Case Digest: Sps Toh v. Solid Bank Corporation, G.R. No. 154183, August 7, 2003

Commercial Law | Release for Deprivation of Subrogation. 

Facts: 

• Solid Bank Corporation agreed to extend an "omnibus line" credit facility worth P10 million to First Business Paper Corporation (FBPC).
• The terms and conditions were stipulated in a "letter-advise," which became effective upon compliance with documentary requirements.
• The submitted documents essential for the credit facility were:
1. Board Resolution or excerpts of the Board of Directors Meeting, duly ratified by a Notary Public, authorizing the loan and security arrangement as well as designating the officers to negotiate and sign for FBPC specifically stating authority to mortgage, pledge and/or assign the properties of the corporation;
2. agreement to purchase Domestic Bills; and, 
3. Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng Li.
• Luis Toh — then Chairman of the Board (FBPC)
• Vicky Tan Toh — then Vice-President (FBPC)
• Kenneth Ng Li — President (FBPC)
• Ma. Victoria Ng Li — General Manager (FBPC)
• The Continuing Guaranty was embodied in a public document prepared solely by respondent Bank. 
• The terms of the instrument defined the contract arising therefrom as a surety agreement and provided for the solidary liability of the signatories thereto for and in consideration of "loans or advances" and "credit in any other manner to, or at the request or for the account" of FBPC.
• The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may incur and for which the sureties may be liable, stating that the credit facility "covers any and all existing indebtedness of, and such other loans and credit facilities which may hereafter be granted to FIRST BUSINESS PAPER CORPORATION." 
• The surety also contained a de facto acceleration clause if "default be made in the payment of any of the instruments, indebtedness, or other obligation" guaranteed by petitioners and respondents. 
• To strengthen this security, the Continuing Guaranty waived rights of the sureties against delay or absence of notice or demand on the part of respondent Bank, and gave future consent to the Bank's action to "extend or change the time payment, and/or the manner, place or terms of payment," including renewal, of the credit facility or any part thereof in such manner and upon such terms as the Bank may deem proper without notice to or further assent from the sureties. 
• FBPC opened thirteen (13) letters of credit obtained loans totaling P15,227,510.00 by November 17, 1993.
• As the letters of credit were secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the goods allegedly purchased from the proceeds of the loans. 
• On January 13, 1994, the Bank received information that respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had fraudulently departed from their conjugal home. 
• On January 14, 1994, the Bank demanded payment from FBPC and petitioners Luis Toh and Vicky Tan Toh invoking the acceleration clause in the trust receipts of FBPC and claimed payment for unpaid overdue accounts on the letters of credit plus interests and penalties.
• The Bank also invoked the Continuing Guaranty executed by petitioner-spouses Luis Toh and Vicky Tan Toh who were the only parties known to be within national jurisdiction to answer as sureties for the credit facility of FBPC.
• The Bank filed a complaint for sum of money against FBPC and the spouses.

• RTC-Pasig: Found FBPC liable to pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum from finality of the Decision until fully paid, and absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability.

• CA: Held that by signing the Continuing Guaranty, petitioner-spouses became solidarily liable with FBPC to pay respondent Bank the amount of P10,539,758.68 as principal with twelve percent (12%) interest per annum from finality of the judgment until completely paid. 
• The provisions of the surety agreement did not "indicate that Spouses Luis and Vicky Toh x x x signed the instrument in their capacities as Chairman of the Board and Vice-President, respectively, of FBPC only." 

Issues: 

• Whether there was a novation of the original obligation. YES
• Whether Spouses Toh are relieved of their obligations as sureties. YES

Held:

This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses as it is a public document that enjoys the presumption of authenticity and due execution. Although petitioners as appellees may raise issues that have not been assigned as errors by respondent Bank as party-appellant, i.e., unenforceability of the surety contract, we are bound by the consistent finding of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed their signature[s]" on the surety agreement and were thus "at some given point in time willing to be liable under those forms." In the absence of clear, convincing and more than preponderant evidence to the contrary, our ruling cannot be otherwise.

Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts their contractual undertaking to such condition or eventuality. In fact the obligations assumed by them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns of the undersigned, and shall inure to the benefit of, and be enforceable by you, your successors, transferees and assigns," and that their commitment "shall remain in full force and effect until written notice shall have been received by [the Bank] that it has been revoked by the undersigned." Verily, if petitioners intended not to be charged as sureties after their withdrawal from FBPC, they could have simply terminated the agreement by serving the required notice of revocation upon the Bank as expressly allowed therein. In Garcia v. Court of Appeals we ruled –

Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore personally bound. There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.

But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so must we also hold respondent Bank to its representations in the "letter-advise" of 16 May 1993. Particularly, as to the extension of the due dates of the letters of credit, we cannot exclude from the Continuing Guaranty the preconditions of the Bank that were plainly stipulated in the "letter-advise." 

Fairness and justice dictate our doing so, for the Bank itself liberally applies the provisions of cognate agreements whenever convenient to enforce its contractual rights, such as, when it harnessed a provision in the trust receipts executed by respondent FBPC to declare its entire indebtedness as due and demandable and thereafter to exact payment thereof from petitioners as sureties. In the same manner, we cannot disregard the provisions of the "letter-advise" in sizing up the panoply of commercial obligations between the parties herein.

Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or from time to time, in [its] discretion x x x extend or change the time payment," this provision even if understood as a waiver is confined per se to the grant of an extension and does not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to defer collection contemplates only authorized extensions, that is, those that meet the terms of the "letter-advise."

Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment per extension. This reading of the Continuing Guaranty is consistent with Philippine National Bank v. Court of Appeals that any doubt on the terms and conditions of the surety agreement should be resolved in favor of the surety.

Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or omission of any kind on [the Bank's] part in the premises shall in any event affect or impair this guaranty" must also be read "strictissimi juris" for the reason that petitioners are only accommodation sureties, i.e., they received nothing out of the security contract they signed. Thus said, the acts or omissions of the Bank conceded by petitioners as not affecting nor impairing the surety contract refer only to those occurring "in the premises," or those that have been the subject of the waiver in the Continuing Guaranty, and stretch to no other. 

Stated otherwise, an extension of the period for enforcing the indebtedness does not by itself bring about the discharge of the sureties unless the extra time is not permitted within the terms of the waiver, i.e., where there is no payment or there is deficient settlement of the marginal deposit and the twenty-five percent (25%) consideration, in which case the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of his contract, and while he is liable to the full extent thereof, his accountability is strictly limited to that assumed by its terms.

It is admitted in the Complaint of respondent Bank before the trial court that several letters of credit were irrevocably extended for ninety (90) days with alarmingly flawed and inadequate consideration - the indispensable marginal deposit of fifteen percent (15%) and the twenty-five percent (25%) prerequisite for each extension of thirty (30) days. It bears stressing that the requisite marginal deposit and security for every thirty (30) - day extension specified in the "letter-advise" were not set aside or abrogated nor was there any prior notice of such fact, if any was done.

Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account officer and manager of respondent Bank and its lone witness in the civil case –

Q:         You extended it even if there was no marginal deposit?

A:         Yes.

Q:         And even if partial payment is less than 25%?

A:         Yes x x x x

Q:         You have repeatedly extended despite the insufficiency partial payment requirement?

A:         I would say yes.

The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty." 

This act of the Bank is not mere failure or delay on its part to demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit which the Bank did not extend, defer or put off, but comprises conscious, separate and binding agreements to extend the due date, as was admitted by the Bank itself –

Q:         How much was supposed to be paid on 14 September 1993, the original LC of P1,655,675.13?

A:         Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it to December 13, 1993 but they made partial payment that is why we extended it.

Q:         The question to you now is how much was paid? How much is supposed to be paid on September 14, 1993 on the basis of the original amount of P1,655,675.13?

A:         Whenever this obligation becomes due and demandable except when you roll it over so there is novation there on the original obligations (underscoring supplied).

As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of their obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code.

Further, we note several suspicious circumstances that militate against the enforcement of the Continuing Guaranty against the accommodation sureties. Firstly, the guaranty was executed more than thirty (30) days from the original acceptance period as required in the "letter-advise." Thereafter, barely two (2) days after the Continuing Guaranty was signed, corporate agents of FBPC were replaced on 12 May 1993 and other adjustments in the corporate structure of FBPC ensued in the month of June 1993, which the Bank did not investigate although such were made known to it.

By the same token, there is no explanation on record for the utter worthlessness of the trust receipts in favor of the Bank when these documents ought to have added more security to the indebtedness of FBPC. The Bank has in fact no information whether the trust receipts were indeed used for the purpose for which they were obtained. To be sure, the goods subject of the trust receipts were not entirely lost since the security officer of respondent Bank who conducted surveillance of FBPC even had the chance to intercept the surreptitious transfer of the items under trust: "We saw two (2) delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out of the compound x x x [which were] taking out the last supplies stored in the compound." In addition, the attached properties of FBPC, except for two (2) of them, were perfunctorily abandoned by respondent Bank although the bonds therefor were considerably reduced by the trial court.

The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080 of the Civil Code, or at the very least, mitigate the liability of the surety up to the value of the property or lien released –

If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once becomes charged with the duty of retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of this security as a primary resource for the payment of a debt, will discharge the surety to the extent of the value of the property or lien released x x x x [for] there immediately arises a trust relation between the parties, and the creditor as trustee is bound to account to the surety for the value of the security in his hands.

For the same reason, the grace period granted by respondent Bank represents unceremonious abandonment and forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five percent (25%) partial payment as fixed in the "letter-advise." These payments are unmistakably additional securities intended to protect both respondent Bank and the sureties in the event that the principal debtor FBPC becomes insolvent during the extension period. Compliance with these requisites was not waived by petitioners in the Continuing Guaranty. For this unwarranted exercise of discretion, respondent Bank bears the loss; due to its unauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties under the Continuing Guaranty.

Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security provided by the marginal deposit and the twenty-five percent (25%) requirement results in the material alteration of the principal contract, i.e., the "letter-advise," and consequently releases the surety.

This inference was admitted by the Bank through the testimony of its lone witness that "[w]henever this obligation becomes due and demandable, except when you roll it over, (so) there is novation there on the original obligations." As has been said, "if the suretyship contract was made upon the condition that the principal shall furnish the creditor additional security, and the security being furnished under these conditions is afterwards released by the creditor, the surety is wholly discharged, without regard to the value of the securities released, for such a transaction amounts to an alteration of the main contract." 

WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals dated 12 December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable with First Business Paper Corporation to pay Solid Bank Corporation the amount of P10,539,758.68 as principal with twelve percent (12%) interest per annum until fully paid, and its Resolution of 2 July 2002 denying reconsideration thereof are REVERSED and SET ASIDE.

The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding First Business Paper Corporation liable to pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum until fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Solid Bank Corporation is REINSTATED and AFFIRMED. No costs.

SO ORDERED.