Palmares v CA (Negotiable Instruments (2) WON the penalty charge of 3% per month before the filing of the present
the filing of the present case. Article
Law)
PALMARES vs. CA (288 SCRA 422)
FACTS:
Private respondent M.B. Lending Corporation
extended a loan to the spouses Osmeña and
Merlyn Azarraga, together with petitioner
Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate
of 6% per annum to be computed every 30
days from the date thereof.
On four occasions after the execution of the
promissory note and even after the loan
matured, petitioner and the Azarraga spouses
were able to pay a total of P16,300.00,
thereby leaving a balance of P13,700.00. No
payments were made after the last payment
on September 26, 1991. Consequently, on
the basis of petitioner's solidary liability under
the promissory note, respondent corporation
filed a complaint 3 against petitioner
Palmares as the lone party-defendant, to the
exclusion of the principal debtors, allegedly
by reason of the insolvency of the latter.
ISSUES:
(1) Where a party signs a promissory note as
a co-maker and binds herself to be jointly
and severally liable with the principal debtor
in case the latter defaults in the payment of
the loan, is such undertaking of the former
deemed to be that of a surety as an insurer
of the debt, or of a guarantor who warrants
the solvency of the debtor? Or WON Palmares
is liable
and attorney's fees equivalent to 25% of the
total amount due are highly inequitable and
unreasonable
HELD:
(1) YES.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be
observed. In such case the contract is called
a suretyship.
a surety is bound equally and absolutely with
the principal, and as such is deemed an
original promisor and debtor from the
beginning. This is because in suretyship there
is but one contract, and the surety is bound
by the same agreement which binds the
principal. In essence, the contract of a surety
starts with the agreement, which is precisely
the situation obtaining in this case before the
Court.
It is a cardinal rule in the interpretation of
contracts that if the terms of a contract are
clear and leave no doubt upon the intention
of the contracting parties, the literal meaning
of its stipulation shall control. In the case at
bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with
the principal maker of the note. The terms of
the contract are clear, explicit and
unequivocal that petitioner's liability is that of
a surety.
(2) YES.
It must be remembered that from the
principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even
1229 of the Civil Code provides that the court
shall equitably reduce the penalty when the
principal obligation has been partly or
irregularly complied with by the debtor. And,
even if there has been no performance, the
penalty may also be reduced if it is iniquitous
or leonine.
The grant of attorney's fees equivalent to
25% of the total amount due is, in our
opinion, unreasonable and immoderate,
considering the minimal unpaid amount
involved and the extent of the work involved
in this simple action for collection of a sum of
money. We, therefore, hold that the amount
of P10,000.00 as and for attorney's fee would
be sufficient in this case.
SECOND DIVISION [G.R. No. 113931. May 6, 1998] E.
ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST CORPORATION, and
SPOUSES RAUL and ELEA R. CLAVERIA, respondents. D E
C I S I O N MARTINEZ, J.:
This petition for review on certiorari seeks the reversal
of the decision [1] of the Court of Appeals dated July 13,
1993 which affirmed the Order of the Regional Trial
Court of Manila, Branch 51, denying petitioner's Motion
to Dismiss the complaint, as well as the Resolution [2]
dated February 15, 1994 denying the motion for
reconsideration thereto. The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing
business under the name "Agro Brokers," applied for a
loan with respondent Consolidated Bank and Trust
Corporation (now SOLIDBANK) in the amount of Two
Million Eight Hundred Seventy Five Thousand Pesos (P2,
875,000.00) to finance the purchase of two (2) maritime
barges and one tugboat [3] which would be used in their
molasses business. The loan was granted subject to the
condition that respondent spouses execute a chattel
mortgage over the three (3) vessels to be acquired and
that a continuing guarantee be executed by Ayala
International Philippines, Inc., now herein petitioner E.
Zobel, Inc. in favor of SOLIDBANK. The respondent
spouses agreed to the arrangement. Consequently, a
chattel mortgage and a Continuing Guaranty [4] were
executed. Respondent spouses defaulted in the payment
of the entire obligation upon maturity. Hence, on
January 31,1991, SOLIDBANK filed a complaint for sum of
money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner.
