Molino vs. Security Diners International Corporation

A surety who expressly waives discharge in case of novation in a continuing suretyship undertaking remains liable for the principal debtor's obligations even after the underlying agreement is modified or replaced, and the creditor may proceed directly against the surety without first obtaining judgment against the principal debtor.

Security Diners International Corporation ("SDIC") operates a credit card system under the name Diners Club, extending credit accommodation to cardholders for purchases from member establishments. SDIC issues two types of cards: the Regular (Local) Card, with a ₱10,000 credit limit, and the Diamond (Edition) Card, with unlimited purchasing privileges. A surety is required for either card. Danilo A. Alto, petitioner Jeanette D. Molino's brother-in-law, applied for a Regular Card on July 24, 1987, with petitioner signing as surety. The Surety Undertaking contained express provisions waiving discharge upon novation or extension of time, declaring the undertaking continuing in nature, and stipulating that the indication of a credit limit would not relieve the surety of liability for charges in excess thereof.

On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Diners Club Card with SDIC, designating his sister-in-law, Jeanette D. Molino, as surety. Danilo signed the printed application form, and Jeanette signed the Surety Undertaking attached thereto. The Surety Undertaking bound Jeanette jointly and severally with Danilo to pay SDIC all obligations and charges incurred in connection with the use of the Diners Club Card, including fees, interest, attorney's fees, and costs. It expressly provided that any change or novation in the agreement, or any extension of time granted by SDIC, would not release the surety, the undertaking being continuing in nature and subsisting until all obligations were fully paid. It further stipulated that the indication of a credit limit would not relieve the surety of liability for charges incurred in excess of that limit.

On the basis of the completed application and Surety Undertaking, SDIC issued Diners Card No. 36510293216-0006 to Danilo, who used the card and initially paid his obligations. On February 8, 1988, Danilo wrote SDIC requesting that his Regular Card be upgraded to a Diamond (Edition) Card. As a requirement of SDIC, Danilo secured Jeanette's approval. On March 2, 1988, Jeanette signed a note certifying her approval of the request of Danilo and Gloria Alto to upgrade their card from regular to diamond edition. Danilo's request was granted, and he was issued a Diamond (Edition) Diners Club Card with unlimited purchasing privileges.

Danilo used the upgraded card and made purchases from member establishments. By October 1, 1988, he had incurred credit charges plus appropriate interest and service charges in the aggregate amount of ₱166,408.31, on which he defaulted. SDIC demanded payment from both Danilo and Jeanette, but neither paid. On November 9, 1988, SDIC filed a collection action against both in the Regional Trial Court of Makati, Branch 145, docketed as Civil Case No. 88-2381.

Danilo failed to file an Answer, and during the pre-trial conference respondent moved to have the complaint dismissed against him without prejudice to a subsequent re-filing, leaving Jeanette as the lone defendant. In her Answer with Compulsory Counterclaim, Jeanette claimed that her liability under the Surety Undertaking was limited to ₱10,000.00 and that she did not expressly and categorically agree to act as surety for Danilo in a higher amount. The trial court dismissed the complaint, finding that while Jeanette clearly bound herself as surety under the Regular Card, there was no evidence that she consented to act as surety under the upgraded Diamond Card; the note she signed was merely a statement of approval of the upgrade request, not an assumption of liability for debts under the upgraded card. The trial court further noted that at the time of upgrading, Danilo had no outstanding credit card debts, since approval of an upgrade required payment of all billings for the preceding three months.

• Limited Liability Under Original Card: Petitioner argued that her liability under the Surety Undertaking was limited to ₱10,000.00, the maximum credit limit for a Regular Diners Club Card, and that she did not expressly and categorically agree to act as surety for Danilo in an amount higher than that.
• Novation Extinguished Suretyship: Petitioner maintained that the note she signed approving the upgrade rendered the Surety Undertaking executed under the previous card "without probative value, immaterial and irrelevant," as it covered only the liability of the surety in the use of the regular credit card by the principal debtor.
• No Liability Absent Adjudication of Principal Debtor: Petitioner argued that, unlike ordinary solidary debtors, a surety does not incur liability unless the principal debtor is first held liable, and since Danilo Alto was dropped as defendant, she could not be held liable as surety.

• Novation of Suretyship: Whether the upgrading of Danilo Alto's credit card from Regular to Diamond Edition constituted a novation that extinguished the Surety Undertaking signed by petitioner.
• Direct Liability of Surety: Whether petitioner could be held liable as surety notwithstanding that the principal debtor, Danilo Alto, was not held liable, having been dropped as defendant in the complaint.

• Novation of Suretyship: No. The upgrading constituted a novation of the original agreement, but the novation did not release petitioner from her surety obligations because the Surety Undertaking expressly waived discharge in case of change or novation, and declared the undertaking continuing in nature.
• Direct Liability of Surety: Yes. Because the Surety Undertaking expressly provided for solidary liability, respondent could proceed directly against petitioner without first obtaining judgment against the principal debtor, pursuant to Article 1216 of the Civil Code.

