Garon vs. Project Movers Realty and Development Corporation

A surety’s liability is strictly limited to the undertaking expressed in the surety bond and cannot be extended by implication to obligations the surety did not guarantee. Where a surety bond secures only the assignment of leasehold rights as collateral for a loan, the surety is not liable for the payment of the principal debt. A creditor who sues to collect the debt rather than to enforce the security conveyed by the bond cannot recover from such surety.

On December 19, 1997, Project Movers Realty and Development Corporation (PMRDC) borrowed ₱6,088,783.68 from Emerita Garon, evidenced by Promissory Note No. PMRDC-97-12-332, with interest at 36% per annum and maturity on December 19, 1998. On December 31, 1997, PMRDC obtained a second loan from Garon in the amount of US$189,418.75, covered by Promissory Note No. PMRDC-D97-12-333, bearing 17% annual interest and maturing on December 31, 1998. Both loans were secured by PMRDC’s undertaking to assign to Garon its leasehold rights over commercial spaces at Monumento Plaza Commercial Complex, covered by Original Certificate of Leasehold Title (OCLT) Nos. 1108 and 0161, respectively. To guarantee the assignment of those leasehold rights, PMRDC procured a surety bond from Stronghold Insurance Company, Inc. (SICI) on November 7, 1997, with a penal sum of ₱12,755,139.85 and an expiration date of November 7, 1998. When PMRDC defaulted, Garon demanded performance of the assignment and, upon non-compliance, filed a collection suit.

• The Loan Transactions: On December 19, 1997, PMRDC obtained a loan from Garon in the amount of ₱6,088,783.68, covered by Promissory Note No. PMRDC-97-12-332, with a stipulated 36% per annum interest and maturity on December 19, 1998. On December 31, 1997, PMRDC obtained a second loan of US$189,418.75, covered by Promissory Note No. PMRDC-D97-12-333, at 17% per annum interest, maturing on December 31, 1998. Each promissory note contained an acceleration clause providing that failure to pay any portion of the note or interest would constitute default, making the entire obligation immediately due and payable without demand.

• The Security and Surety Bond: As security for the loans, PMRDC undertook to assign to Garon its leasehold rights over spaces at Monumento Plaza Commercial Complex covered by OCLT Nos. 1108 and 0161. To guarantee that assignment, PMRDC procured surety bond No. 67831 from SICI on November 7, 1997. The bond expressly stated: “this bond is conditioned to guarantee the assignment of Leasehold Rights of the Principal at Monumento Plaza Building in favor of the Obligee over the Certain Original Certificate of Leasehold Title No. 0161 and 0108 (sic).” The penal sum was ₱12,755,139.85, and the bond was to expire on November 7, 1998, to be cancelled five days thereafter unless the surety was notified of any existing obligations thereunder.

• Default and Demands: PMRDC defaulted on its payment obligations. On November 3, 1998, Garon sent a demand letter to PMRDC requiring execution and delivery of a unilateral Deed of Assignment of its leasehold rights over the subject properties. On November 6, 1998, Garon sent a separate demand to SICI for compliance with its obligation under the surety bond. Neither PMRDC nor SICI performed.

• Complaint and Defenses: Garon filed a complaint for collection in the RTC. Her prayer sought payment from PMRDC of the principal sums under both promissory notes, accrued interest and penalties, attorney’s fees, and a declaration that SICI was solidarily liable to pay ₱12,755,139.85 under the bond. The complaint did not pray for the assignment of leasehold rights.

  PMRDC denied executing the promissory notes, characterizing them as mere roll-overs of earlier notes, claimed it had already complied by procuring the surety bond, argued that Garon’s demand on SICI constituted a waiver of its claim against PMRDC, and assailed the stipulated interest as unconscionable. SICI, in its answer, raised special and affirmative defenses: the complaint stated no cause of action and was prematurely filed, its obligation had been extinguished or discharged, liability on the bond had prescribed, and the bond guaranteed only its investment in PMRDC’s project. SICI also asserted that Garon failed to minimize losses by not requiring surrender of the OCLTs before releasing the loans, and set up a cross-claim against PMRDC under an indemnity agreement.

