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ATOK FINANCE CORPORATION v. CA

FACTS:

Atok Finance Corporation ("Atok Finance") filed a collection case against Sanyu Chemical Corporation ("Sanyu Chemical") and other defendants before the Regional Trial Court of Manila. Atok Finance alleged that Sanyu Chemical failed to collect and remit the amounts due under the assigned trade receivables. The defendants sought the dismissal of Atok's claim, arguing that it had already prescribed and lacked cause of action. The defendants also contended that the Continuing Suretyship Agreement was null and void since Sanyu Chemical had no pre-existing obligation due to Atok Finance. The trial court rendered a decision in favor of Atok Finance, which the defendants appealed. The appeal was dismissed by the Intermediate Appellate Court for abandonment. Atok Finance sought a writ of execution, but the defendants filed a Petition for Relief from Judgment before the Court of Appeals, claiming excusable negligence for their failure to file the appeal brief. The Court of Appeals granted the petition and reversed the trial court decision, dismissing the complaint of Atok Finance. Atok Finance filed a motion to set aside the decision of the Court of Appeals.

The controversy in this case stemmed from a dispute over a suretyship agreement between Atok Finance Corporation (Atok Finance) and private respondents, spouses Stephen W. Fuller and Susana Fuller. Atok Finance filed a complaint against the Fullers, seeking payment for the principal amount, interests, and charges due under the suretyship agreement. In their answer, the Fullers alleged that the suretyship agreement was null and void for lack of consideration and that it violated the principle of mutuality of contracts since it allowed for future debts to be secured. The trial court ruled in favor of Atok Finance, prompting the Fullers to file an appeal with the Court of Appeals. In the course of the appeal, Atok Finance filed a motion to dismiss the appeal, arguing that the Fullers had abandoned their appeal due to their failure to file an appeal brief. The Third Civil Cases Division of the Court of Appeals issued a resolution dismissing the appeal based on Atok Finance's motion. Subsequently, the Fullers filed a Petition for Relief from Judgment with the 15th Division of the Court of Appeals, alleging that the dismissal of their appeal by the Third Civil Cases Division was improper. The 15th Division granted the petition, setting aside the previous dismissal and allowing the Fullers to file an appeal brief within fifteen days. Atok Finance, however, did not file an appellee's brief.

ISSUES:

  1. Whether a continuing suretyship agreement can be used to secure future debts.

  2. Whether the continuing suretyship agreement in this case is null and void for lack of consideration without evidence being adduced by the private respondents.

  3. Whether the Court of Appeals erred in granting the Petition for Relief from Judgment while execution proceedings were ongoing in the trial court.

  4. Whether the surety bonds are valid and enforceable even if the principal obligation referred to in said bonds had not yet been entered into.

  5. Whether the sureties are liable under a comprehensive surety agreement to guarantee future debts.

  6. Whether the warranty of solvency under Article 1629 of the Civil Code applies to the assignor's debt to the assignee.

  7. Whether the liability of the assignor under the Deed of Assignment is ex lege (ex Article 1629) or ex contractu.

  8. Whether or not the Court of Appeals erred in reversing and setting aside the decision of the trial court in Civil Case No. 84-22198.

  9. Whether or not the penalty clause attached to the Deed of Assignment should be reduced.

RULING:

  1. The Court of Appeals ruled that a continuing suretyship agreement cannot be used to secure future debts as it is not in consonance with the laws on guaranty and security. The court held that the agreement cannot exist without a valid obligation that serves as the principal obligation between the parties. Furthermore, the "future debts" referred to in the law on guaranty pertain to debts that already existed at the time of the constitution of the agreement, but the amount was unknown.

  2. The Court of Appeals held that the continuing suretyship agreement is null and void for lack of consideration, as there was no pre-existing obligation that served as the principal obligation between the parties when the agreement was made. The court emphasized that the agreement could not be enforced because it is similar to a guaranty, which requires a valid obligation.

  3. The Court of Appeals erred in granting the Petition for Relief from Judgment while execution proceedings were ongoing in the trial court. However, the defect arising from this decision is disregarded as secondary due to an intervening event, which led to confusion during the transition from the old Intermediate Appellate Court to the new Court of Appeals.

  4. The surety bonds are valid and enforceable even if the principal obligation had not yet been entered into at the time the bonds were executed. Article 1825 of the Civil Code recognizes that a guaranty may be given as security for future debts, the amount of which is not yet known.

  5. The sureties are liable under a comprehensive surety agreement for future debts. The surety agreement was executed to guarantee future debts which the principal debtor may incur, as allowed under the Civil Code.

  6. The warranty of solvency under Article 1629 of the Civil Code does not apply to the assignor's debt to the assignee. The debt referred to in Article 1629 is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. It is not the debt incurred by the assignor to the assignee.

  7. The liability of the assignor under the Deed of Assignment is ex contractu. The Deed of Assignment explicitly states that the failure of the debtor to pay the assigned contract upon maturity is a violation of the warranty of solvency. Consequently, the assignor becomes a solidary debtor under the assigned receivables and assumes solidary liability for any non-payment. The liability of the assignor and the other private respondents is based on the terms of the assignment agreement, not on the breach of the warranty of solvency under Article 1629.

  8. The Court reversed and set aside the decision of the Court of Appeals and reinstated the decision of the trial court in Civil Case No. 84-22198.

  9. The penalty clause attached to the Deed of Assignment was reduced to 18% per annum.

PRINCIPLES:

  • A guaranty or suretyship agreement is an accessory contract entered into to secure the performance of a principal obligation. (Article 2052, Civil Code)

  • A guaranty can be constituted to guarantee the performance of a voidable or unenforceable contract and can also guarantee a natural obligation. (Article 2052, Civil Code)

  • A guaranty may be given as security for future debts, the amount of which is not yet known. No claim can be made against the guarantor until the debt is liquidated. (Article 2053, Civil Code)

  • A guaranty may be given as security for future debts, the amount of which is not yet known. (Article 1825, Civil Code)

  • A comprehensive surety agreement can bind the sureties to guarantee future debts of the principal debtor.

  • The warranty of solvency under Article 1629 of the Civil Code applies to the assignor's debt in the assigned contract or the original debts, not to the debt incurred by the assignor to the assignee.

  • The liability of the assignor under a Deed of Assignment is ex contractu and not ex lege. The assignor assumes solidary liability for the assigned receivables if the debtor fails to pay upon maturity.

  • Discretionary authority of the court to equitably mitigate penalty clauses.

  • The power of the court to modify the penalty clause to make it fair and reasonable.