The case was docketed as Civil Case No. 9155909 in the
Regional Trial Court of Manila. Petitioner moved to
dismiss the complaint on the ground that its liability as
guarantor of the loan was extinguished pursuant to
Article 2080 of the Civil Code of the Philippines. It argued
that it has lost its right to be subrogated to the first
chattel mortgage in view of SOLIDBANK's failure to
register the chattel mortgage with the appropriate
government agency. SOLIDBANK opposed the motion
contending that Article 2080 is not applicable because
petitioner is not a guarantor but a surety. On February
18, 1993, the trial court issued an Order, portions of
which reads: "After a careful consideration of the matter
on hand, the Court finds the ground of the motion to
dismiss without merit. The document referred to as
'Continuing Guaranty' dated August 21,1985 (Exh. 7)
states as follows: 'For and in consideration of any
existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the
payment of which the undersigned is now obligated to
you as surety and in order to induce you, in your
discretion, at any other manner, to, or at the request or
for the account of the borrower, x x x ' "The provisions of
the document are clear, plain and explicit. "Clearly
therefore, defendant E. Zobel, Inc. signed as surety. Even
though the title of the document is 'Continuing
Guaranty', the Court's interpretation is not limited to the
title alone but to the contents and intention of the
parties more specifically if the language is clear and
positive. The obligation of the defendant Zobel being
that of a surety, Art. 2080 New Civil Code will not apply
as it is only for those acting as guarantor. In fact, in the
letter of January 31, 1986 of the defendants (spouses
and Zobel) to the plaintiff it is requesting that the chattel
mortgage on the vessels and tugboat be waived and/or
rescinded by the bank inasmuch as the said loan is
covered by the Continuing Guaranty by Zobel in favor of
the plaintiff thus thwarting the claim of the defendant
now that the chattel mortgage is an essential condition
of the guaranty. In its letter, it said that because of the
Continuing Guaranty in favor of the plaintiff the chattel
mortgage is rendered unnecessary and redundant. "With
regard to the claim that the failure of the plaintiff to
register the chattel mortgage with the proper
government agency, i.e. with the Office of the Collector
of Customs or with the Register of Deeds makes the
obligation a guaranty, the same merits a scant
consideration and could not be taken by this Court as the
basis of the extinguishment of the obligation of the
defendant corporation to the plaintiff as surety. The
chattel mortgage is an additional security and should not
be considered as payment of the debt in case of failure
of payment. The same is true with the failure to register,
extinction of the liability would not lie. "WHEREFORE,
the Motion to Dismiss is hereby denied and defendant E.
Zobel, Inc., is ordered to file its answer to the complaint
within ten (10) days from receipt of a copy of this
Order." [5] Petitioner moved for reconsideration but was
denied on April 26,1993. [6] Thereafter, petitioner
questioned said Orders before the respondent Court of
Appeals, through a petition for certiorari, alleging that
the trial court committed grave abuse of discretion in
denying the motion to dismiss. On July 13,1993, the
Court of Appeals rendered the assailed decision the
dispositive portion of which reads: "WHEREFORE, finding
that respondent Judge has not committed any grave
abuse of discretion in issuing the herein assailed orders,
We hereby DISMISS the petition." A motion for
reconsideration filed by petitioner was denied for lack of
merit on February 15,1994. Petitioner now comes to us
via this petition arguing that the respondent Court of
Appeals erred in its finding: (1) that Article 2080 of the
New Civil Code which provides: "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," is not applicable to petitioner;
(2) that petitioner's obligation to respondent SOLIDBANK
under the continuing guaranty is that of a surety; and (3)
that the failure of respondent SOLIDBANK to register the
chattel mortgage did not extinguish petitioner's liability
to respondent SOLIDBANK. We shall first resolve the
issue of whether or not petitioner under the "Continuing
Guaranty" obligated itself to SOLIDBANK as a guarantor
or a surety. 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. [7] A contract of
guaranty, on the other hand, is a collateral undertaking
to pay the debt of another in case the latter does not
pay the debt. [8] Strictly speaking, guaranty and surety
are nearly related, and many of the principles are
common to both. However, under our civil law, they may
be distinguished thus: 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 nonperformance. 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. [9] 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. [10] Based on the
aforementioned definitions, it appears that the contract
executed by petitioner in favor of SOLIDBANK, albeit
denominated as a "Continuing Guaranty," is a contract of
surety. The terms of the contract categorically obligates
petitioner as "surety" to induce SOLIDBANK to extend
credit to respondent spouses. This can be seen in the
following stipulations. "For and in consideration of any
existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal
age, married and with business address x x x (hereinafter
called the Borrower), for the payment of which the
undersigned is now obligated to you as surety and in
order to induce you, in your discretion, at any time or
from time to time hereafter, to make loans or advances
or to extend credit in any other manner to, or at the
request or for the account of the Borrower, either with
or without purchase or discount, or to make any loans or
advances evidenced or secured by any notes, bills
receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness x x upon
which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the undersigned
agrees to guarantee, and does hereby guarantee, the
punctual payment, at maturity or upon demand, to you
of any and all such instruments, loans, advances, credits
and/or other obligations herein before referred to, and
also any and all other indebtedness of every kind which
is now or may hereafter become due or owing to you by
the Borrower, together with any and all expenses which
may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all such
payments to be made strictly in accordance with the
terms and provisions of any agreement (g), express or
implied, which has (have) been or may hereafter be
made or entered into by the Borrower in reference
thereto, regardless of any law, regulation or decree, now
or hereafter in effect which might in any manner affect
any of the terms or provisions of any such agreements(s)
or your right with respect thereto as against the
Borrower, or cause or permit to be invoked any
alteration in the time, amount or manner of payment by
the Borrower of any such instruments, obligations or
indebtedness; x x x " (Italics Ours) One need not look too
deeply at the contract to determine the nature of the
undertaking and the intention of the parties. The
