SECURITY BANK v. CUENCA - Pursuant to Art.

- Pursuant to Art. 1296, since the 1989 Loan Agreement had extinguished the original credit
Obligations Secured | 3 October 2000 | J. Panganiban
Nature of Case: Petition for Review
Digest maker: Africa
SUMMARY: SBTC granted a credit line to SIMC for P8M, secured by an Indemnity
Agreement wherein Cuenca, as President, held himself solidarily liable. Due to difficulty in
paying, SIMC and SBTC agreed to restructure its obligations, to allow the former to make
several more loans. When SIMC defaulted, SBTC filed suit against both SIMC and Cuenca
pursuant to the Indemnity Agreement.
DOCTRINE: The continuing guaranty is one which 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.
accommodation, the Indemnity Agreement, an accessory obligation, was necessarily
extinguished.
- This is further supported by Art. 2079, which provides that an extension granted to the
debtor by the creditor without the consent of the guarantor extinguishes the guaranty.*
- That there is no need for Cuenca to execute another surety contract as indemnity was in the
nature of containing surety is untenable. The continuing guaranty is one which 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.
- In this case, the indemnity agreement has two limitations: 1) that obligation should not
exceed Php8M, and that 2) it should expire on 30 November 1981. Cuenca’s responsibility is
confined to those limitations.
RULING: CA ruling AFFIRMED.

FACTS:
1. Security Bank granted Sta. Ines Melale (SIMC) a credit line in 1980 amounting to Php8M to NOTE:
assist the latter in meeting the capitalisation requirement in its logging operations. In the * Ratio: an extension of time given to the principal debtor by the creditor without the suretys
Credit Approval Memorandum, it was stated that credit line would expire on 30 consent would deprive the surety of his right to pay the creditor and to be immediately
November 1981. Mr. Cuenca, President and Chairman of the Board, executed an indemnity subrogated to the creditors remedies against the principal debtor upon the maturity date. The
agreement where he shall be solidarity liable with SIMC by virtue of said credit surety is said to be entitled to protect himself against the contingency of the principal debtor or
accommodation including renewals, extensions, and amendments. becoming insolvent during the extended period.
2. SIMC had a difficulty paying the loan, hence their 1989 agreement to restructure the loan.
In this agreement, it was provided that the loan now would be Php12.2M, Php8.8M of
which would be applied for the principal, while Php3.4M would be for the past due
interest and penalty.
3. SIMC still failed to settle its accounts, prompting Security Bank to file a complaint for
collection of sum of money. RTC ruled in favour of the latter, but CA ruled that Cuenca’s
responsibility as surety was extinguished.

ISSUE/S & RATIO:

1. WON Cuenca shall still be held solidarily liable. — NO
- In the absence of an express agreement, there is novation when the following requisites are
met: 1) previous valid obligation; 2) parties concerned agreed to a new contract; 3) old
contract is extinguished; and 4) valid new contract. In this case, the 1989 agreement
extinguished the obligation. Original loan (8M) was increased to 12M, and new conditions
were found in the second contract that are not in the earlier contract.