan Agreement novated the original credit accommodation and Cuencas
liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to
be notified of and to give consent to any substitution, renewal, extension, increase,
amendment, conversion or revival of the said credit accommodation. As preliminary
matters, the procedural questions raised by respondent will also be addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA
Decision, in merely rehashing the arguments already passed upon by the appellate
court, was pro forma; that as such, it did not toll the period for filing the present
Petition for Review.[9] Consequently, the Petition was filed out of time.[10]
We disagree. A motion for reconsideration is not pro forma just because it
reiterated the arguments earlier passed upon and rejected by the appellate
court. The Court has explained that a movant may raise the same arguments,
precisely to convince the court that its ruling was erroneous.[11]
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo,[12] the Court
explained that a pro forma motion had no other purpose than to gain time and to
delay or impede the proceedings. Hence, where the circumstances of a case do
not show an intent on the part of the movant merely to delay the proceedings, our
Court has refused to characterize the motion as simply pro forma. It held:
We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right of
appeal, that doctrine should be applied reasonably, rather than literally. The right
to appeal, where it exists, is an important and valuable right. Public policy would
be better served by according the appellate court an effective opportunity to
review the decision of the trial court on the merits, rather than by aborting the
right to appeal by a literal application of the procedural rules relating to pro forma
motions for reconsideration.
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the
service and filing of pleadings and other papers shall be done personally. Except
with respect to papers emanating from the court, a resort to other modes must be
accompanied by a written explanation why the service or filing was not done
personally. A violation of this Rule may be cause to consider the paper as not
filed.
Respondent maintains that the present Petition for Review does not contain a
sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the
aforecited rule was mandatory, and that only when personal service or filing is
not practicable may resort to other modes be had, which must then be
accompanied by a written explanation as to why personal service or filing was
not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of
Sta. Ines and Cuenca by registered mail in lieu of personal service due to
limitations in time and distance.[14] This explanation sufficiently shows that
personal service was not practicable. In any event, we find no adequate reason to
reject the contention of petitioner and thereby deprive it of the opportunity to
fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the
Civil Code, which reads as follows:
ART. 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.
Novation of a contract is never presumed. It has been held that [i]n the absence of an
express agreement, novation takes place only when the old and the new obligations
are incompatible on every point.[15] Indeed, the following requisites must be
established: (1) there is a previous valid obligation; (2) the parties concerned agree
to a new contract; (3) the old contract is extinguished; and (4) there is a valid new
contract.[16]
Petitioner contends that there was no absolute incompatibility between the old and
the new obligations, and that the latter did not extinguish the earlier one. It further
argues that the 1989 Agreement did not change the original loan in respect to the
parties involved or the obligations incurred. It adds that the terms of the 1989
Contract were not more onerous.[17] Since the original credit accomodation was not
extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this
case. The 1989 Loan Agreement extinguished the obligation[18] obtained under the
1980 credit accomodation.This is evident from its explicit provision to liquidate the
principal and the interest of the earlier indebtedness, as the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of
the Borrowers present total outstanding Indebtedness to the Lender (the
Indebtedness) while the Second Loan shall be applied to liquidate the past due
interest and penalty portion of the Indebtedness.[19] (Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan
Agreement were used to pay-off the original indebtedness serves to strengthen this
ruling.[21]
Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8 million,
[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for
payment were also different.
Likewise, the later contract contained conditions, positive covenants and negative
covenants not found in the earlier obligation. As an example of a positive covenant,
Sta. Ines undertook from time to time and upon request by the Lender, [to] perform
such further acts and/or execute and deliver such additional documents and writings
as may be necessary or proper to effectively carry out the provisions and purposes of
this Loan Agreement.[23] Likewise, SIMC agreed that it would not create any
mortgage or encumbrance on any asset owned or hereafter acquired, nor would it
participate in any merger or consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which
provides:
ART. 1296. When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit third
persons who did not give their consent.
