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Continuing Surety

The document discusses a continuing surety agreement between a bank and an individual. It analyzes whether the individual was still liable as a surety for subsequent loans to a corporation after he was no longer an officer or shareholder. The court held that the 1989 loan agreement extinguished the prior agreement and surety, so the individual was not liable without having consented to being a surety for the new obligation.

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Norr Mann
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84 views2 pages

Continuing Surety

The document discusses a continuing surety agreement between a bank and an individual. It analyzes whether the individual was still liable as a surety for subsequent loans to a corporation after he was no longer an officer or shareholder. The court held that the 1989 loan agreement extinguished the prior agreement and surety, so the individual was not liable without having consented to being a surety for the new obligation.

Uploaded by

Norr Mann
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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. In Dino v. CA, the Court held that "a continuing guaranty is one which
37  38 

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 ₱8
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 ₱8 million.

Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 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, respondent’s


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
creditor’s 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 ₱8 million credit accommodation. Hence, the Indemnity
Agreement, which had been an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioner’s 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.

SO ORDERED.

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