contract clearly disclose that petitioner assumed liability
to SOLIDBANK, as a regular party to the undertaking and
obligated itself as an original promissor. It bound itself
jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort
to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable
for the obligation. This can be gleaned from a reading of
the stipulations in the contract, to wit: 'x x x If default be
made in the payment of any of the instruments,
indebtedness or other obligation hereby guaranteed by
the undersigned, or if the Borrower, or the undersigned
should die, dissolve, fail in business, or become
insolvent, x x x , or if any funds or other property of the
Borrower, or of the undersigned which may be or come
into your possession or control or that of any third party
acting in your behalf as aforesaid should be attached of
distrained, or should be or become subject to any
mandatory order of court or other legal process, then, or
any time after the happening of any such event any or all
of the instruments of indebtedness or other obligations
hereby guaranteed shall, at your option become (for the
purpose of this guaranty) due and payable by the
undersigned forthwith without demand of notice, and
full power and authority are hereby given you, in your
discretion, to sell, assign and deliver all or any part of the
property upon which you may then have a lien
hereunder at any broker's board, or at public or private
sale at your option, either for cash or for credit or for
future delivery without assumption by you of credit risk,
and without either the demand, advertisement or notice
of any kind, all of which are hereby expressly waived. At
any sale hereunder, you may, at your option, purchase
the whole or any part of the property so sold, free from
any right of redemption on the part of the undersigned,
all such rights being also hereby waived and released. In
case of any sale and other disposition of any of the
property aforesaid, after deducting all costs and
expenses of every kind for care, safekeeping, collection,
sale, delivery or otherwise, you may apply the residue of
the proceeds of the sale and other disposition thereof,
to the payment or reduction, either in whole or in part,
of any one or more of the obligations or liabilities
hereunder of the undersigned whether or not except for
disagreement such liabilities or obligations would then
be due, making proper allowance or interest on the
obligations and liabilities not otherwise then due, and
returning the overplus, if any, to the undersigned; all
without prejudice to your rights as against the
undersigned with respect to any and all amounts which
may be or remain unpaid on any of the obligations or
liabilities aforesaid at any time (s)" xxx xxx xxx 'Should
the Borrower at this or at any future time furnish, or
should be heretofore have furnished, another surety or
sureties to guarantee the payment of his obligations to
you, the undersigned hereby expressly waives all
benefits to which the undersigned might be entitled
under the provisions of Article 1837 of the Civil Code
(beneficio division), the liability of the undersigned
under any and all circumstances being joint and several;"
(Italics Ours) The use of the term "guarantee" does not
ipso facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee" is
frequently employed in business transactions to describe
not the security of the debt but an intention to be bound
by a primary or independent obligation. [11] As aptly
observed by the trial court, the interpretation of a
contract is not limited to the title alone but to the
contents and intention of the parties. 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, [12] we have ruled that Article 2080 of the
New Civil Code does not apply where the liability is as a
surety, not as a guarantor. But even assuming that
Article 2080 is applicable, SOLIDBANK's failure to register
the chattel mortgage did not release petitioner from the
obligation. In the Continuing Guaranty executed in favor
of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even
released SOLIDBANK from any fault or negligence that
may impair the contract. The pertinent portions of the
contract so provides: "x x x the undersigned (petitioner)
who hereby agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or
condition of any collateral, and notwithstanding any
such change, exchange, settlement, compromise,
surrender, release, sale, application, renewal or
extension, and notwithstanding also that all obligations
of the Borrower to you outstanding and unpaid at any
time (s) may exceed the aggregate principal sum herein
above prescribed. 'This is a Continuing Guaranty and
shall remain in full force and effect until written notice
shall have been received by you that it has been revoked
by the undersigned, but any such notice shall not be
released the undersigned from any liability as to any
instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you
may have any interest, at the time of the receipt of such
notice. No act or omission of any kind on your part in the
premises shall in any event affect or impair this
guaranty, nor shall same be affected by any change
which may arise by reason of the death of the
undersigned, of any partner (s) of the undersigned, or of
the Borrower, or of the accession to any such
partnership of any one or more new partners." (Italics
supplied) In fine, we find the petition to be without merit
as no reversible error was committed by respondent
Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of
Appeals is hereby AFFIRMED. Costs against the
petitioner. SO ORDERED.
[G.R. No. 110086. July 19, 1999]
PARAMOUNT INSURANCE
CORPORATION, petitioner, vs. COURT OF
APPEALS and DAGUPAN ELECTRIC
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
Before this Court is a petition for review
on certiorari assailing the Decision of the Court of
Appeals dated April 30, 1993 in CA-G.R. CV No. 11970
which dismissed petitioner Paramount Insurance
Corporations (PARAMOUNT) appeal, thereby affirming
the decision of the court a quo finding petitioner liable on
its injunction bond.
McAdore Finance and Investment, Inc.
(McADORE) was the owner and operator of the
McAdore International Palace Hotel in Dagupan
City. Private respondent Dagupan Electric Corporation
(DECORP), on the other hand, was the grantee of a
franchise to operate and maintain electric services in the
province of Pangasinan, including Dagupan City.
On February 2, 1978, McADORE and DECORP
entered into a contract whereby DECORP shall provide
electric power to McADOREs Hotel. During the term of
their contract for power service, 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 McADOREs
failure and continued refusal to pay the corrected electric
bills, DECORP disconnected power supply to the hotel
on November 27, 1978.
Aggrieved, McADORE commenced a suit against
DECORP for damages with prayer for a writ of
preliminary injunction. McADORE posted injunction
bonds from several sureties, one of which was herein
petitioner PARAMOUNT, which issued an injunction
bond on July 7, 1980 with a face amount of
P500,000.00. Accordingly, a writ of preliminary
injunction was issued wherein DECORP was ordered to
continue supplying electric power to the hotel and
restrained from further disconnecting it.
