Case Digest: Philippine National Bank v. The Honorable Court of Appeals, G.R. No. L-30937, January 21, 1987

Commercial Law | Increase of Indebtedness

Facts: 
  • Marino P. Rubin obtained a sugar crop loan of P40,200.00 from Philippine National Bank (PNB)-Binalbagan secured by a chattel mortgage.
  • As additional security, Philippine Phoenix Surety and Insurance, Inc. (Phoenix) issued Surety Bond No. 88 for P10,000.00 in favor of PNB.
    • The said bond was to expire one (1) year from the date thereof, unless within ten (10) days from its expiration, the surety is notified of any existing obligations thereunder
  • Three months later, PNB increased the loan to P56,800.00 without the knowledge and consent of Phoenix.
  • Rubin failed to liquidate said loan. 
  • PNB demanded of Phoenix that it make good its undertaking as surety for Rubin up to the stated amount of P10,000.00.
  • Phoenix denied liability.
  • PNB to filed a collection case against Rubin, his guarantors, and sureties, including Phoenix.
  • CFI: Ruled in favor of PNB, ordering Phoenix to pay P10,000.00 if Rubin and his guarantors failed to settle the judgment amount.
  • CA: Modified the decision, exonerating Phoenix from liability under the surety bond.
Issues: 
  • Whether the the private respondent Phoenix is exonerated from liability under its surety bond. YES 
Held:

The discharge of private respondent Phoenix from liability under Surety Bond No. 88 is correct. Contrary to petitioner's thinking, the contract in question is not a continuing chattel mortgage for which consent and knowledge of the surety is unnecessary for an increase in the amount of the principal obligation. 

The contract of chattel mortgage itself fixed the credits, loans, overdrafts, etc. and other valuable consideration received thereunder at Forty Thousand Two Hundred Pesos [P40,200,00]. The undertaking under said contract was "for the purpose of securing their payment including the interest thereon, the cost of collection and other obligations owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the mortgagee ... . " [p. 179, Record on Appeal].

Applying the principle of ejusdem generis, the term "other obligations" must be limited to such as are of the same nature as interest and costs of collection. The term cannot be enlarged to include future additional advances to debtor-mortgagor, much less be interpreted as a previous authorization from the surety to increase the principal amount fixed in the contract.

The increase in the indebtedness from P40,200.00 to P56,800.00 is material and prejudicial to private respondent Phoenix. While the liability of private respondent under the bond is limited to P10,000.00, the increase in the amount of the debt proportionally decreased the probability of the principal debtor being able to liquidate the debt; thus, increasing the risk undertaken by the surety to answer for the failure of the debtor to pay. "A material alteration of the principal contract, effected by the creditor and principal debtor without the knowledge and consent of the surety, completely discharges the surety from all liability in the contract of suretyship."

ACCORDINGLY, the decision of the Court of Appeals under review is hereby affirmed. Costs against petitioner.

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