Lim vs. Security Bank Corporation

A Continuing Suretyship that expressly covers all credit accommodations extended by the bank to the debtor, including obligations thereafter owing, binds the surety for a loan obtained by the principal debtor even after the suretyship's execution; the surety's liability is direct, primary and absolute. Attorney's fees stipulated in the contract may be reduced by the courts if manifestly exorbitant.

Mariano Lim stood as surety for Raul Arroyo under a Continuing Suretyship in favor of Security Bank Corporation, an arrangement designed to cover a series of credit accommodations rather than a single loan. The agreement's definition of guaranteed obligations was broad enough to include future obligations, and the case tests the scope of that continuing suretyship under the Civil Code's provisions on guaranty for future debts.

Mariano Lim executed a Continuing Suretyship in favor of Security Bank Corporation to secure "any and all types of credit accommodation that may be granted by the bank hereinto and hereinafter" in favor of Raul Arroyo for the amount of ₱2,000,000.00, covered by a Credit Agreement/Promissory Note. The promissory note stated that the interest on the loan shall be 19% per annum, compounded monthly, for the first 30 days from the date thereof, and if the note is not fully paid when due, an additional penalty of 2% per month of the total outstanding principal and interest due and unpaid, shall be imposed. The Continuing Suretyship stipulated that petitioner's liability as surety is solidary and not contingent upon the pursuit of the bank of whatever remedies it may have against the debtor or the collaterals/liens it may possess; if any of the guaranteed obligations is not paid or performed on due date, the surety shall, without need for any notice, demand or any other act or deed, immediately become liable therefor and shall pay and perform the same. It defined "Guaranteed Obligations" as the obligations of the debtor arising from all credit accommodations extended by the bank to the debtor, including increases, renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the debtor presently or hereafter owing to the bank, as appears in the accounts, books and records of the bank, whether direct or indirect, and (ii) any and all expenses which the bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments. The loan for which respondent later sought to hold petitioner liable was obtained by the principal debtor six months after the execution of the Continuing Suretyship.

Raul Arroyo defaulted on his loan obligation. Thereafter, petitioner received a Notice of Final Demand dated August 2, 2001, informing him that he was liable to pay the loan obtained by Raul and Edwina Arroyo, including the interests and penalty fees amounting to ₱7,703,185.54, and demanding payment thereof. For failure of petitioner to comply with said demand, respondent filed a complaint for collection of sum of money against him and the Arroyo spouses. Since the Arroyo spouses could no longer be located, summons was not served on them, hence only petitioner actively participated in the case.

The CA later found that the proceeds from the foreclosure of the real estate and chattel mortgages were deducted only on June 20, 2001, although the public auctions were conducted on August 26, 1998 and September 7, 1999, respectively, and that the litigation expense incurred by respondent was ₱92,321.10, the amount it paid as filing fee.

• Hostile Witness Issue: Respondent maintained that the propriety of making petitioner a hostile witness cannot be raised for the first time on appeal.

• Liability under Continuing Suretyship: Whether petitioner may validly be held liable for the principal debtor's loan obtained six months after the execution of the Continuing Suretyship.
• Attorney's Fees: Whether the award of attorney's fees should be reduced.
• Computation of Indebtedness and Litigation Expenses: Whether the SC should revisit the CA's factual findings on the proper computation of total indebtedness and the amount of litigation expenses.
• Hostile Witness: Whether the propriety of making petitioner a hostile witness may be raised for the first time on appeal.

• Liability under Continuing Suretyship: Yes. The Continuing Suretyship expressly covered all credit accommodations extended by the bank to the debtor, including future obligations, and Article 2053 of the Civil Code allows a guaranty for future debts.
• Attorney's Fees: Yes. Attorney's fees stipulated in a contract are valid, but courts may reduce them if unreasonable; the award of 10% of the total amount due plus interest and penalties would exceed the principal and was manifestly exorbitant.
• Computation of Indebtedness and Litigation Expenses: No. These are factual matters satisfactorily addressed by the CA, and the SC is not a trier of facts.
• Hostile Witness: No. The issue cannot be raised for the first time on appeal.

• Liability under Continuing Suretyship: The SC described a contract of suretyship as an agreement whereby the surety guarantees the performance by the principal obligor of an obligation in favor of the obligee. Although the surety's obligation is accessory or collateral to the principal obligation, the surety's liability to the creditor is direct, primary and absolute; the surety is directly and equally bound with the principal. A continuing surety agreement is commonplace in financial and commercial practice and covers a projected series of credit transactions without need for a separate surety contract for each accommodation. The Continuing Suretyship executed by petitioner stated that he shall, without need for notice or demand, immediately become liable for all credit accommodations extended by the bank to the debtor, including increases, renewals, roll-overs, extensions, restructurings, amendments or novations, and all obligations presently or hereafter owing, whether direct or indirect. The SC held that these stipulations are valid and constitute the law between the parties, as Article 2053 of the Civil Code allows a guaranty for future debts the amount of which is not yet known. Petitioner was therefore bound by the terms of the Continuing Suretyship and liable for the principal of the loan, together with interest and penalties, even if the loan was obtained by the principal debtor after the execution of the Continuing Suretyship.
• Attorney's Fees: The SC noted that Article 2208 of the Civil Code does not prohibit recovery of attorney's fees if there is a stipulation in the contract. A stipulation for attorney's fees is in the nature of liquidated damages and is a penal clause binding on the obligor so long as it does not contravene law, morals, or public order. The obligor is bound to pay the stipulated amount without need for proof of the existence and measure of damages caused by the breach. However, courts retain the power to reduce attorney's fees if they are unreasonable. In Trade & Investment Corporation of the Philippines vs. Roblett Industrial Construction Corp., the SC equitably reduced attorney's fees because interests and penalties had ballooned to thrice the principal debt. The SC found that the same situation obtained here: an award of attorney's fees amounting to 10% of the principal debt, plus interest and penalty charges, would definitely exceed the principal amount, making the attorney's fees manifestly exorbitant. The SC therefore reduced the attorney's fees to 10% of the principal debt only.
• Computation of Indebtedness and Litigation Expenses: The SC held that the proper computation of the total indebtedness and the amount of litigation expenses are factual matters that had been satisfactorily addressed by the CA. The CA ruled that respondent should recompute the total amount due because the proceeds from the foreclosure of the real estate and chattel mortgages were deducted only on June 20, 2001, when the public auctions were conducted on August 26, 1998 and September 7, 1999, respectively; the proceeds should have been deducted from the indebtedness on the date the public auction was held. The CA also pointed out that the litigation expense incurred by respondent was ₱92,321.10, the amount it paid as filing fee, as shown by the Legal Fees Form. The SC reiterated that it is not a trier of facts and would not revisit these issues in the petition for review on certiorari.
• Hostile Witness: The SC agreed with respondent that the propriety of making petitioner a hostile witness cannot be raised for the first time on appeal. The issue was improperly raised in the petition for review on certiorari, so the SC did not address it.