After due hearing, the Regional Trial Court of
Quezon City, Branch 106, rendered judgment in favor of
DECORP, the dispositive portion of which reads:
WHEREFORE, there being preponderance of evidence,
the court hereby dismisses the amended
complaint. Further, the court rescinds the service contract
between the parties, and orders McAdore to pay Decorp
the following:
1. Actual damages consisting of total
arrearages for electric services rendered
from February 1978 to January 1983, in the
sum of P3,834,489.62, plus interest at the
legal rate, computed from the date of
demand until full payment;
2. Moral damages in the sum of P600,000.00;
3. Exemplary damages in the sum of
P400,000.00;
4. Attorneys fees in the sum of P100,000.00;
and
5. Costs of the suit.
While this case was under litigation, the court issued a
number of restraining orders or injunctions. During these
incidents, McAdore filed the following bonds: Policy No.
8022709 by Paramount Insurance Corporation for
P500,000.00; No. 00007 and No. 00008 by Sentinel
Insurance Company, Inc. for P100,000.00 and
P50,000.00; and No. 1213 by the Travelers Multi-
Indemnity Corporation for P225,000.00.
Pursuant to the dispositive portion of this decision, the
court holds that these bonding companies are jointly and
severally liable with McAdore, to the extent of the value
of their bonds, to pay the damages adjudged to Decorp.
Send this decision to: plaintiffs counsel Atty. Pagapong;
defendants counsel Atty. Vera Cruz; and to each of the
bondsman.
It is so ordered.[1]
McADORE did not appeal the above
decision. PARAMOUNT, however, appealed to the Court
of Appeals assigning the following errors, to wit:
I. APPELLANT SURETY WAS NOT
GRANTED DUE PROCESS NOR GIVEN
ITS DAY IN COURT.
II. APPELLANTS SURETY BOND, BEING
AN INJUNCTION OR TEMPORARY
RESTRAINING ORDER BOND, THE
MANDATORY PROCEDURE IN SEC.
20, RULE 57, IN RELATION TO SEC. 9,
RULE 58, RULES OF COURT WAS NOT
OBSERVED IN THIS CASE;
III. NO EVIDENCE NOR PROOF HAD
BEEN PRESENTED TO SHOW THAT
HEREIN APPELLANT SURETY BOND
SHOULD BE HELD LIABLE FOR
TOTAL DAMAGES AS ADJUDGED IN
THE CHALLENGED DECISION.[2]
In essence, PARAMOUNT contended that it was
not given its day in court because it was not notified by
DECORP of its intention to present evidence of damages
against its injunction bond, as mandated by Sec. 9 of Rule
58, in relation to Sec. 20 of Rule 57 of the Revised Rules
of Court.
The Court of Appeals was not convinced with
petitioners contentions. On April 30, 1993, it affirmed the
decision of the trial court.
In the instant petition, PARAMOUNT seeks to
reverse and set aside the decision of the Court of Appeals
on the following assignment of errors:
FIRSTLY, THE HONORABLE COURT OF APPEALS
ERRED IN RULING THAT NOTICE TO PETITIONER
AND ITS PRESENCE THROUGH COUNSEL IN ONE
HEARING WHERE NO EVIDENCE IN SUPPORT OF
THE DAMAGES GUARANTEED BY PETITIONERS
BOND RENDERS THE NEED FOR ANOTHER
HEARING ON THAT MATTER A SUPERFLUITY.
SECONDLY, THE HONORABLE COURT OF
APPEALS ERRED IN AFFIRMING THE DECISION
OF THE COURT A QUO THAT PETITIONER IS
JOINTLY AND SEVERALLY LIABLE WITH
McADORE TO THE EXTENT OF ITS BOND, WHICH
DECISION IS NOT SUPPORTED BY THE
EVIDENCE.[3]
PARAMOUNT asserts that (t)he bone of contention
in the instant case is the matter of evidence (or lack
thereof) presented by private respondent during the
hearing of the case a quo, notice (or lack thereof) to the
surety relative to the proceedings before the court a
quo during which said evidence was presented, as well as
the actual proceedings themselves.[4] PARAMOUNT
further asseverates that no evidence relative to damages
suffered by private respondent as a result of the
injunction was ever presented, or that if any such
evidence was presented, the same was done without
notice to petitioner and in violation of its right to due
process.[5] Moreover, petitioner maintains that the
injunction bond was issued and approved sometime in
April 1980 to guarantee actual and material damages as
may be sustained and duly proved by private respondent.
Thus, it can only cover the period prospectively from the
date of its issuance and does not retroact to the date of the
initial controversy.
In its Comment, DECORP claims that
PARAMOUNT participated in the proceedings and was
given its day in court. This is evidenced by the Notice of
Hearing dated February 26, 1985 addressed to the three
sureties. In fact, at the hearing on March 22, 1985,
PARAMOUNT was in attendance represented by Atty.
Nonito Q. Cordero. Likewise, PARAMOUNT was
notified of the next hearing scheduled for April 26,
1985. DECORP further stressed that the hearing on April
26, 1985 proceeded as scheduled without any comment,
objection, opposition or reservation from PARAMOUNT.
