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Security Bank and Trust Co., Inc. v. Rodolfo Cuenca (2000) Panganiban, J. Facts:

Sta. Ines Melale is a corporation engaged in logging. In Nov 1980, Sta Ines was granted a credit line by Security Bank and Trust Co. for P8 million because Sta. Ines needed assistance in meeting the addl capitalization requirements for its logging operations. The Credit Approval Memorandum expressly stated that the P8 million credit loan facility shall be effective only until Nov 30 1981. Sta Ines executed a chattel mortgage over some of its machinery & equipment and as addl security, Cuenca (the President and Chairman of the Board of Directors of Sta Ines) executed an Indemnity Agreement wherein he bound himself solidarily with Sta Ines including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodations. On Nov 26, 1981 (4 days before expiration of the credit loan facility), Sta Ines made a first drawdown from its credit line for P6 million. 1985: Cuenca resigned. His shareholdings were then sold at public auction. Subsequently (various dates 1985-86), Sta Ines obtained 6 other loans totaling to P6.37million. However, Sta. Ines failed to make payments so it requested a restructuring of its indebtedness. Security Bank agreed. They executed a Loan Agreement (Oct 1989) to formalize the loan restructuring. Sta Ines defaulted on the restructured loans. Security Bank filed a complaint for collection of sum of money. CA: (Wasnt stated but Cuenca probably lost in the trial court bec he appealed to the CA) o CA released Cuenca from liability ruling that the 1989 Loan Agreement novated the 1980 credit line. Novation extinguished the Indemnity Agreement by which Cuenca bound himself solidarily liable. o CA noted that the 1989 agreement was executed without notice/consent from Cuenca. o The Credit Approval Memo specified that the (original) credit accommodation was only up to P8million. o Loan Restructuring was tantamount to an extension of time to the debtor without the consent of the surety. Under NCC 2079, such extension extinguished the surety.

Issue/Held: Is Cuenca still liable? NO Did the 1989 Loan agreement novate the original credit accommodation? YES Did Cuenca waive his right to be notified? NO Ratio: Original obligation extinguished by novation An obligation may be extinguished by novation (NCC 1292) The requisites of novation are present. There was an explicit provision in the 1989 agreement of liquidate the principal and the interest of the earlier indebtedness. (the testimony of a bank officer that the proceeds of the 1989 loan agreement were used to pay off the orig debt, serves to strengthen the CA ruling) Since the 1989 loan agreement extinguished the orig obligation, the indemnity agreement (an accessory obligation) was necessarily extinguished) The 1989 loan agreement was not a mere renewal/extension of the P8 million accommodation. It was a novation. Purpose of the 1989 agreement was to liquidate and not to renew or extend. Cuenca did not consent to the 1989 agreement which ,according to the bank, was an extension. Hence, Cuencas obligation as a surety should be deemed extinguished pursuant to NCC 2079. Rationale for 2079: 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. There was no waiver of consent nor did Cuenca impliedly give consent. Cuencas consent or waiver is allegedly found in the Indemnity Agreement when 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


SC says: an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the suretys obligation. As held in National Bank v. Veraguth: it is fundamental in the law of suretyship that an 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. Although Cuenca did hold himself liable for the credit accommodation or any modification, such 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 the license to modify the nature and scope of the original credit accommodation, without notice/consent of Cuenca who was solidarily liable. Also, the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation.

Cuenca, as surety, was entitled to be notified of any modification in the orig loan accommodation. If we following the banks reasoning that only the borrower was entitled to a notice, that would mean such modification would NOT be valid as to the borrower but valid to the surety. The suretys liability would then be more burdensome than the borrowers. Such theory is contrary to the principle that a surety cannot assume an obligation more onerous than the principals. Contract of surety A contract of surety cannot extend to more than what is stipulated. The contract of surety is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety. 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 Cuenca waived his right to be notified / give consent to any alteration of the credit accommodation, SC cannot sustain the banks view that there was a waiver. A continuing surety does not authorize the bank to extend the score of the principal obligation inordinately. In Dino v. CA: SC 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. In this case, the Indemnity Agreement was subject to 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 Nov 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. Cuencas surety secured only the first loan, and not the others obtained in 1986. The bank cites the Dino ruling in which the SC found the surety liable for the loan obtained after the payment of the original one, which was covered by a continuing surety agreement. SC answers that in Dino, the surety Agreement specifically provided that "each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation." Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower. There was no similar provision in this case. Petition denied.