Toh vs. Solid Bank Corporation

An accommodation surety is discharged from liability when the creditor grants extensions of the principal debtor's obligations without complying with the preconditions for such extensions stipulated in the governing credit agreement, constituting an illicit extension under Article 2079 of the Civil Code, and when the creditor's acts or omissions impair or release securities that would have protected the surety's right of subrogation under Article 2080.

Solid Bank Corporation extended a P10 million "omnibus line" credit facility to First Business Paper Corporation (FBPC), a corporation engaged in the paper business. The credit facility was governed by a "letter-advise" dated 16 May 1993, which set forth the terms and conditions and the documentary requirements for opening the credit line. Among the required documents was a Continuing Guaranty to be signed by petitioner-spouses Luis Toh and Vicky Tan Toh, who were then Chairman of the Board and Vice-President of FBPC, respectively, and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li, who were President and General Manager, respectively. The "letter-advise" specified that domestic letters of credit were to be supported by a fifteen percent (15%) marginal deposit, extendible three times for thirty (30) days each, subject to a twenty-five percent (25%) partial payment per extension.

Solid Bank Corporation agreed to extend a P10 million "omnibus line" credit facility in favor of First Business Paper Corporation (FBPC), with the terms and documentary requirements set forth in a "letter-advise" dated 16 May 1993 addressed to FBPC and its President, Kenneth Ng Li. The credit facility required, among other documents, a Continuing Guaranty signed by petitioner-spouses Luis Toh and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li. At the time, Luis Toh was Chairman of the Board and Vicky Tan Toh was Vice-President of FBPC, while Kenneth Ng Li was President and Ma. Victoria Ng Li was General Manager. The "letter-advise" specified that domestic letters of credit were to be supported by a fifteen percent (15%) marginal deposit, extendible three times for thirty (30) days each, subject to a twenty-five percent (25%) partial payment per extension.

On 10 May 1993, more than thirty days from the date of the "letter-advise," the two sets of spouses signed the Continuing Guaranty, a public document prepared solely by Solid Bank. The instrument defined the contract as a surety agreement providing for the solidary liability of the signatories for any and all indebtedness of FBPC, with no maximum limit. It contained a de facto acceleration clause, waived the sureties' rights to notice or demand, and authorized the Bank to extend or change the time and manner of payment without notice to or further assent from the sureties. The Continuing Guaranty was to remain in full force and effect until a written revocation was served upon the Bank.

Beginning 16 June 1993, FBPC availed of the credit facility. By 17 November 1993, it had opened thirteen letters of credit and obtained loans totaling P15,227,510.00, secured by a series of trust receipts executed by FBPC officers Kenneth Ng Li, Ma. Victoria Ng Li, and Redentor Padilla. On 13 January 1994, the Bank learned that the Ng Li spouses had fraudulently departed from their conjugal home. The following day, the Bank served a demand letter upon FBPC and Luis Toh, invoking the acceleration clause in the trust receipts and claiming P10,539,758.68 in unpaid overdue accounts. On 17 January 1994, the Bank filed a complaint for sum of money with an ex parte application for a writ of preliminary attachment against FBPC and both sets of spouses, docketed as Civil Case No. 64047 before RTC-Br. 161, Pasig City.

Petitioner-spouses filed a joint answer admitting their involvement in FBPC from its incorporation in 1991 but alleging that beginning March 1993 they had already divested their shares in favor of Kenneth Ng Li, though the deeds of assignment were notarized only on 14 June 1993. They claimed it was impossible for them to have freely executed the Continuing Guaranty on 10 May 1993 since they had already withdrawn from FBPC. They further asserted that through a 12 May 1993 Board Resolution, Luis Toh was removed as authorized signatory and replaced by the Ng Li spouses and Redentor Padilla, and that they resigned from their positions as reflected in a 12 June 1993 Secretary's Certificate submitted to the SEC. Petitioners also claimed that in June 1993 they obtained from Kenneth Ng Li their exclusion from surety agreements with several banks, and that the other banks executed written surety agreements showing Kenneth Ng Li as the only surety.