• Summary Judgment and RTC Ruling: The RTC granted Garon’s motion for summary judgment, finding no genuine issue as to the material facts. It held that the assignment of leasehold rights was an accessory obligation, and Garon’s demand on the bond was not a waiver of the right to collect from PMRDC. The RTC ruled that SICI’s liability arose upon PMRDC’s failure to assign the leasehold rights, not on the maturity of the loans, and that demand was made before the bond’s November 7, 1998 expiration. It ordered PMRDC to pay the principal sums, interest, and penalties, and held SICI solidarily liable for the penal sum of ₱12,755,139.85 along with attorney’s fees and costs.

• CA Decision: On appeal by SICI, the Court of Appeals affirmed the summary judgment but absolved SICI of liability. It held that the surety bond had expired on November 7, 1998, prior to the maturity dates of the loans on December 19 and 31, 1998; thus, when PMRDC defaulted, the bond was no longer effective.

• Maturity and Acceleration: Petitioner contended that the Court of Appeals gravely erred in ruling that the promissory notes matured only on December 17 and 31, 1998, respectively. She invoked the acceleration clause in each note, which provided that default in any payment rendered the entire obligation immediately due and demandable. Consequently, PMRDC’s default triggered the maturity of the loans before the bond’s expiration on November 7, 1998, and SICI’s liability attached at the moment PMRDC failed to assign the leasehold rights, not upon the stated loan maturity dates.

• Timeliness of Demand on Surety: Petitioner argued that her demand on SICI on November 6, 1998 was made within the life of the bond, and the surety’s obligation became fixed upon PMRDC’s default in assigning the leasehold rights. The surety bond was part of the record, and SICI did not deny the authenticity of the promissory notes containing the acceleration clause; thus, the contents of those notes could be read in evidence.

• Liability Based on Non-Assignment: Petitioner asserted that because SICI admitted PMRDC never assigned the leasehold rights, SICI should be held liable under the bond, which was procured precisely to guarantee that assignment.

• Non-Coverage of the Loan: Respondent SICI maintained that the surety bond did not guarantee the promissory notes or the payment of the loan. Its undertaking was solely to guarantee the assignment of leasehold rights; thus, it could not be made to answer for the principal obligation of PMRDC.

• Expiration of the Bond: Respondent argued that, in any event, its liability on the bond had expired on November 7, 1998, before the loans reached maturity on December 19 and 31, 1998. It contended that the obligation guaranteed had not yet matured at the time of demand.

• Premature and Unfounded Demand: Respondent asserted that at the time Garon sent her demand letter, the obligation guaranteed by the bond had not yet matured, rendering the demand ineffective. It further claimed that the bond never became effective because PMRDC never assigned the leasehold rights.

• Propriety of Summary Judgment: Before the appellate court, SICI argued that the RTC erred in granting summary judgment because genuine factual issues—including the authenticity and terms of the obligations—remained unresolved.

• Scope of Surety’s Undertaking: Whether the surety bond issued by SICI guaranteed the payment of PMRDC’s principal loan, or was limited solely to the assignment of the leasehold rights as security.

• Consequence of the Form of Action: Whether a complaint that seeks to collect the debt, rather than to enforce the assignment of leasehold rights, can support a claim against the surety under a bond that secures only that assignment.

• Timeliness of Demand and Expiration of the Bond: Whether demand on the surety was made before the bond expired, and whether the bond’s expiration prior to the stated loan maturity dates precluded liability.

• Scope of Surety’s Undertaking: The surety bond was limited to guaranteeing the assignment of leasehold rights; it did not cover the payment of the principal debt. The language of the bond was clear: it conditioned liability on the failure to assign the leasehold rights, not on the non-payment of the loans. A surety’s liability is determined exclusively by the terms of the suretyship contract and cannot be extended by implication beyond those terms. Because SICI was a stranger to the loan agreements between Garon and PMRDC, it could not be held answerable for an obligation it had not undertaken to guarantee. Thus, the bond could not be a source of liability for the sums due under the promissory notes.

