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SECURITY BANK v. RODOLFO M. CUENCA

FACTS:

Defendant-appellant Sta. Ines Melale Corporation (Sta. Ines) obtained a credit line of P8,000,000.00 from petitioner Security Bank and Trust Co. (SBTC) for its logging operations. To secure the payment of amounts drawn from the credit line, Sta. Ines executed a Chattel Mortgage and respondent Rodolfo M. Cuenca (Cuenca) executed an Indemnity Agreement. Sta. Ines made a drawdown of P6,100,000.00 from the credit line before its expiration. Cuenca later resigned as president and chairman of Sta. Ines and sold his shareholdings in the corporation. Sta. Ines further availed itself of the credit line and obtained six other loans from SBTC.

Sta. Ines Melale Veneer and Plywood Corporation (SIMC) also obtained credit accommodations from SBTC and executed promissory notes. SIMC requested for a complete restructuring of its debt, which SBTC approved without notice or consent from Cuenca. SBTC extended two loans to Sta. Ines to liquidate its outstanding indebtedness, but SIMC defaulted in paying the restructured loan obligations. SBTC filed a complaint for collection of the sum of money, and the court ruled in favor of SBTC. Cuenca appealed.

SIMC obtained credit assistance from Philippine Bank of Commerce (PBC), and Cuenca executed an indemnity agreement to guarantee the obligations of SIMC. The indemnity agreement covered availments on SIMC's credit line up to 8 million pesos and required Cuenca's consent for any alteration or modification of the principal obligation. SIMC requested for a debt restructuring, which PBC approved without Cuenca's consent. Cuenca argued that this constituted an extension of the principal obligation without its consent and extinguished its liability under the indemnity agreement. The Court of Appeals ruled in favor of Cuenca, holding that the restructuring was done without the surety's consent. PBC appealed to the Supreme Court.

(Source: Cuenca v. Security Bank Corporation, G.R. No. 172336, Jan. 20, 2014)

ISSUES:

  1. Whether the 1989 Loan Agreement novated the original credit accommodation and Cuenca's liability under the Indemnity Agreement:

    • First Sub-Issue: Whether Respondent Cuenca's liability under the Indemnity Agreement covered only availments on SIMC's credit line to the extent of P8,000,000.00 and made on or before 30 November 1981.

    • Second Sub-Issue: Whether the restructuring of SIMC's indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Cuenca's liability under the Indemnity Agreement.

    • Third Sub-Issue: Whether Cuenca gave his consent to any substitution, renewal, extension, increase, amendment, conversion, or revival of the credit accommodation.

  2. 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 credit accommodation.

  3. Whether procedural questions such as the petitioner's motion for reconsideration being pro forma and service of the petition by registered mail complied with the procedural rules.

RULING:

  1. Novation by the 1989 Loan Agreement:

    • The 1989 Loan Agreement constituted a novation of the original credit accommodation, which extinguished the original P8 million obligation. Consequently, the Indemnity Agreement, which was an accessory to the original credit accommodation, was also extinguished.

    • The restructuring of SIMC's indebtedness under the P8 million credit accommodation amounted to an extension granted to SIMC without Cuenca's consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code.

  2. Waiver of Consent:

    • Cuenca did not waive his right to be notified of or give consent to any modification of the credit accommodation. The Court emphasized that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latter's obligation.

  3. Procedural Questions:

    • The petitioner's motion for reconsideration was not pro forma just because it reiterated the arguments already passed upon by the appellate court. The petitioner's motion did toll the filing period.

    • Service of the petition by registered mail with an explanation due to "limitations in time and distance" was found to be sufficient.

PRINCIPLES:

  1. Novation: An obligation may be extinguished by novation if the new obligation is incompatible with the old one or if it expressly states the novation. (Article 1292 of the Civil Code)

  2. Suretyship: Any extension granted to the debtor by the creditor without the consent of the surety extinguishes the surety's liability. (Article 2079 of the Civil Code)

  3. Procedural Rules: A motion for reconsideration is not pro forma if it simply reiterates previous arguments to convince the court of an error in its ruling. Compliance with service requirements can be demonstrated by an explanation of difficulties in personal service.

  4. Continuing Surety: A continuing surety agreement covers transactions within the description or contemplation of the contract until its termination.

  5. Novation Impact on Accessory Obligations: Extinguishment of the principal obligation by novation results in the extinguishment of accessory obligations unless they benefit third parties who did not consent. (Article 1296 of the Civil Code)

  6. Strict Construction Against Creditor: Contracts of suretyship are construed strictly against the creditor, and any doubt is resolved against enlarging the liability of the surety.

  7. Fair Play in Banking Practice: Banks should act prudently in requiring suretyship, ensuring that the surety is in a position to guarantee the payment of the obligation and not extending beyond the original terms without consent.