Credit Transactions Guaranty and Suretyship Cases PDF

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Credit TransactionsPalmares vs. CA, 288 SCRA 422 FACTS: M. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares. From then, the Azarraga spouses were able to pay leaving a balance but no payments were made after the last payment. T...

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Credit Transactions Palmares vs. CA, 288 SCRA 422 FACTS: M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares. From then, the Azarraga spouses were able to pay leaving a balance but no payments were made after the last payment. The respondent later filed a complaint against the petitioner. Petitioner countered in her answer that she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about. She also said that corporation acted in bad faith in suing her alone without including the Azarragas. ISSUE: Whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability. RULING: A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal’s debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor. Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right,

to be given notice of the principal’s default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship. E. Zobel, Inc. vs. CA, 290 SCRA 1 FACTS:

Spouses Claveria, doing business under the name "Agro Brokers," applied for a loan with respondent SOLIDBANK. The loan was granted subject to the condition that respondent spouses execute a chattel mortgage and that a continuing guarantee be executed by E. Zobel, Inc., in favor of SOLIDBANK. However, spouses defaulted in the payment of the entire obligation upon maturity. SOLIDBANK filed a complaint. Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished. ISSUE: Whether the liability as guarantor has already been extinguished. RULING: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor’s own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from that supporting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal. Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay. Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, Court ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a guarantor.

Paramount Insurance Corp. vs. CA, 310 SCRA 377 (By the contract of suretyship, it is not for the obligee to see to it that the principal pays the debt, but for the surety to see to it that the principal pay.) FACTS: McADORE was the owner and operator of the McAdore International Palace Hotel in Dagupan City. DECORP, on the other hand, was the grantee of a franchise to operate and maintain electric services in the province of Pangasinan. They entered into a contract where DECORP shall provide electric power to McADORE's Hotel. During the term of contract, DECORP noticed discrepancies between the actual monthly billings and the estimated monthly billings of McADORE. Upon inspection, it was discovered that the terminal in the transformers connected to the meter had been interchanged resulting in the slow rotation of the meter. Consequently, DECORP issued a corrected bill but McADORE refused to pay. As a result of

McADORE's failure and continued refusal to pay the corrected electric bills, DECORP disconnected power supply to the hotel. They filed a complaint against McADORE that refused to pay the bill. ISSUE: Whether McADORE is liable to pay under their contract of suretyship. RULING: It may not be amiss to point out that by the contract of suretyship, it is not for the obligee to see to it that the principal pays the debt or fulfills the contract, but for the surety to see to it that the principal pay or perform. The purpose of the injunction bond is to protect the defendant against loss or damage by reason of the injunction in case the court finally decides that the plaintiff was not entitled to it, and the bond is usually conditioned accordingly. Thus, the bondsmen are obligated to account to the defendant in the injunction suit for all damages, or costs and reasonable counsel’s fees, incurred or sustained by the latter in case it is determined that the injunction was wrongfully issued.

Security Bank and Trust Co. vs. Cuenca, 341 SCRA 781 FACTS: Sta. Ines is a corporation engaged in logging operations. Security Bank granted Sta. Ines a credit line. In the Credit Approval Memorandum, it was stated that credit line would expire on 30 November 1981. Mr. Cuenca, President and Chairman of the Board, executed an indemnity agreement where he shall be solidarity liable with SIMC by virtue of said credit accommodation including renewals, extensions, and amendments. However, SIMC had a difficulty paying the loan, hence their 1989 agreement to restructure the loan. In this agreement, it was provided that the loan now would be Php12.2M, Php8.8M of which would be applied for the principal, while Php3.4M would be for the past due interest and penalty. Cuenca resigned as President and Chairman of Sta. Ines. Subsequently, SIMC defaulted in the payment of its restructured loan obligations to SBTC despite demands made upon appellant SIMC and CUENCA.RTC ruled in

favour of the latter, but CA ruled that Cuenca’s responsibility as surety was extinguished. ISSUE: Whether Cuenca is still responsible as surety. RULING: 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, 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 surety’s consent would deprive the surety of his right to pay the creditor and to be immediately surrogated to the creditor’s 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.” 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 , “it 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.”