• Novation of Suretyship: Novation as a mode of extinguishing obligations may be effected either by explicit declaration or by material incompatibility (implied novation). The test of incompatibility is whether the two obligations can stand together, each having its independent existence; if they cannot, the latter novates the first. The upgrading of Danilo's card was undoubtedly a novation of the original agreement, since it was committed with the intent of canceling and replacing the first card. However, the novation did not serve to release petitioner from her surety obligations because the Surety Undertaking she signed expressly provided that any change or novation in the agreement would not release her, that the undertaking was continuing and would subsist until all obligations were fully paid, and that the indication of a credit limit would not relieve her of liability for charges in excess thereof. The extent of a surety's liability is determined by the language of the suretyship contract itself. Article 1370 of the Civil Code provides that 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 plain language of the undertaking admitted of no additional interpretation. This case was indistinguishable from Pacific Banking Corporation vs. Intermediate Appellate Court, where a guarantor who signed an undertaking with identical waiver-of-discharge and continuing-obligation provisions was held liable to the full extent of the cardholder's indebtedness notwithstanding the credit limit.

• Direct Liability of Surety: The Surety Undertaking expressly provided that petitioner's liability was solidary. A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary to a valid principal obligation, his liability to the creditor is direct, primary, and absolute. There being no question that Danilo incurred debts of ₱166,408.31, an obligation shared solidarily by petitioner, respondent was within its rights to proceed singly against petitioner as surety and solidary debtor, without prejudice to any action it might later file against Danilo, until the obligation was fully satisfied. This is provided under Article 1216 of the Civil Code, which allows the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously. Petitioner, a graduate of business administration with considerable banking experience, knew the full import of the Surety Undertaking she executed and had the option to withdraw her suretyship when Danilo upgraded his card, but instead approved the upgrading.

• Nature and Extent of Surety's Liability — The extent of a surety's liability is determined by the language of the suretyship contract or bond itself. Where the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control (Article 1370, Civil Code). A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary, and absolute.
• Continuing Suretyship and Waiver of Discharge Upon Novation — Where a surety expressly waives discharge in case of any change or novation in the agreement governing the underlying obligation, and declares the undertaking to be continuing in nature, the surety remains liable notwithstanding subsequent modifications or replacements of the original agreement. The surety's obligation subsists until all obligations of the principal debtor have been fully paid and satisfied.
• Novation — Novation as a mode of extinguishing obligations may be done in two ways: by explicit declaration, or by material incompatibility (implied novation). The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. The will to novate, whether totally or partially, must appear by express agreement of the parties or by their acts which are too clear or unequivocal to be mistaken.
• Creditor's Right to Proceed Against Solidary Debtors — Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one shall not be an obstacle to those subsequently directed against the others, so long as the debt has not been fully collected. A surety whose liability is solidary may thus be proceeded against directly without first obtaining judgment against the principal debtor.

• "The extent of a surety's liability is determined by the language of the suretyship contract or bond itself." — This passage states the controlling rule for interpreting suretyship agreements, anchoring the Court's refusal to read additional limitations into the plain terms of the Surety Undertaking.

• "A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable." — This formulation defines the nature of a surety's liability as direct, primary, and absolute, supporting the ruling that the creditor may proceed against the surety without first adjudicating the principal debtor's liability.

• "Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom." — This passage articulates the doctrinal distinction between the surety's contract being secondary in essence yet primary in liability to the creditor, resolving petitioner's argument that the principal debtor must first be held liable.

• Pacific Banking Corporation vs. Intermediate Appellate Court, 203 SCRA 496 (1991) — Controlling precedent followed. Involved a Guarantor's Undertaking (in substance a contract of surety) for a credit card application. The guarantor argued his liability should be limited to the credit limit, but the Court held him liable to the full extent of the cardholder's indebtedness because the undertaking expressly waived discharge upon novation and was continuing in nature. The Court found the present case indistinguishable.
• Fortune Motors vs. Court of Appeals — Cited for the test of incompatibility in implied novation: whether the two obligations can stand together, each having its independent existence.
• Rizal Commercial Banking Corporation vs. Court of Appeals, 178 SCRA 739 (1989) — Cited for the principle that the extent of a surety's liability is determined by the language of the suretyship contract or bond itself.
• Luzon Surety Company, Inc. vs. Quebrar, 127 SCRA 295 (1984) — Cited alongside RCBC vs. CA for the same principle on the extent of surety's liability.
• Philippine National Bank vs. Pineda, 197 SCRA 1 (1991) — Cited for the principle that a surety is considered in law as being the same party as the debtor, with interwoven and inseparable liabilities.
• Garcia vs. Court of Appeals, 191 SCRA 493 (1990) — Cited for the principle that a surety's liability to the creditor is direct, primary, and absolute, notwithstanding the essentially secondary nature of the surety's contract.

• Article 1370, Civil Code — Provides that 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. Applied to uphold the plain language of the Surety Undertaking, which expressly waived discharge upon novation and declared the undertaking continuing.
• Article 1216, Civil Code — Provides that the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously, and that demand against one is not an obstacle to subsequent demands against the others so long as the debt has not been fully collected. Applied to sustain respondent's right to proceed singly against petitioner as surety and solidary debtor without first obtaining judgment against the principal debtor.
• Article 1229, Civil Code — Provides that the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, and may also reduce the penalty if it is iniquitous or unconscionable even without performance. Cited to acknowledge the Court's power to equitably reduce penalties, though no reduction of the principal liability was granted under the circumstances.

Melo, Panganiban, and Sandoval-Gutierrez, JJ., concurred. Vitug, J., concurred in the result (pro hac vice).