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MARKETING CORP (RMC) 1.19.4 hectares land located in Bohol, was originally owned by Mumar since 1917 & who sold it to Carlos in
1950 who was issued Tax Dec. & he occupied and cultivated said land unknwon to Carlos, Alvarez
1. RMC maintained current accounts W/ PBC; current account deposits are accepted by bank based on succeeded in obtaining regis. of parcel of land in his name w.c included the 19.4, Alvarez never occupied
deposit slips prepared and signed by depositor indicating Acct No., depositor’s name, date & amt. of Alvarez sold it to Sps. Beduya to whom TCT issued Sps obtained loan from DBP & mortgaged land Sps.
deposit; deposit slips are prepared in duplicate by depositor, original retained by bank, while duplicate failed to pay hence, mortgage foreclosed & DBP was highest bidder Carlos also applied for loan from DBP,
returned to depositor offering his 19.4 in w/c DBP’s rep. inspected land and appraised its value but after releasing loan DBP found
that land mortgaged by Carlos was included in TCT in Sps name, thus, DBP cancelled loan 1986- re-
2. RMC’s Presi. entrusted RMC cash funds to his secretary, Yabut, for depositing in PBC; but Yabut’s modus: appraisal of land was conducted by DBP’s rep. that discovered that Carlos was occupying portion of said
accomplish original and duplicate deposit slips, original showed her husb’s name as depositor and his land DBP filed a complaint for recovery of possession w/ damages against Carlos in RTC Tagbilaran City
current Acct No, on duplicate was written Acct No. of her husband but name of depositor left blan PBC's w/c ruled infav. of DBP declaring it owner of entire land CA reversed declaring Carlos the onwer of 19.4
teller-Mabayad, would validate and stamp both original and duplicate of these deposit slips retaining only
original, duplicate kept by Yabut who would then fill up name of RMC blank, thus, cash was deposited in her ISSUE: W/n DBP is innocent purchaser for value in foreclosure sale w/c cannot be compeeled to reconvey
husb’s acct PBC regularly furnished RMC monthly statements showing its accounts balances but it’s NOT the 19.4 har to Carlos= NO.
practice of RMC to check these monthly statements reposing complete trust and confidence on PBC.
SC: 1. Cert. of title conclusive upon whole world BUT subject to right of person deprived of land thru fraud
3. RMC upon discov. filed suit in RTC w/c ruled infav. of RMC CA affirmed 7 deleted exemplary & atty’s
to bring action for reconveyance