The trial court found that petitioners voluntarily signed the Continuing Guaranty but absolved them of liability, reasoning that the surety was effective only while they were stockholders and officers of FBPC and that the Bank knew of their divestment and resignation. The Court of Appeals reversed, holding that the Continuing Guaranty was signed in their personal capacities, not as corporate officers, and remained in full force absent any written revocation. The appellate court also rejected petitioners' claim of material alterations in the "letter-advise." Petitioners' motion for reconsideration was denied, prompting the present Petition for Review.

• Due Process: Petitioner-spouses argued that the Court of Appeals denied them due process by failing to grant their motion for reconsideration and without bothering to consider their Reply with Motion for Oral Argument.
• Validity of the Continuing Guaranty: Petitioner-spouses maintained that the Continuing Guaranty was not legally valid and binding against them because it was executed long after they had withdrawn from FBPC.
• Extinguishment of Suretyship: Petitioner-spouses claimed the surety agreement was extinguished by material alterations of the "letter-advise" and the Continuing Guaranty, brought about by the acceleration clause in the trust receipts, the flight of their co-sureties, the grant of credit beyond the P10 million limit without marginal deposits, the Bank's inordinate delay in demanding payment, ghost deliveries and fictitious purchases, extensions without the required 25% partial payment, approval of another letter of credit after default, and an unmistakable pattern of fraud.

• Presumption of Regularity: Respondent Solid Bank argued that the appellate court is presumed to have passed upon all points raised in petitioners' Reply with Motion for Oral Argument, as the pleading formed part of the records.
• Competence of Petitioners: Respondent debunked petitioners' claim of being inexperienced and ignorant parties taken advantage of, asserting that petitioners are astute businessmen familiar with banking practice.
• Presumption of Authenticity: Respondent argued that the notarization of the Continuing Guaranty discredits the uncorroborated assertions against its authenticity and due execution.
• Res Judicata: Respondent contended that the trial court's finding that the surety agreement was valid and binding constituted res judicata, since petitioners failed to appeal therefrom.
• Waivers: Respondent pointed to the various waivers made by petitioner-spouses in the Continuing Guaranty to justify the extension of the due dates of the letters of credit.

• Due Process: Whether the Court of Appeals denied petitioner-spouses due process by failing to address their Reply with Motion for Oral Argument.
• Validity of the Continuing Guaranty: Whether the Continuing Guaranty is a valid and binding contract against petitioner-spouses personally, notwithstanding their divestment from FBPC.
• Scope of Surety Liability: Whether the sureties' liability under the Continuing Guaranty was limited to the period during which they were corporate officers and stockholders of FBPC.
• Extinguishment by Illicit Extension: Whether the Bank's extensions of the letters of credit without the required marginal deposit and partial payment discharged the sureties under Article 2079 of the Civil Code.
• Extinguishment by Impairment of Security: Whether the Bank's acts or omissions, including the release of attached properties and failure to preserve securities, discharged the sureties under Article 2080 of the Civil Code.

• Due Process: No. The appellate court is presumed to have passed upon all matters raised in the case, and its Resolution expressly referenced a "careful review of the records," which included the Reply with Motion for Oral Argument.
• Validity of the Continuing Guaranty: Yes. The Continuing Guaranty is a public document enjoying the presumption of authenticity and due execution, and the consistent finding of the courts a quo that petitioners voluntarily signed it is binding absent clear and convincing evidence to the contrary.
• Scope of Surety Liability: No. Nothing in the Continuing Guaranty restricts the sureties' undertaking to their tenure as corporate officers and stockholders; the obligations subsist until written revocation is served upon the Bank.
• Extinguishment by Illicit Extension: Yes. The Bank's extensions of letters of credit without the required 15% marginal deposit and 25% partial payment per extension were illicit extensions under Article 2079 of the Civil Code, discharging the sureties.
• Extinguishment by Impairment of Security: Yes. The Bank's failure to preserve securities, including the perfunctory abandonment of attached properties and the forfeiture of marginal deposit and partial payment requirements, discharged the sureties under Article 2080 of the Civil Code.