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension
of the P8 million original accommodation; it was not a novation.[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement
expressly stipulated that its purpose was to liquidate, not to renew or extend, the
outstanding indebtedness.Moreover, respondent did not sign or consent to the
1989 Loan Agreement, which had allegedly extended the original P8 million
credit facility. Hence, his obligation as a surety should be deemed extinguished,
pursuant to Article 2079 of the Civil Code, which specifically states that [a]n
extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. x x x. In an earlier case,[26] the Court
explained the rationale of this provision in this wise:
The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the suretys consent would deprive the surety of his
right to pay the creditor and to be immediately subrogated to the creditors
remedies against the principal debtor upon the maturity date. The surety is said to
be entitled to protect himself against the contingency of the principal debtor or
the indemnitors becoming insolvent during the extended period.
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit
Approval Memorandum in holding that the credit accommodation was only
for P8 million, and that it was for a period of one year ending on November 30,
1981. Petitioner objects to the appellate courts reliance on that document,
contending that it was not a binding agreement because it was not signed by the
parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove
the accommodation. Attached to the Complaint as Annex A was a copy thereof
evidencing the accommodation.[27] Moreover, in its Petition before this Court, it
alluded to the Credit Approval Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the
Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to
assist SIMC in meeting the additional capitalization requirements for its logging
operations. For this purpose, the Bank issued a Credit Approval Memorandum dated
10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of the P8
million credit accommodation as contained in the very document it presented to the
courts. Indeed, it cannot take advantage of that document by agreeing to be bound
only by those portions that are favorable to it, while denying those that are
disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave
his consent to any modification of the credit accommodation or otherwise waived
his right to be notified of, or to give consent to, the same.[28] Respondents consent
or waiver thereof is allegedly found in the Indemnity Agreement, in which he held
himself liable for the credit accommodation including [its] substitutions, renewals,
extensions, increases, amendments, conversions and revival. It explains that the
novation of the original credit accommodation by the 1989 Loan Agreement is
merely its renewal, which connotes cessation of an old contract and birth of another
one x x x.[29]
At the outset, we should emphasize that an essential alteration in the terms of the
Loan Agreement without the consent of the surety extinguishes the latters
obligation. As the Court held in National Bank v. Veraguth,[30] [i]t is fundamental
in the law of suretyship that any agreement between the creditor and the principal
debtor which essentially varies the terms of the principal contract, without the
consent of the surety, will release the surety from liability.
In this case, petitioners assertion - that respondent consented to the alterations in the
credit accommodation -- finds no support in the text of the Indemnity Agreement,
which isreproduced hereunder:
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest
Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and
in consideration of the credit accommodation in the total amount of eight million
pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing under and by virtue of
the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter
referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS
CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests
and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)],
made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s)
himself/themselves jointly and severally with the CLIENT in favor of the BANK for
the payment , upon demand and without benefit of excussion of whatever amount or
amounts the CLIENT may be indebted to the BANK under and by virtue of
aforesaid credit accommodation(s) including the substitutions, renewals, extensions,
increases, amendment, conversions and revivals of the aforesaid credit
accommodation(s), as well as of the amount or amounts of such other obligations
that the CLIENT may owe the BANK, whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the BANK, plus
interest and expenses arising from any agreement or agreements that may have
heretofore been made, or may hereafter be executed by and between the parties
thereto, including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s), and further
bind(s) himself/themselves with the CLIENT in favor of the BANK for the
faithful compliance of all the terms and conditions contained in the aforesaid
credit accommodation(s), all of which are incorporated herein and made part
hereof by reference.
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the P8
million limit and the November 30, 1981 term. It did not give the bank or Sta.
Ines any license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of respondent who was
solidarily liable. Taking the banks submission to the extreme, respondent (or his
successors) would be liable for loans even amounting to, say, P100 billion
obtained 100 years after the expiration of the credit accommodation, on the
ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety cannot extend to more than what
is stipulated. It is strictly construed against the creditor, every doubt being
resolved against enlarging the liability of the surety.[31] Likewise, the Court has
ruled that it is a well-settled legal principle that if there is any doubt on the terms
and conditions of the surety agreement, the doubt should be resolved in favor of
the surety x x x. Ambiguous contracts are construed against the party who caused
the ambiguity.[32] In the absence of an unequivocal provision that respondent
waived his right to be notified of or to give consent to any alteration of the credit
accommodation, we cannot sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows
that the bank did not have absolute authority to unilaterally change the terms of
the loan accommodation. Indeed, it may do so only upon notice to the borrower,
pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not
respondent, was entitled to be notified of any modification in the original loan
accommodation.[34] Following the banks reasoning, such modification would
not be valid as to Sta. Ines if no notice were given; but would still be valid as to
respondent to whom no notice need be given. The latters liability would thus be
more burdensome than that of the former. Such untenable theory is contrary to the
principle that a surety cannot assume an obligation more onerous than that of the
principal.[35]
The present controversy must be distinguished from Philamgen v. Mutuc,[36] in
which the Court sustained a stipulation whereby the surety consented to be bound
not only for the specified period, but to any extension thereafter made, an extension
x x x that could be had without his having to be notified.