ISSUE: W/n proximate cause of loss is PBC’s negligence= YES 2. As banking institution, mortgagee must exercise due diligence before entering into said contract. Judicial
SC: 1. PBC’s teller-Mabayad, was negligent in validating, officially stamping and signing all deposit slips notice is taken of the standard practice for banks, before approving loan, to send reps. to land premises & to
prepared and presented by Yabut, despite duplicate copy NOT completely accomplished; odd circumstance investigate who are real owners thereof; since it’s impressed w/ public interest, they are expected to
alone that such duplicate lacked one vital information (name of Acct. holder) should have already put her exercise more care & prudence than private individuals in their dealings
on guard.
- Here, DBP’s rep. came to know of property for 1st time in 1979 when he inspected it to determine whether
2. This is coupled by PBC’s negli- in its careless selection and supervision of Mabayad exemplified in PBC’s portion occupied by Carlos and mortgaged by him to DBP was included in TCT w/c means that when land
Manager’s testimony that while he ordered investigation of incident, he never came to know that blank was mortgaged by Sps in 1972, no investigation was made by DBP, failing to exercise due care and diligence
deposit slips were validated in total disregard of bank's validation procedures; only after lapse of more than in establishing condition of the land as regards its actual owners and possessors before it entered into
(7) years that bank manager became aware of the practice of teller Mabayad mortgage contract; also DBP was already informed by Gaudencio Beduya that Carlos occupied land; instead
-Proxim. cause- cause w/c in natural and continuous sequence, unbroken by any efficient intervening cause, of inquiring into Carlos' occupation over land, DBP simply proceeded w/ foreclosure sale, pretending that no
produces injury, w/o w/c result would not have occurred; also assuming that RMC was negligent in doubts surround ownership of land covered
entrusting cash to dishonest employee, CANNOT be denied that PBC, thru its teller, had last clear chance to
prevent injury, simply by faithfully observing their self-imposed validation procedure 3. Decree of registration extinguished a right acquired by person when such right refers to
lien/encumbrance on land NOT right of ownership w/c was not annotated on title; Regis. NEVER mode of
3. For banks, degree of diligence is more than that of good father of a family considering fiduciary nature of acquiring ownership Carlos been in OCEN possession of property since 1950 corroborated by witness
their relationship w/ their depositors, banks are duty bound to treat accts. of their clients w/ highest degree testim & tax decs; his possession tacked to that of his predecessor Mumar, w/c dates back to 1917 thus
of care; utmost fidelity; as a business affected w/ public interest bank is under obligation to treat accts of its more than 30 years elapsed before decree of registration was issued in favor of Alvarez; hence entitled to
depositors w/ meticulous care, always having in mind fiduciary nature of their relationship. reconveyance w/c may be filed at any time since it’s in actual possession of land.
-While RMC never checked monthly statements of account sent by PBC it NOT change that were it not for
wanton and reckless negligence of PBC’s employee loss would not have occurred. -DBP NOT estopped from questioning Carlos’ title since upon learning that land occupied by Carlos was also
covered by TCT, DBP immediately demanded full payment of loan and cancelled mortgage contract w/
4. Considering that fraud was committed for more than 1 yr., common human experience dictates that Carlos.
there’s collusion between Yabut and Mabayad thus PBC entitled to claim reimbursement from Mabayad for
whatever they shall be ordered to pay in this case; damages mitigated because of RMC’s contrib. negli of
NOT checking monthly statements sent by PBC