 The core issue to be resolved here is whether or not
petitioner Paramount Insurance Corporation was denied
due process when the trial court found the injunction
bond it issued in favor of McADORE liable to
DECORP. Stated otherwise, was there sufficient evidence
to establish the liability of the petitioner on its injunction
bond?
The petition is devoid of merit.
Petitioners submissions necessitates going into the
nature of an injunction as well as over the procedure in
claiming, ascertaining and awarding damages upon the
injunction bond.
Injunction is an extraordinary remedy calculated to
preserve the status quo of things and to prevent actual or
threatened acts violative of the rules of equity and good
conscience as would consequently afford an injured party
a cause of action resulting from the failure of the law to
provide for an adequate or complete relief.[6] A
preliminary injunction is an order granted at any stage of
an action or proceeding prior to the judgment or final
order, requiring a party or a court, agency or a person to
refrain from a particular act or acts. It may also require
the performance of a particular act or acts, in which case
it shall be known as a preliminary mandatory
injunction.[7] Its sole purpose is not to correct a wrong of
the past, in the sense of redress for injury already
sustained, but to prevent further injury.[8]
A preliminary injunction or temporary restraining
order may be granted only when, among others, the
applicant, unless exempted by the court, files with the
court where the action or proceeding is pending, a bond
executed to the party or person enjoined, in an amount to
be fixed by the court, to the effect that the applicant will
pay such party or person all damages which he may
sustain by reason of the injunction or temporary
restraining order if the court should finally decide that the
applicant was not entitled thereto. Upon approval of the
requisite bond, a writ of preliminary injunction shall be
issued.[9] At the trial, the amount of damages to be
awarded to either party, upon the bond of the adverse
party, shall be claimed, ascertained, and awarded under
the same procedure prescribed in Section 20 of Rule
57.[10]
Rule 57, Section 20, of the 1997 Rules of Civil plaintiff-applicant to recover the damages occasioned by
Procedure, which is similarly applicable to preliminary the issuance by the trial court of the writ of injunction.
injunction, pertinently provides:
In order for the injunction bond to become
answerable for the above-described damages, the
Sec. 20. Claim for damages on account of improper, following requisites must concur:[11]
irregular or excessive attachment. - An application for
damages on account of improper, irregular or excessive 1. The application for damages must be filed in
attachment must be filed before the trial or before appeal the same case where the bond was issued;
is perfected or before the judgment becomes executory,
with due notice to the attaching obligee or his surety or 2. Such application for damages must be filed
sureties, setting forth the facts showing his right to before the entry of judgment; and
damages and the amount thereof. Such damages may be 3. After hearing with notice to the surety.
awarded only after proper hearing and shall be included
in the judgment on the main case. The records of this case reveal that during its
pendency in the trial court, DECORP filed its Answer
raising compulsory counterclaims for rescission of
If the judgment of the appellate court be favorable to the
contract, moral damages, exemplary damages, attorneys
party against whom the attachment was issued, he must
fees and litigation expenses.[12] During the trial, Atty.
claim damages sustained during the pendency of the
Nonito Cordero appeared[13] as counsel for
appeal by filing an application in the appellate court with
petitioner. PARAMOUNT as well as the other sureties
notice to the party in whose favor the attachment was
were properly notified of the hearing and given their day
issued or his surety or sureties, before the judgment of the
in court. Specifically, notice was sent to Atty. Cordero of
appellate court becomes executory. The appellate court
the hearing on April 27, 1985, which was set for the
may allow the application to be heard and decided by the
purpose of determining the liability of the sureties. The
trial court.
counterclaims for damages of DECORP were proven at
the trial and yet PARAMOUNT did not exert any effort
Nothing herein contained shall prevent the party against
to controvert the evidence presented by DECORP. Given
whom the attachment was issued from recovering in the
these circumstances, PARAMOUNT cannot hide under
same action the damages awarded to him from any
the cloak of non-liability on its injunction bond on the
property of the attaching obligee not exempt from
mere expediency that it was deprived of due process. It
execution should the bond or deposit given by the latter
bears stressing that what the law abhors is not the absence
be insufficient or fail to fully satisfy the award. (mutatis
of previous notice but rather the absolute lack of
mutandis)
opportunity to ventilate a partys side.[14] In other words,
petitioner cannot successfully invoke denial of due
The above rule comes into play when the plaintiff- process where it was given the chance to be heard. As
applicant for injunction fails to sustain his action, and the
aptly held by the Court of Appeals, viz.:
defendant is thereby granted the right to proceed against
the bond posted by the former. In the case at bench, the
The records of the case disclose that during the trial of the
trial court dismissed McADOREs action for damages
case, PARAMOUNT was present and represented by its
with prayer for writ of preliminary injunction and
counsel Atty. Nonito Q. Cordero as shown in the trial
eventually adjudged the payment of actual, moral, and
courts order dated March 22, 1985 (Annex A of
exemplary damages against plaintiff-
Appellees Brief). In the said order, PARAMOUNT was
applicant. Consequently, private respondent DECORP
duly notified of the next hearing which was scheduled on
can proceed against the injunction bond posted by
April 26, 1985. Evidently, PARAMOUNT was well-
apprised of the next hearing and it cannot feign lack of
notice. Having been given an opportunity to be heard
during the main hearing for the matter of damages,
PARAMOUNT therefore, cannot bewail that it was not
given an opportunity to be heard upon denial of its
motion to cancel its injunction bond. Of what use,
therefore, is there to conduct another hearing when the
issue of damages has been the subject of the main action
of which PARAMOUNT had been duly notified? A new
notice and hearing prescribed by Sec. 20, Rule 57, is
therefore a repetition and a superfluity.