• Consequence of the Form of Action: The complaint filed by Garon prayed for the payment of the principal debts, not for the assignment of the leasehold rights. By electing to enforce her right to collect the loan rather than her right to perfect the security of that loan, Garon sought to impose upon SICI a liability—payment of the debt—that went beyond the bond’s coverage. The action, as framed, sought solidary liability for the debt itself, which the surety had not contracted to secure. This confirmed that recovery from SICI could not be sustained.

• Timeliness of Demand and Expiration of the Bond: The liability of SICI as surety arose at the moment PMRDC failed to assign its leasehold rights upon Garon’s demand on November 3, 1998. The formal demand on SICI followed on November 6, 1998, before the bond expired on November 7, 1998. The demand was therefore timely, and the bond’s expiration did not extinguish a liability that had already attached. The CA’s contrary reasoning—that the bond had expired before the loans’ maturity dates—was not the proper basis for absolving SICI. Nonetheless, timeliness alone could not create liability where the bond did not cover the obligation sought to be enforced.

• Extent of Surety’s Liability: The liability of a surety is measured strictly by the language of the suretyship contract or bond. It cannot be extended by implication, beyond the precise terms of the undertaking. The surety is bound only to the extent, in the manner, and under the circumstances set forth in the bond.

• Separation of Principal and Accessory Obligations: A surety bond that guarantees only a security arrangement—such as the assignment of leasehold rights—does not thereby guarantee the principal obligation that the security supports. The surety’s accessory obligation is confined to the specific prestation it agreed to answer for, and the creditor cannot convert that undertaking into liability for a different obligation without exceeding the contractual boundaries.

• Literal Interpretation of Contracts (Art. 1370, Civil Code): Where the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of the stipulations controls. The surety bond’s unequivocal language conditioning liability on the assignment of leasehold rights precluded any construction that would render the surety liable for the payment of the loan.

• “The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself. It cannot be extended by implication, beyond the terms of the contract.” This passage articulates the controlling principle that circumscribes all surety obligations.

• “Since respondent’s undertaking under the surety bond was to guarantee the assignment of leasehold rights, the security of the principal debt, its obligation cannot extend to the payment of the principal obligation; to do so would mean going beyond the terms of the contract.” This excerpt directly ties the rule to the facts, highlighting that a surety for a collateral security does not become a surety for the debt.

• “If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.” The Court invoked the literal interpretation rule under Article 1370 to reject any expansive reading of the bond.

• Tiu Hiong Guan v. Metropolitan Bank & Trust Company, G.R. No. 144339, August 9, 2006 — Cited for the definition of suretyship and the rule that a surety’s liability cannot be extended beyond the terms of the contract; followed.

• Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction Corp., G.R. No. 139290, November 11, 2005 — Referred to for the principle that a surety is considered the same party as the debtor with inseverable liabilities; applied in relation to the direct nature of surety obligations but qualified by the limits of the bond.

• Molino v. SDIC, 415 Phil. 587 (2001) — Cited together with Rizal Commercial Banking Corporation v. Court of Appeals (G.R. No. 85396, October 27, 1989) for the rule that a surety’s liability is determined solely by the language of the bond; followed.

• International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No. 160324, November 15, 2005 — Invoked for the principle that contracts have the force of law between the parties; followed to underscore that the bond’s terms bound the parties.

• Article 1370, Civil Code — Applied to the interpretation of the surety bond. Because the terms of the bond clearly and unequivocally guaranteed only the assignment of leasehold rights, the literal meaning of its stipulations governed, precluding any construction that would make the surety liable for the payment of the loan.

Associate Justice Consuelo Ynares-Santiago (Chairperson), Associate Justice Ma. Alicia Austria-Martinez, Associate Justice Minita V. Chico-Nazario, and Associate Justice Antonio Eduardo B. Nachura concurred.