1. Pet. for mandamus &prohibition, w/ prelim. inj. seeking establishment of joint and solidary liability to 1. Pet. & Sps. Pugao entered into an agreement whereby Pet. purchased from Pugaos 2 parcels of land w/
P350K, against CBP & OBM on alleged failure of OBM to return time deposits made by Serrano and assigned agreem. that titles to lots be transferred to Pet. upon full payment of purchase price and owner's copies of
to him, & that CBP failed to exercise strict supervision over OBM to protect depositors and general public TCTs be deposited in safety deposit box (SDB)of any bank they rented SDB of SB w/c signed contract that
SB NOT depositary neither has possession nor control of it & SB NO interest in said contents 2 renter's
2. Serrano made time deposit of 150K w/ OBM & Concepcion’s time deposit of 200K was assigned to him keys were given, 1 to Pet & other to Pugaos; guard key remained in SB; SDB has 2 keyholes, w/c may be
despite his demands for encashment of time deposits from OBM, NO time deposit cert. was honored by opened only by 1 guard key together w/ 1 renter’s key Ramos offered to buy said land hence Pet &
OBM CBP admits that it’s w/ duty of administering banking system of Republic but denies duty to exercise Pugaos went to SB to open SDB and get title but when opened yielded no titles, thus ramos withdrew offer
most stringent supervision of banks; OBM while operating, was only on limited degree of banking operations
since Monetary Board decided in its Reso. to prohibit OBM from making new loans in view of its chronic 2. Pet. filed Damages against SB w/ CFI Pasig, Metro Manila SB’s Answer- no cause of action because of
reserve deficiencies; CBP NOT guarantor of permanent solvency of any banking institution; CBP denied that pars. 13 and 14 of contract of lease states loss of any of items contained in box NOT give rise to an action
constructive trust was created in favor of Serrano when their time deposits were made w/ OBM since against it CFI infav. of SB dismissing Pet’s com CA affirmed CFI on theory that contract executed by Pet
during that time OBM NOT insolvent bank; CBP NO knowledge of Serrano’s claim that props. given by OBM & SB is a contract of lease in w/c SB NO right to open box because it had neither the possession nor control
as additional collaterals to CBP for OBM’s overdrafts and emergency loans were acquired thru use of
depositors' money of Serrano ISSUE: Is contractual relation between commercial bank and another party in contract of rent of SDB w/
respect to its contents placed by latter one of bailor and bailee or one of lessor and lessee= BAILOR &BAILEE
3. In a case in SC (Ramos vs CBP) , OBM sought to prevent CBP from closing/declaring it insolvent, and
liquidating its assets Serrano filed motion to intervene w/c was denied by SC SC ruled in that case infav. SC: 1. Contract for the rent of SDB NOT an ordinary contract of lease but NOT contract of deposit that is to
of OBM thus Serrano filed a motion for judgment praying for a decision adjudging CBP jointly and be strictly governed by Civil Code on deposit; contract in the case at bar is a special kind of deposit; cannot
severally liable w/ OBM be ordinary contract of lease because full and absolute possession and control of SDB NOT given to joint
renters; thus US prevailing rule is that relation betwee bank renting out SDB and its customer w/ respect to
ISSUE: W/n claim of Serrano’s pet. for mandamus & prohib is proper= NO its contents is that of a bailor and bailee, bailment being for hire and mutual benefit.
SC: 1. Nature of Serrano’s claims- recovery of time deposits plus interest from OBM and recovery of
damages against CBP for its alleged failure to strictly supervise acts of OBM and protect interests of its 2. Sec. 72 of General Banking Act-bank receive in custody funds, documents, and valuable objects, and rent
depositors by virtue of constructive trust created when CBP required them to increase its collaterals for its SDB for safeguarding; primary function is still found w/in parameters of contract of deposit; renting out of
overdrafts said emergency loans, said collaterals allegedly acquired through the use of depositors money. SDB NOT independent from, but related to said principal function; in absence of any stipulation prescribing
degree of diligence required, that of good father of family is to be observed; Hence, any stipulation
- shoud be ventilated in CFI since NOT proper in actions for mandamus and prohibition as NO clear abuse of exempting depositary from any liability arising from loss of thing deposited on account of fraud, negligence
discretion by CBP in its exercise of supervision over OBM, and if there was, Serrano NOT proper party to or delay would be void for being contrary to law and public policy.
raise that question, but rather OBM; Neither to prohibit since questioned acts of CBP (acts of dissolving and
liquidating OBM), w/c Serrano here intends to use as his basis for damages against CBP had been -Here Par. 13 and 14 of contract of Lease (bank NOT depositary of contents & NO interest therein) are
accomplished long time ago. inconsistent w/ Bank's responsibility as depositary under Section 72(a) of General Banking Act; NOT correct
to assert that Bank has neither possession nor control of contents since in fact, SDBox itself is located in its
2. Both parties overlooked nature of bank deposits when Serrano claimed that there should be created a premises and is under its absolute control; moreover, SB keeps guard key
constructive trust in his favor when OBM la increased its collaterals in favor of CBP for OBM’s overdrafts and
emergency loans, since these collaterals were acquired by the use of depositors' money. -Pet. should be dismissed, but on grounds that SB’s exoneration cannot be based on characterization of
impugned contract of lease, but rather on fact that no competent proof was presented to show that SB was
-Bank deposits are irregular deposits; they are loans because they earn interest & to be treated as loans and aware of agreement between Pet & Pugaos to effect that titles were withdrawable from SDB only upon both
are covered by law on loans since bank can use the same; Serrano in making time deposits earning interests parties' joint signatures, and NO evidence submitted to reveal that loss of titles was due to fraud/negligence
w/ OBM was creditor of OBM NOT depositor & OBM was the debtor; failure of OBM to honor time deposit of SB, thus contract was one of deposit
is failure to pay obligation as debtor NOT breach of trust arising from depositary's failure to return subject
matter of the deposit.
5. BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner, appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked
vs. with "X" — meaning unsecured, while the line with the words "this loan is wholly/partly secured by" is
HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents. followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint
account of Velasco and Lim with a balance of P331,261.44.
Leonen, Ramirez & Associates for petitioner.
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated
Constante A. Ancheta for private respondents. 18 August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC]
and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and
Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and
definitive judicial action or a settlement between and among the contesting parties thereto." 7 Paragraph 02
of the Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their
alleged interests in the Account Balance shall have been established with finality, ample
The petitioner urges us to review and set aside the amended Decision1 of 6 March 1992 of respondent Court and sufficient power as shall be necessary to retain said Account Balance and enable
of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect
Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands of principal and/or accrued interest.
(successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and
Benigno D. Lim. The Court of Appeals had affirmed the dismissal of the complaint but had granted the
And paragraph 05 thereof reads:
defendants' counterclaim for P331,261.44 which represents the outstanding balance of their account with
the plaintiff.
The acceptance of this holdout shall not impair the right of Comtrust to declare the loan
payable on demand at any time, nor shall the existence hereof and the non-resolution of
As culled from the records and the pleadings of the parties, the following facts were duly established:
the dispute between the contending parties in respect of entitlement to the Account
Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or
Private respondents Eastern Plywood Corporation (Eastern) and Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" shall default in payment of all obligations and liabilities thereunder.
account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of
the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in
In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig,
the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of
entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the
Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco
whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of
and Lim. The money therein was placed in the money market.
Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs of
Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at divide among themselves the amount withdrawn. 8
P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as
President and General Manager of Eastern, 2 one-half of this amount was provisionally released and
Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a
transferred to one of the bank accounts of Eastern with CBTC. 3
complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. The
complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch 19 of the said court, then
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim
Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the
by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and interests thereon after deducting the amount due on the promissory note.
General Manager. 4The loan was payable on demand with interest at 14% per annum.
After due proceedings, the trial court rendered its decision on
For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on 15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled
demand to the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own that "the promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this
capacity and as President and General Manager of Eastern. No reference to any security for the loan agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the
promissory note to set off the loan even though the same has no fixed maturity." 11 As to the defendants' The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an
counterclaim, the trial court, recognizing the fact that the entire amount in question had been withdrawn by unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is
Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the "said no question that the promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was
claim cannot be awarded without disturbing the resolution" of the intestate court. 12 not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation
by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the
Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-G.R. note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the note
CV No. 25739. subject to the Holdout Agreement.