Babst vs. CA, January 26, 2001 FACTS: ELISCON obtained from CBTC a loan but then ELISCON defaulted in its payments, leaving an outstanding indebtedness. Subsequently, on September 26, 1978Chua and Babst executed a Continuing Suretyship, whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC. CBTC opened for ELISCON in favor of National Steel Corporation. ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an outstanding account. BPI and CBTC entered into a merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC. Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the DBP. In order to settle its obligations, ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness. DBP formally took over the assets of ELISCON, including its indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but BPI expressly rejected the formula submitted to it for not being acceptable. BPI, as successor-ininterest of CBTC, filed a complaint for sum of money against ELISCON, MULTI and Babst. ISSUE:

Whether Babst is liable under suretyship. RULING: BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. It must be remembered, however, that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtor's failure or refusal to pay. A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. A surety is an insurer of the debt; he promises to pay the principal's debt if the principal will not pay. In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased by the government. Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going after the sureties. The course of action chosen taxes the credulity of this Court. At the very least, suffice it to state that BPI's actuation

in this regard runs counter to the good faith covenant in contractual relations, provided for by the Civil Code.

Taňedo vs. Allied Banking Corp., February 1, 2002 FACTS: Allied Banking Corporation and Cheng Ban Yek & Co., Inc. appealed from the Order, as summary judgment where Cheng Ban Yek Co., Inc. was ordered to pay plaintiff and to 4 more causes of action. It was also declared that there was a "Continuing Guaranty" as having been extinguished after plaintiff branded it as a "worthless security" and preferred to avail, as it did avail, of the provisional remedy of attachment; and declaring defendants Alfredo Ching and Emilio Tañedo relieved of their obligation under the said continuing Guaranty; and. ISSUE: Whether there is a continuing guaranty. RULING: Allied Banking Corporation and Cheng Ban Yek & Co., Inc. extended the maturity of the promissory notes without notice or consent of the petitioner as surety of the obligations. However, the “continuing guarantee” executed by the petitioner provided that he consents and agrees that the bank may, at any time or from time to time extend or change the time of payments and/or the manner, place or terms of payment of all such instruments, loans, advances, credits or other obligations guaranteed by the surety. Hence, the extensions of the loans did not release the surety. As to the second issue, even if the “continuing guarantee” were considered as one of adhesion, we find the contract of “surety” valid because petitioner was “free to reject it entirely”. Petitioner was a stockholder and officer of Cheng Ban Yek and Co., Inc. and it was common business and banking practice to require “sureties” to guarantee corporate obligations.

Diamond Builders Conglomeration vs. Country Bankers Insurance Copr, 540 SCRA 194 (2007) Facts

Marceliano Borja sued Rogelio S. Acidre for the latter’s breach of his obligation to construct a residential and commercial building. Rogelio is the sole proprietor of petitioner Diamond Builders Corporation. Consequently, they entered into a compromise agreement. The RTC Caloocan approved the Compromise Agreement and rendered a Decision in accordance with the terms and conditions contained therein. In compliance with the Compromise Agreement, Rogelio obtained a Surety Bond from Country Bankers in favor of the spouses Borja. In this regard, Rogelio and his spouse, petitioner Teresita P. Acidre, together with some DBC employees, also petitioners, signed an Indemnity Agreement. Several days later, Rogelio allegedly violates the agreement. So, respondent advised petitioners that in the event it is constrained to pay under the surety bond to Borja, it shall proceed against petitioners for reimbursement. However, the RTC Caloocan issued a Writ of Execution. Petitioners then filed a motion for reconsideration. The RTC of Caloocan served Country Bankers a copy of the writ.