• Continuing Suretyship — A continuing surety agreement covers a series of credit transactions and future obligations; the surety becomes liable for all credit accommodations extended by the bank to the debtor, including increases, renewals, roll-overs, extensions, restructurings, amendments or novations, and obligations presently or hereafter owing, even if the loan was obtained after the execution of the suretyship. The SC applied it to hold petitioner liable for the principal debtor's loan obtained six months after execution.
• Suretyship — A contract whereby a party guarantees performance by another of an obligation in favor of a third; although accessory to a valid principal obligation, the surety's liability to the creditor is direct, primary and absolute, and the surety is directly and equally bound with the principal. The SC used this to explain petitioner's solidary liability.
• Guaranty for Future Debts — Article 2053 of the Civil Code allows a guaranty to be given as security for future debts, the amount of which is not yet known. The SC applied this to validate the Continuing Suretyship covering future credit accommodations.
• Attorney's Fees as Liquidated Damages/Penal Clause — A stipulation for attorney's fees is valid if not contrary to law, morals, or public order and is strictly binding; it is in the nature of liquidated damages and a penal clause, but courts may reduce it if unreasonable. The SC reduced the award to 10% of the principal debt only because the original 10% of the total amount due plus interest and penalties would exceed the principal.

• "A contract of suretyship is an agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of another party, called the obligee." — The SC used this definition to frame the nature of petitioner's undertaking as surety.
• "The surety's obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal." — This passage explains why petitioner could be held directly and solidarily liable despite the accessory nature of suretyship.
• "Such stipulations are valid and legal and constitute the law between the parties, as Article 2053 of the Civil Code provides that '[a] guaranty may also be given as security for future debts, the amount of which is not yet known; x x x.'" — The SC relied on this to uphold the Continuing Suretyship's coverage of future credit accommodations.
• "However, even if such attorney's fees are allowed by law, the courts still have the power to reduce the same if it is unreasonable." — This is the basis for reducing the attorney's fees to 10% of the principal debt only.

• Philippine Charter Insurance Corporation vs. Petroleum Distributors & Service Corporation, G.R. No. 180898, April 18, 2012, 670 SCRA 166 — Cited for the definition and nature of a contract of suretyship.
• Stronghold Insurance Company, Inc. vs. Republic-Asahi Glass Corporation — Cited for the rule that the surety's obligation, though accessory, is direct, primary and absolute, and the surety is directly and equally bound with the principal.
• Saludo, Jr. vs. Security Bank Corporation, G.R. No. 184041, October 13, 2010, 633 SCRA 247 — Cited for the essence of a continuing surety agreement.
• Totanes vs. China Banking Corporation — Cited in Saludo for the practice and purpose of comprehensive or continuing surety agreements.
• Asian Construction and Development Corporation vs. Cathay Pacific Steel Corporation (CAPASCO), G.R. No. 167942, June 29, 2010, 622 SCRA 122 — Cited for the rule that the law allows recovery of attorney's fees under a written agreement.
• Titan Construction Corporation vs. Uni-Field Enterprises, Inc., 546 Phil. 12, 20-21 (2007) — Cited for the same rule on recovery of attorney's fees under a written agreement.
• Barons Marketing Corporation vs. Court of Appeals — Cited for the rule that attorney's fees may be in the nature of liquidated damages and the stipulation is a penal clause binding on the obligor.
• Trade & Investment Corporation of the Philippines vs. Roblett Industrial Construction Corp., 511 Phil. 127, 160 (2005) — Cited for the equitable reduction of attorney's fees where interests and penalties ballooned to thrice the principal debt.

• Article 2053, Civil Code — Provides that a guaranty may be given as security for future debts, the amount of which is not yet known. The SC applied it to uphold the Continuing Suretyship covering future credit accommodations and to hold petitioner liable for the loan obtained after its execution.
• Article 2208, Civil Code — Does not prohibit recovery of attorney's fees if there is a stipulation in the contract. The SC applied it to allow attorney's fees but reduced the award because it was unreasonable.
• Rule 45, Rules of Court — The petition for review on certiorari was filed under this rule. The SC also noted that issues not raised below, such as the hostile witness issue, cannot be raised for the first time on appeal.