On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear
however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that
of their counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply
1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred
with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the
not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank
CBTC/BPI should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account was has the option to exercise. 19
claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44
representing the outstanding balance in the bank account of defendants." 14 Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was
not in any way precluded from demanding payment from Eastern and from instituting an action to recover
On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on
subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to
respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the
that amount are established as a result of a final and definitive judicial action or a settlement between and promissory note for P73,000.00. Its suit for the enforcement of the note was then in order and it was error
among the contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-
court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of 42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal.
the defendants to set off the amount of P73,000.00 covered by the promissory note.
The "suspensive condition" theory of the petitioner is, therefore, untenable.
Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They
interpret the findings of both the trial and appellate courts that the money deposited in the joint account of The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the
Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the return of the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit
joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of
Lim." And because the latter are the rightful owners of the money in question, the suspensive condition money in banks and similar institutions shall be governed by the provisions concerning simple loan."
does not find any application in this case and the bank had the duty to set off this deposit with the loan. In Serrano vs. Central Bank of the Philippines, 21 we held that bank deposits are in the nature of irregular
They add that the ruling of the lower court that they own the disputed amount is the final and definitive deposits; they are really loans because they earn interest. The relationship then between a depositor and a
judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit;
P73,000.00 representing the security required for the note and must return the rest. 16 hence, it was payable on demand of the depositor. 22

The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto. The account was proved and established to belong to Eastern even if it was deposited in the names of Lim
and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment
We gave due course to the petition and required the parties to submit simultaneously their memoranda. thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of
Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such
withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money
The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the
deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern
existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account
that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was
subject of the Holdout Agreement after its withdrawal by the heirs of Velasco.
being claimed by the heirs of Velasco.23
Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw DECISION
the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no
judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final PANGANIBAN, J.:
determination or adjudication that the account belonged to Velasco. We have ruled that when the
ownership of a particular property is disputed, the determination by a probate court of whether that
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt
property is included in the estate of a deceased is merely provisional in character and cannot be the subject
is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain
of execution. 24
the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it
thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the
Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that
no right to pay to persons other than those in whose favor the obligation was constituted or whose right or the latter waived his right to be notified thereof, or to give consent thereto. This is especially true where, as
authority to receive payment is indisputable. The payment of the money deposited with BPI that will in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at
extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to
authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does not pay the creditor and had no more reason to bind himself anew to the subsequent obligations.
extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in
utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a
The Case
third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not
extinguish its obligation to the true depositor, Eastern.
This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of
Court. Petitioner assails the December 22, 1998 Decision1 of the Court of Appeals (CA) in CA-GR CV No.
In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The
56203, the dispositive portion of which reads as follows:
award on the counterclaim is sustained subject to a modification of the interest.
"WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant
WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No.
Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the
25735 is hereby MODIFIED. As modified:

(1) Private respondents are ordered to pay the petitioner the promissory note for
"Furthermore, [Respondent] Rodolfo M. Cuenca’s counterclaim is hereby DISMISSED for lack of merit.
P73,000.00 with interest at:
"In all other respect[s], the decision appealed from is AFFIRMED."2
(a) 14% per annum on the principal, computed from
18 August 1978 until payment;
Also challenged is the April 14, 1999 CA Resolution,3 which denied petitioner’s Motion for Reconsideration.
(b) 12% per annum on the interest which had accrued up to the date
of the filing of the complaint, computed from that date until payment Modified by the CA was the March 6, 1997 Decision4 of the Regional Trial Court (RTC) of Makati City (Branch
pursuant to Article 2212 of the Civil Code. 66) in Civil Case No. 93-1925, which disposed as follows:

(2) The award of P331,264.44 in favor of the private respondents shall bear interest at "WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo
the rate of 12%per annum computed from the filing of the counterclaim. M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum of ₱39,129,124.73
representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and
the sum of ₱100,000.00 as attorney’s fees and litigation expenses and to pay the costs.
No pronouncement as to costs.
The Facts
RODOLFO M. CUENCA, respondent. The facts are narrated by the Court of Appeals as follows:5
"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (‘Sta. Ines’) is a of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (₱6,100,000.00). To cover said drawdown, SIMC duly
corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit ‘C’).
Department of Environment and Natural Resources (‘DENR’).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-
Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (₱8,000,000.00) to assist the latter appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled ‘Adolfo A. Angala vs.
in meeting the additional capitalization requirements of its logging operations. Universal Holdings, Inc. and Rodolfo M. Cuenca’. Said shares were bought by Adolfo Angala who was the
highest bidder during the public auction.
"The Credit Approval Memorandum expressly stated that the ₱8M Credit Loan Facility shall be effective until
30 November 1981: "Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from
[Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand
‘JOINT CONDITIONS: [n]ineteen and 50/100 [p]esos (₱6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover
the amounts of the abovementioned additional loans against the credit line.
‘1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines
plus JSS of Rodolfo M. Cuenca.
"Appellant SIMC, however, encountered difficulty6 in making the amortization payments on its loans and
requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant
‘2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the
SIMC’s request and signified its approval in a letter dated 18 February 1988 (Exhibit ‘G’) wherein SBTC and
company’s duly authorized signatory/ies;
defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to
restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to
‘3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this extend to defendant-appellant Sta. Ines the following loans:
connection, a Makati account shall be opened prior to availment on lines;
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (₱8,800,000.00), to be
‘4. Lines shall expire on November 30, 1981; and applied to liquidate the principal portion of defendant-appellant Sta. Ines[‘] total outstanding indebtedness
to [Petitioner] Security Bank (cf. P. 1 of Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’,
‘5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written Expediente, et Vol I, pp. 33 to 34) and
notice to the Borrower.’ (Emphasis supplied.)
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (₱3,400,000.00), to be
"To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant
SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit ‘A’) over some of its machinery and Sta. Ines to [Petitioner] Security Bank (cf. Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’,
equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Expediente, at Vol. II, p. 33 to 34).’
Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit ‘B’) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows: "It should be pointed out that in restructuring defendant-appellant Sta. Ines’ obligations to [Petitioner]
Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred
xxx xxx xxx [t]housand [p]esos (₱6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-
Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19
‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the December 1980 (Exhibit ‘3-Cuenca’, Expediente, at Vol. II, p. 331), was not segregated from, but was instead
bank for the payment, upon demand and without the benefit of excussion of whatever amount x x x the lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and
client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the DLS/74/47/86 (Exhibits ‘D’, ‘E’, and ‘F’, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-
substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit appellant Sta. Ines which were not secured by said Indemnity Agreement.
accommodation(s) x x x .’ (Emphasis supplied).
"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-
"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the ₱8M-Credit appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of
Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount [Petitioner] Security Bank:
of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit
accommodation. It noted that the 1989 Loan Agreement had been executed without notice to, much less
RL/74/596/88 ₱8,800,000.00 consent from, Cuenca who at the time was no longer a stockholder of the corporation.