Moreover, PARAMOUNT has only itself to blame when
it did not make any opposition or objection during the
hearing for the reception of DECORPs evidence. Having
manifested its desire to cancel its bond, it should have
asked for a deferment of hearing on DECORPs evidence
but PARAMOUNT did not do anything of this sort. Only
when an adverse judgment was rendered by the trial court
against its principal McAdore did it whimper a denial of
procedural due process.[15]
On the same point, PARAMOUNT argues that
contrary to the ruling of the Court of Appeals, there is a
need for a separate hearing for the purpose of presenting
evidence on the alleged damages claimed by DECORP
on petitioners injunction bond. PARAMOUNT contends
that a separate hearing is needed as no evidence dealing
with DECORPs claim for damages on petitioners bond
was presented during the hearing wherein petitioners
counsel attended nor in the next hearing wherein
petitioner was notified but failed to attend. Since no
hearing was held for the purpose of establishing its
liability on the injunction bond, PARAMOUNT
concludes that it is released from its obligation as surety.
Contrary to petitioners thesis, it is neither
mandatory nor fatal that there should be
a separate hearing in order that damages upon the bond
can be claimed, ascertained and awarded, as can be
gleaned from a cursory reading of the provisions of Rule
57, Section 20. This Court agrees with the appellate
courts ruling that:
Jurisprudential findings laid down the doctrine that a final
adjudication that the applicant is not entitled to the
injunction does not suffice to make the surety liable. It is
necessary, in addition, that the surety be accorded due
process, that is, that it be given an opportunity to be heard
on the question of its solidary liability for damages
arising from a wrongful injunction order. Withal, the fact
that the matter of damages was among the issues tried
during the hearings on the merits will not render
unnecessary or superfluous a summary hearing to
determine the extent of a suretys liability unless of
course, the surety had been impleaded as a party, or
otherwise earlier notified and given opportunity to be
present and ventilate its side on the matter during the
trial.
The exception under the doctrinal ruling abovenoted is
extant in the case at bar.[16]
What is necessary only is for the attaching party and
his surety or sureties to be duly notified and given the
opportunity to be heard. In the case at bench, this Court
accords due respect to the factual finding of the Court of
Appeals that PARAMOUNT was present and represented
by its counsel Atty. Nonito Q. Cordero as shown in the
trial courts order dated March 22, 1985 x x x. [17]
As stated, PARAMOUNT also argues that assuming
it is liable on its injunction bond, its liability should be
limited only to the amount of damages accruing from the
time the injunction bond was issued until the termination
of the case, and not from the time the suit was
commenced. In short, it claims that the injunction bond is
prospective and not retroactive in application.
This Court does not agree. Rule 58, Section 4(b),
provides that a bond is executed in favor of the party
enjoined to answer for all damages which he may sustain
by reason of the injunction. This Court already had
occasion to rule on this matter in Mendoza v.
Cruz,[18] where it held that (t)he injunction bond is
intended as a security for damages in case it is finally
decided that the injunction ought not to have been
granted. It is designed to cover all damages which the
party enjoined can possibly suffer. Its principal purpose is
to protect the enjoined party against loss or damage by
reason of an injunction. No distinction was made as to
when the damages should have been incurred.
Moreover, when petitioner issued its injunction
bond in favor of DECORP, it was done with the full
knowledge of the relevant facts obtaining in the
controversy between DECORP and McADORE. At the
time the injunction bond was issued, DECORP was
already claiming arrears in electric bills and damages
from McADORE.
It bears stressing that McADORE was found liable
to pay actual damages, moral damages, exemplary
damages, attorneys fees and costs of the suit. To argue
therefore that PARAMOUNT is only liable on its
injunction bond from the time of its issuance and not
from the time the suit was commenced is preposterous if
not absurd. Indeed, it would be impossible to determine
the reckoning point when moral damages, exemplary
damages, attorneys fees and costs of the suit were
supposed to have been incurred. Consequently, it can be
safely deduced that the bond answers for any and all
damages arising from the injunction, regardless of
whether it was sustained before or after the filing of the
injunction bond.
PARAMOUNT further maintains that it is liable to
pay actual damages only.[19] However, Rule 58, Section
4(b), clearly provides that the injunction bond is
answerable for all damages. The bond insures with all
practicable certainty that the defendant may sustain no
ultimate loss in the event that the injunction could finally
be dissolved. Consequently, the bond may obligate the
bondsmen to account to the defendant in the injunction
suit for all: (1) such damages; (2) costs and damages; (3)
costs, damages and reasonable attorneys fees as shall be
incurred or sustained by the person enjoined in case it is
determined that the injunction was wrongfully
issued.[20] Thus, PARAMOUNT is liable, jointly and
severally, for actual damages, moral damages, exemplary
damages, attorneys fees and costs of the suit, to the extent
of the amount of the bond.