In that case, the surety agreement contained this unequivocal stipulation: It is hereby
further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided
without the necessity of executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any renewal or extension of
the bond which may be granted under this indemnity agreement.
In the present case, there is no such express stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the
bank or Sta. Ines to modify or extend the original obligation without the consent of
the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety
does not authorize the bank to extend the scope of the principal obligation
inordinately.[37] In Dino v. CA,[38] the Court held that a continuing guaranty is one
which covers all transactions, including those arising in the future, which are within
the description or contemplation of the contract of guaranty, until the expiration or
termination thereof.
To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation: (1) that the obligation should not exceed P8
million, and (2) that the accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to loans obtained on or before
the aforementioned expiry date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans, purportedly
under the 1980 credit accommodation, that were obtained in 1986. Certainly, he
could not have guaranteed the 1989 Loan Agreement, which was executed after
November 30, 1981 and which exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety In sum, we hold that the 1989 Loan Agreement extinguished by novation the
liable for the loan obtained after the payment of the original one, which was obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity
covered by a continuing surety agreement. At the risk of being repetitious, we Agreement, which had been an accessory to the 1980 credit accommodation, was
hold that in Dino, the surety Agreement specifically provided that each suretyship also extinguished. Furthermore, we reject petitioners submission that respondent
is a continuing one which shall remain in full force and effect until this bank is waived his right to be notified of, or to give consent to, any modification or
notified of its revocation. Since the bank had not been notified of such extension of the 1980 credit accommodation.
revocation, the surety was held liable even for the subsequent obligations of the In this light, we find no more need to resolve the issue of whether the loan obtained
principal borrower. before the expiry date of the credit accommodation has been paid.
No similar provision is found in the present case. On the contrary, respondents
liability was confined to the 1980 credit accommodation, the amount and the WHEREFORE, the Petition is DENIED and the assailed
expiry date of which were set down in the Credit Approval Memorandum. Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Special Nature of the JSS
It is a common banking practice to require the JSS (joint and solidary signature)
of a major stockholder or corporate officer, as an additional security for loans
granted to corporations.There are at least two reasons for this. First, in case of
default, the creditors recourse, which is normally limited to the corporate
properties under the veil of separate corporate personality,would extend to the
personal assets of the surety. Second, such surety would be compelled to ensure
that the loan would be used for the purpose agreed upon, and that it would be which exceeded the stipulated P8 million ceiling.
paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to
have required the JSS of respondent, who was the chairman and president of Sta.
Ines in 1980 when the credit accommodation was granted. There was no reason
or logic, however, for the bank or Sta. Ines to assume that he would still agree to
act as surety in the 1989 Loan Agreement, because at that time, he was no longer
an officer or a stockholder of the debtor-corporation. Verily, he was not in a
position then to ensure the payment of the obligation. Neither did he have any
reason to bind himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
respondent, without even informing him, smacks of negligence on the part of the
bank and bad faith on that of the principal debtor. Since that Loan Agreement
constituted a new indebtedness, the old loan having been already liquidated, the
spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a
surety for the new loan.

In the same vein, a little prudence should have impelled the bank to insist on the
JSS of one who was in a position to ensure the payment of the loan. Even a
perfunctory attempt at credit investigation would have revealed that respondent
was no longer connected with the corporation at the time. As it is, the bank is
now relying on an unclear Indemnity Agreement in order to collect an obligation
that could have been secured by a fairly obtained surety. For its defeat in this
litigation, the bank has only itself to blame.