RL/74/597/88 ₱3,400,000.00 The appellate court also noted that the Credit Approval Memorandum had specified that the credit
accommodation was for a total amount of ₱8 million, and that its expiry date was November 30, 1981.
Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an
TOTAL ₱12,200,000.00
amount not exceeding ₱8 million.

(Exhibits ‘H’ and ‘I’, Expediente, at Vol. II, pp. 338 to 343). It further held that the restructuring of Sta. Ines’ obligation under the 1989 Loan Agreement was
tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under Article
"To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, 2079 of the Civil Code, such extension extinguished the surety.
[Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October
1989 (Exhibit ‘5-Cuenca’, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to
31 October 1989 provides: materially alter or modify the principal obligation after the expiry date of the credit accommodation.

‘1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE Hence, this recourse to this Court.7
MILLION TWO HUNDRED THOUSAND PESOS (₱12,200,000.00), Philippines [c]urrency (the ‘Loan’). The loan
shall be released in two (2) tranches of ₱8,800,000.00 for the first tranche (the ‘First Loan’) and The Issues
₱3,400,000.00 for the second tranche (the ‘Second Loan’) to be applied in the manner and for the purpose
stipulated hereinbelow. In its Memorandum, petitioner submits the following for our consideration:8

‘1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrower’s present "A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as
total outstanding indebtedness to the Lender (the ‘indebtedness’) while the Second Loan shall be applied to surety under the Indemnity Agreement for the payment of the principal amount of twelve million two
liquidate the past due interest and penalty portion of the Indebtedness.’ (Underscoring supplied.) (cf. p. 1 of hundred thousand pesos (₱12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988
Exhibit ‘5-Cuenca’, Expediente, at Vol. I, p. 33) and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other
charges due thereon;
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to
[Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent
[p]esos (P1,757,000.00) (Exhibits ‘8’, ‘9-P-SIMC’ up to ‘9-GG-SIMC’, Expediente, at Vol. II, pp. 38, 70 to 165) Cuenca’s liability under the Indemnity Agreement covered only availments on SIMC’s
credit line to the extent of eight million pesos (P8,000,000.00) and made on or before 30
"Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite November 1981;
demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters
dated 5 June 1991 (Exhibit ‘K’) and 27 June 1991 (Exhibit ‘L’), respectively. ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of
SIMC’s indebtedness under the ₱8 million credit accommodation was tantamount to an
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint extension granted to SIMC without Respondent Cuenca’s consent, thus extinguishing his
for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;
a quo, x x x from which [Respondent] Cuenca appealed."
iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring
Ruling of the Court of Appeals of SIMC’s indebtedness under the ₱8 million credit accommodation constituted a
novation of the principal obligation, thus extinguishing Respondent Cuenca’s liability
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the under the indemnity agreement;
1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such novation
extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and president
B. Whether or not Respondent Cuenca’s liability under the Indemnity Agreement was extinguished by the Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
payments made by SIMC;
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings
C. Whether or not petitioner’s Motion for Reconsideration was pro-forma; and other papers shall be done personally. Except with respect to papers emanating from the court, a resort
to other modes must be accompanied by a written explanation why the service or filing was not done
D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of personally. A violation of this Rule may be cause to consider the paper as not filed."
the 1997 Rules of Civil Procedure."
Respondent maintains that the present Petition for Review does not contain a sufficient written explanation
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement why it was served by registered mail.
novated the original credit accommodation and Cuenca’s liability under the Indemnity Agreement; and (b)
whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal, We do not think so. The Court held in Solar Entertainment v. Ricafort13 that the aforecited rule was
extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary mandatory, and that "only when personal service or filing is not practicable may resort to other modes be
matters, the procedural questions raised by respondent will also be addressed. had, which must then be accompanied by a written explanation as to why personal service or filing was not
practicable to begin with."
The Court’s Ruling
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca "by
The Petition has no merit. registered mail in lieu of personal service due to limitations in time and distance." 14 This explanation
sufficiently shows that personal service was not practicable. In any event, we find no adequate reason to
reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.
Preliminary Matters: Procedural Questions