Be that as it may, a scrutiny of petitioners Indemnity
Agreement[21] with McADORE shows that the former
agreed to become surety for the stated amount in favor of
Dagupan Electric Corp. It should be noted that
McADORE was already in arrears starting from June
1979[22] up to the time it entered into an Indemnity
Agreement with PARAMOUNT on July 17, 1980.
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. [23] 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 counsels fees, incurred or sustained
by the latter in case it is determined that the injunction
was wrongfully issued.[24]
The posting of a bond in connection with a
preliminary injunction (or attachment under Rule 57, or
receivership under Rule 59, or seizure or delivery of
personal property under Rule 60) does not operate to
relieve the party obtaining an injunction from any and all
responsibility for the damages that the writ may thereby
cause. It merely gives additional protection to the party
against whom the injunction is directed. It gives the latter
a right of recourse against either the applicant or his
surety, or against both.[25] In the same manner, when
petitioner PARAMOUNT issued the bond in favor of its
principal, it undertook to assume all the damages that
may be suffered after finding that the principal is not
entitled to the relief being sought.
WHEREFORE, based on the foregoing, the instant
petition is DENIED. The decision of the Court of
Appeals dated April 30, 1993 in CA-G.R. CV No. 11970
is AFFIRMED. With costs.
SO ORDERED.
[G.R. No. 138544. October 3, 2000]
SECURITY BANK AND TRUST COMPANY,
Inc., petitioner, vs. RODOLFO M.
CUENCA, respondent.
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- Article 2079 of the Civil Code, such extension
SIMC, Expediente, at Vol. II, pp. 38, 70 to 165) extinguished the surety.
The CA also opined that the surety was entitled
Appellant SIMC defaulted in the payment of its to notice, in case the bank and Sta. Ines decided to
restructured loan obligations to [Petitioner] SBTC despite materially alter or modify the principal obligation
demands made upon appellant SIMC and CUENCA, the after the expiry date of the credit accommodation.
last of which were made through separate letters dated 5
June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), Hence, this recourse to this Court.[7]
respectively.
Appellants individually and collectively refused to pay The Issues
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 In its Memorandum, petitioner submits the
x x from which [Respondent] Cuenca appealed. following for our consideration:[8]
A. Whether or not the Honorable Court of
Ruling of the Court of Appeals
Appeals erred in releasing Respondent
Cuenca from liability as surety under
the Indemnity Agreement for the
payment of the principal amount of
In releasing Respondent Cuenca from liability,
twelve million two hundred thousand
the CA ruled that the 1989 Loan Agreement had
pesos (P12,200,000.00) under
novated the 1980 credit accommodation earlier
Promissory Note No. RL/74/596/88
granted by the bank to Sta. Ines.Accordingly, such
dated 9 March 1988 and Promissory
novation extinguished the Indemnity Agreement, by
Note No. RL/74/597/88 dated 9 March
which Cuenca, who was then the Board chairman
1988, plus stipulated interests,
and president of Sta. Ines, had bound himself
penalties and other charges due
solidarily liable for the payment of the loans secured
thereon;
by that credit accommodation. It noted that the 1989
Loan Agreement had been executed without notice i. Whether or not the Honorable
to, much less consent from, Cuenca who at the time Court of Appeals erred in
was no longer a stockholder of the corporation. ruling that Respondent
Cuencas liability under the
The appellate court also noted that the Credit
Indemnity Agreement
Approval Memorandum had specified that the credit
covered only availments on
accommodation was for a total amount of P8 million,
SIMCs credit line to the
and that its expiry date was November 30,
extent of eight million pesos
1981. Hence, it ruled that Cuenca was liable only for
(P8,000,000.00) and made
loans obtained prior to November 30, 1981, and
on or before 30 November
only for an amount not exceeding P8 million.
1981;
It further held that the restructuring of Sta. Ines
ii. Whether or not the
obligation under the 1989 Loan Agreement was
Honorable Court of Appeals
tantamount to a grant of an extension of time to the
erred in ruling that the
debtor without the consent of the surety. Under
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 ART. 1296. When the principal obligation is extinguished
provision to liquidate the principal and the interest of in consequence of a novation, accessory obligations may
the earlier indebtedness, as the following shows: subsist only insofar as they may benefit third persons who
did not give their consent.
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 Alleged Extension
Indebtedness) while the Second Loan shall be applied
to liquidate the past due interest and penalty portion of
the Indebtedness.[19] (Italics supplied.) Petitioner insists that the 1989 Loan Agreement
was a mere renewal or extension of the P8 million
The testimony of an officer[20] of the bank that original accommodation; it was not a novation.[25]
the proceeds of the 1989 Loan Agreement were
used to pay-off the original indebtedness serves to This argument must be rejected. To begin with,
the 1989 Loan Agreement expressly stipulated that
strengthen this ruling.[21]
its purpose was to liquidate, not to renew or extend,
the outstanding indebtedness.Moreover, respondent
Furthermore, several incompatibilities between
did not sign or consent to the 1989 Loan
the 1989 Agreement and the 1980 original obligation
Agreement, which had allegedly extended the
demonstrate that the two cannot coexist. While the
1980 credit accommodation had stipulated that the original P8 million credit facility. Hence, his
amount of loan was not to exceed P8 million,[22] the obligation as a surety should be deemed
1989 Agreement provided that the loan was P12.2 extinguished, pursuant to Article 2079 of the Civil
million. The periods for payment were also different. Code, which specifically states that [a]n extension
granted to the debtor by the creditor without the
Likewise, the later contract contained consent of the guarantor extinguishes the guaranty.