Forthwith, Country Bankers, requested for a 10-day grace period within which to settle the claim. So, Rogelio filed an Urgent Omnibus Motion to suspend the Writ of Execution and to resolve the Motion for Reconsideration. Respondent wrote Sheriff of RTC of Caloocan and requested that the implementation of the Writ of Execution be held in abeyance. Issue: Whether petitioners should indemnify Country Bankers for the payment of the surety bond? Ruling: Yes. The Compromise Agreement between Borja and Rogelio explicitly provided that the latter’s failure to complete construction of the building within the stipulated period shall cause the full implementation of the surety bond as a penalty for the default, and as an award for damages to Borja. Furthermore, the Compromise Agreement contained a default executory clause in case of a violation or avoidance of the terms and conditions thereof. Therefore, the payment made by the Country Bankers to Borja was proper, as failure to pay would have amounted to contumacious disobedience of a valid court order. Article 2047 of the Civil Code specifically calls for the application of the provisions on solidary obligations to suretyship contracts. In particular, Article 1217 of the Civil Code recognizes the right of reimbursement from a co-debtor in favor of the one who paid.

Erma Industries, Inc.vs. Security Bank Corp., G.R. No. 191274, Dec. 06, 2017 FACTS: In this petition for review under Rule 45, Petitioner Erma Industries, Inc. (Erma) challenged the CA decision which affirmed the RTC decision in holding Petitioner liable to pay their loans and declared Respondent Sergio Ortiz-Luiz liable as surety. Erma obtained from respondent Security Bank Corporation (Security Bank) a credit facility embodied in a credit agreement. Spouses Marcelo and Spouses Ortiz Luiz signed a Continuing Suretyship agreement in favor of Security Bank. Both pairs of spouses were to be jointly and severally liable with Erma in case the latter

defaults in the payment according to the terms of the Continuing Suretyship agreement. Erma obtained various loans from Security Bank and defaulted in the payment of the obligations. Erma requested for a restructuring of the whole loan. Erma offered as security a certain property registered in the name of petitioner Ernesto Marcelo. Security Bank received the title of such property and remained in its possession but only approved the restructuring up to a certain amount. Security Bank eventually demanded payment of the balance from Erma and its sureties but the former was refused payment. Security Bank filed a complaint for payment. Erma requested the return of the TCT of the property which was in Security Bank’s possession but latter refused to return. Sergio Ortiz-Luiz claimed that he is a mere accommodation party and nominal surety being that he only signed the suretyship agreement as the Administrative Vice President of Erma at thattime. Thus, he should be discharged as surety. ISSUE: Can Ortiz-Luiz, signing as a mere officer of Erma Industries, Inc. but who subsequently executed a Continuing Suretyship agreement be held liable as surety in his personal capacity?

RULING: Yes. An accommodation surety acts without motive of pecuniary gain and, hence, should be protected against unjust pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. However, this cannot be said of a compensated corporate surety which is a business association organized for the purpose of assuming classified risks in large numbers, for profit and on an impersonal basis, through the medium of standardized written contractual forms drawn by its own representatives with the primary aim of protecting its own interests. In the case of the corporate surety, the rule of strictissimi juris is not applicable, and courts apply the rules of interpretation of appertaining to contracts of insurance. The lower courts found that while respondent Ortiz signed the Credit Agreement as an officer of Erma, as shown by his signature under Erma Industries, Inc. (Borrower), this does not absolve him from liability because he subsequently executed a Continuing Suretyship agreement wherein he guaranteed the "due and full payment and performance" of all credit accommodations granted to Erma and bound himself solidarily liable with Ernesto Marcelo for the obligations of Erma. Furthermore, respondent Ortiz's claim that he is a mere accommodation party is immaterial and does not discharge him as a surety. He remains to be liable according to the character of his undertaking and the terms and conditions of the Continuing Suretyship, which he signed in his personal capacity and not in representation of Erma.

FGU Ins. Corp. vs. Sps. Roxas, G.R. No. 189526, Aug. 09, 2017 FACTS: FGU Insurance Corporation (FGU) and Spouses Floro and Eufemia Roxas (Sps. Roxas) both filed separate Petitions for Review to set aside the CA decision which modified the RTC ruling by declaring that FGU was solidarily liable with Rosendo Dominguez to pay Sps. Roxas. Sps. Roxas entered into a Contract of Building

Construction with Dominguez and Philtrust Bank. The latter was to finance the cost of materials and supplies while Dom...