First Issue: Original Obligation Extinguished by Novation

Motion for Reconsideration Not Pro Forma

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as
Respondent contends that petitioner’s Motion for Reconsideration of the CA Decision, in merely rehashing
the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the
period for filing the present Petition for Review.9 Consequently, the Petition was filed out of time.10
"ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier
point incompatible with each other."
passed upon and rejected by the appellate court. The Court has explained that a movant may raise the same
arguments, precisely to convince the court that its ruling was erroneous.11
Novation of a contract is never presumed. It has been held that "[i]n the absence of an express agreement,
novation takes place only when the old and the new obligations are incompatible on every point." 15 Indeed,
Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina
the following requisites must be established: (1) there is a previous valid obligation; (2) the parties
Valley Development Corporation v. Flojo,12 the Court explained that a pro forma motion had no other
concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new
purpose than to gain time and to delay or impede the proceedings. Hence, "where the circumstances of a
case do not show an intent on the part of the movant merely to delay the proceedings, our Court has
refused to characterize the motion as simply pro forma." It held:
Petitioner contends that there was no absolute incompatibility between the old and the new obligations,
and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not
"We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon
change the original loan in respect to the parties involved or the obligations incurred. It adds that the terms
the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather
of the 1989 Contract were "not more onerous."17 Since the original credit accomodation was not
than literally. The right to appeal, where it exists, is an important and valuable right. Public policy would be
extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.
better served by according the appellate court an effective opportunity to review the decision of the trial
court on the merits, rather than by aborting the right to appeal by a literal application of the procedural
rules relating to pro forma motions for reconsideration." We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan
Agreement extinguished the obligation18 obtained under the 1980 credit accomodation. This is evident from
Service by Registered Mail Sufficiently Explained
its explicit provision to "liquidate" the principal and the interest of the earlier indebtedness, as the following subrogated to the creditor’s remedies against the principal debtor upon the maturity date. The surety is said
shows: to be entitled to protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period."
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower’s present
total outstanding Indebtedness to the Lender (the "Indebtedness") while the Second Loan shall be applied Binding Nature of the Credit Approval Memorandum
to liquidate the past due interest and penalty portion of the Indebtedness."19 (Italics supplied.)
As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan Agreement were used "to pay- that the credit accommodation was only for ₱8 million, and that it was for a period of one year ending on
off" the original indebtedness serves to strengthen this ruling.21 November 30, 1981. Petitioner objects to the appellate court’s reliance on that document, contending that
it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation internal use.
demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the
amount of loan was not to exceed ₱8 million,22 the 1989 Agreement provided that the loan was ₱12.2 We disagree. It was petitioner itself which presented the said document to prove the accommodation.
million. The periods for payment were also different. Attached to the Complaint as Annex A was a copy thereof "evidencing the accommodation." 27 Moreover, in
its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:
Likewise, the later contract contained conditions, "positive covenants" and "negative covenants" not found
in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook "from time to time and "4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the Bank a credit line in
upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional
documents and writings as may be necessary or proper to effectively carry out the provisions and purposes capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval
of this Loan Agreement."23 Likewise, SIMC agreed that it would not create any mortgage or encumbrance on Memorandum dated 10 November 1980."
any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.24
Clearly, respondent is estopped from denying the terms and conditions of the ₱8 million credit
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity accommodation as contained in the very document it presented to the courts. Indeed, it cannot take
Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil advantage of that document by agreeing to be bound only by those portions that are favorable to it, while
Code, which provides: denying those that are disadvantageous.

"ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory Second Issue: Alleged Waiver of Consent
obligations may subsist only insofar as they may benefit third persons who did not give their consent."
Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his consent to any
Alleged Extension modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent
to, the same."28 Respondent’s consent or waiver thereof is allegedly found in the Indemnity Agreement, in
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the ₱8 million original which he held himself liable for the "credit accommodation including [its] substitutions, renewals,
accommodation; it was not a novation.25 extensions, increases, amendments, conversions and revival." It explains that the novation of the original
credit accommodation by the 1989 Loan Agreement is merely its "renewal," which "connotes cessation of
an old contract and birth of another one x x x."29
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its
purpose was to "liquidate," not to renew or extend, the outstanding indebtedness. Moreover, respondent
did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original ₱8 million At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without
credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the consent of the surety extinguishes the latter’s obligation. As the Court held in National Bank v.
the Civil Code, which specifically states that "[a]n extension granted to the debtor by the creditor without Veraguth,30 "[i]t is fundamental in the law of suretyship that any agreement between the creditor and the
the consent of the guarantor extinguishes the guaranty. x x x." In an earlier case, 26 the Court explained the principal debtor which essentially varies the terms of the principal contract, without the consent of the
rationale of this provision in this wise: surety, will release the surety from liability."

"The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor In this case, petitioner’s assertion - that respondent consented to the alterations in the credit
without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to
391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the respondent to whom no notice need be given. The latter’s liability would thus be more burdensome than
total amount of eight million pesos (₱8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an
a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala obligation more onerous than that of the principal.35
Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST
PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges The present controversy must be distinguished from Philamgen v. Mutuc,36 in which the Court sustained a
thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the stipulation whereby the surety consented to be bound not only for the specified period, "but to any
CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor extension thereafter made, an extension x x x that could be had without his having to be notified."
of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or
amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s)
In that case, the surety agreement contained this unequivocal stipulation: "It is hereby further agreed that
including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the
in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same
aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the
terms and conditions as herein provided without the necessity of executing another indemnity agreement
CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts,
for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the
books and records of the BANK, plus interest and expenses arising from any agreement or agreements that
bond which may be granted under this indemnity agreement."
may have heretofore been made, or may hereafter be executed by and between the parties thereto,
including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the
aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the In the present case, there is no such express stipulation.1âwphi1 At most, the alleged basis of respondent’s
BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend
accommodation(s), all of which are incorporated herein and made part hereof by reference." the original obligation without the consent of the surety or notice thereto.

While respondent held himself liable for the credit accommodation or any modification thereof, such clause Continuing Surety
should be understood in the context of the ₱8 million limit and the November 30, 1981 term. It did not give
the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains
without informing or getting the consent of respondent who was solidarily liable. Taking the bank’s that there was no need for respondent to execute another surety contract to secure the 1989 Loan
submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, Agreement.
₱100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he
consented to all alterations and extensions thereof. 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.37 In Dino v. CA,38 the Court held that "a
Indeed, it has been held that a contract of surety "cannot extend to more than what is stipulated. It is continuing guaranty is one which covers all transactions, including those arising in the future, which are
strictly construed against the creditor, every doubt being resolved against enlarging the liability of the within the description or contemplation of the contract of guaranty, until the expiration or termination
surety."31 Likewise, the Court has ruled that "it is a well-settled legal principle that if there is any doubt on thereof."
the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x.
Ambiguous contracts are construed against the party who caused the ambiguity."32 In the absence of an To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit
unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration accommodation: (1) that the obligation should not exceed ₱8 million, and (2) that the accommodation
of the credit accommodation, we cannot sustain petitioner’s view that there was such a waiver. 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.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have
absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 million obtained on November 26,
upon notice to the borrower, pursuant to this condition: 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
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written after November 30, 1981 and which exceeded the stipulated P8 million ceiling.
notice to the Borrower."33
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan
We reject petitioner’s submission that only Sta. Ines as the borrower, not respondent, was entitled to be obtained after the payment of the original one, which was covered by a continuing surety agreement. At the
notified of any modification in the original loan accommodation.34 Following the bank’s reasoning, such 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 WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
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. SO ORDERED.

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

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.