conditions, positive covenants and negative x x x. In an earlier case,[26] the Court explained the
covenants not found in the earlier obligation. As an rationale of this provision in this wise:
example of a positive covenant, Sta. Ines undertook
from time to time and upon request by the Lender,
The theory behind Article 2079 is that an extension of
[to] perform such further acts and/or execute and
time given to the principal debtor by the creditor without
deliver such additional documents and writings as
the suretys consent would deprive the surety of his right
may be necessary or proper to effectively carry out
to pay the creditor and to be immediately subrogated to
the provisions and purposes of this Loan
the creditors remedies against the principal debtor upon
Agreement.[23] Likewise, SIMC agreed that it would
the maturity date. The surety is said to be entitled to
not create any mortgage or encumbrance on any
protect himself against the contingency of the principal
asset owned or hereafter acquired, nor would it
debtor or the indemnitors becoming insolvent during the
participate in any merger or consolidation.[24]
extended period.
Since the 1989 Loan Agreement had
extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was Binding Nature of the Credit Approval Memorandum
necessarily extinguished also, pursuant to Article
1296 of the Civil Code, which provides:
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 liable for the loan
obtained after the payment of the original one, which
was covered by a continuing surety agreement. At
the risk of being repetitious, we hold 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.
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 expiry date of which were set down
in the Credit Approval Memorandum.
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 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.
In sum, we hold that the 1989 Loan Agreement
extinguished by novation the obligation under the
1980 P8 million credit accommodation. Hence, the
Indemnity Agreement, which had been an accessory
to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioners
submission that respondent waived his right to be
notified of, or to give consent to, any modification or
extension of the 1980 credit accommodation.
In this light, we find no more need to resolve
the issue of whether the loan obtained before the
expiry date of the credit accommodation has been
paid.
WHEREFORE, the Petition is DENIED and the
assailed Decision AFFIRMED. Costs against
petitioner.
III. Ruling
SECURITY BANK AND TRUST COMPANY, Inc. The 1989 Loan Agreement extinguished by
vs novation the obligation under the1980 P8 million
RODOLFO M. CUENCA credit accommodation. It is essential in the law of
Panganiban, J. October 3, 2003 Extinguishment of suretyship
Guaranty thata n y a g r e e m e n t b e t w e e n t h e c r e d i t o r
I. Facts and the principal debtor that essentiall
y varies the terms of the principal contract
* Creditor: Sccurity Bank and Trust Co.Debtor: Sta.
without the consent of the surety, willrelease
Ines Melale Corp.Surety: Rodolfo Cuenca
A. the surety from liability. The 1989 Loan
Sta. Ines is a corporation engaged in Agreement expressly
logging operations. In 1980, it stipulatedt h a t i t s p u r p o s e w a s t o l
iquidate, not to renew or exten
w a s granted by Security Bank a credit line in
the amount of Php 8M. To securepayment, it d , t h e o u t s t a n d i n g indebtedness.
executed a chattel mortgage over some of Moreover, respondent did not sign or c
its machineries andequipments. And as an o n s e n t t o t h e 1 9 8 9 L o a n Agreement, which
additional security, its President and Chairman of had allegedly extended the original P8 million credit
theB o a r d o f D i r e c t o r s R o d o l f o C u e n c a , facility.
e x e c u t e d a n I n d e m n i t y a g r e e m e n t i n fav
or of Security Bank whereby he bound Indeed, the stipulation in the 1989 Loan Agreement
himself jointly and severally with Sta. Ines. providing for the surety of respondent, without
After Cuenca resigned, Sta. Ines obtained a Php 6M even informing him, smacks of negligence on
loan. Becauseof its difficulty in making the the part of the bank and bad faith on that of the
amortization paym ents, in 1989 it principal debtor. Since that Loan
requestedS e c u r i t y B a n k a c o m p l e t e r Agreementconstituted a new indebtedness,
estructure of its indebtedness, whi the old loan having been already liquidated,
c h w a s approved without prior notice thespirit of fair play should have impelled
to, or prior consent of Cuenca. Still it Sta. Ines to ask somebody else to act as a
w a s unable to pay. surety for the new loan.
B. Contention of the Petitioner
Security Bank insists that the 1989 Loan Agreement
was a mere renewal orextension of the Php 8M
original accommodation, that Cuenca waived
his right tobe notified of and to give consent to any
substitution, renewal, extension,
increase,amendment, conversion or revival of the
same, and that it was a continuing surety.
C. Contention of the Respondent
Cuenca argues that the 1989 agreement
extinguished the obligation under the 1980
credit accommodation by novation.
II. Issues
WON the 1989 Loan Agreement novated the
original credit accommodationand Cuenca’s liability
under the Indemnity Agreement.