• Due Process: The presumption that all matters within an issue raised in a case were laid before the court and passed upon it applies. In the absence of evidence to the contrary, the appellate court is presumed to have discharged its task properly. The Resolution of 2 July 2002 expressly referenced a "careful review of the records," which necessarily included the Reply with Motion for Oral Argument, negating petitioners' claim of deprivation of due process.

• Validity of the Continuing Guaranty: The Continuing Guaranty is a public document that enjoys the presumption of authenticity and due execution. The consistent finding of both the trial court and the Court of Appeals that petitioners "voluntarily affixed their signature[s]" on the surety agreement is binding. Petitioners did not appeal the trial court's finding that they voluntarily executed the instrument. Absent clear, convincing, and more than preponderant evidence to the contrary, the validity of the Continuing Guaranty as a binding contract of petitioner-spouses was upheld.

• Scope of Surety Liability: The Continuing Guaranty contains no provision restricting the sureties' undertaking to their tenure as corporate officers or stockholders. The obligations assumed subsist upon the sureties, their heirs, executors, administrators, successors, and assigns, and remain in full force and effect until written notice of revocation is received by the Bank. If petitioners intended not to be charged as sureties after their withdrawal from FBPC, they could have terminated the agreement by serving the required notice of revocation. Citing Garcia vs. Court of Appeals, the Court ruled that a corporate officer who signs a surety agreement in his personal capacity is personally bound, and the limited liability doctrine may be waived by voluntarily binding oneself to payment of corporate debts.

• Extinguishment by Illicit Extension: The "letter-advise" required that domestic letters of credit be supported by a 15% marginal deposit, extendible three times for 30 days each, subject to a 25% partial payment per extension. The waiver in the Continuing Guaranty authorizing the Bank to "extend or change the time payment" is confined to the grant of an extension and does not surrender the prerequisites therefor as mandated in the "letter-advise." The Bank's own witness, Victor Ruben L. Tuazon, admitted that extensions were granted without the marginal deposit and with less than 25% partial payment. These extensions were not covered by the waiver in the Continuing Guaranty and constituted illicit extensions prohibited under Article 2079 of the Civil Code, which provides that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty." The Bank's witness himself characterized the roll-overs as involving "novation there on the original obligations." Any doubt on the terms and conditions of the surety agreement should be resolved in favor of the surety, pursuant to Philippine National Bank vs. Court of Appeals. Moreover, as accommodation sureties who received nothing out of the security contract, petitioners' waivers must be read strictissimi juris.

• Extinguishment by Impairment of Security: The Bank's omissions discharged the sureties under Article 2080 of the Civil Code, which provides that guarantors are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter. The Bank perfunctorily abandoned attached properties of FBPC except for two insignificant items, failed to verify whether trust receipts were used for their intended purpose, and forfeited the 15% marginal deposit and 25% partial payment requirements — all additional securities intended to protect both the Bank and the sureties. The Bank's failure to safe-keep these securities resulted in a material alteration of the principal contract (the "letter-advise"), releasing the surety. As stated in the cited treatise, if the suretyship contract was made upon the condition that the principal shall furnish additional security, and such security is afterwards released by the creditor, the surety is wholly discharged.

• Presumption of Authenticity of Public Documents — A notarized document enjoys the presumption of authenticity and due execution. In this case, the Continuing Guaranty being a public document, its validity was presumed, and the consistent factual finding that petitioners voluntarily signed it was binding absent clear, convincing, and more than preponderant evidence to the contrary.

• Personal Liability of Corporate Officers as Sureties — A corporate officer who signs a surety agreement in his personal capacity is personally bound; the limited liability doctrine protecting stockholders from personal liability for corporate debts may be waived by voluntarily binding oneself to payment of corporate debts. Cited from Garcia vs. Court of Appeals.

• Strictissimi Juris Interpretation of Accommodation Surety Agreements — Waivers in a surety agreement executed by accommodation sureties (those who receive nothing from the security contract) must be read strictissimi juris. The acts or omissions conceded by the sureties as not affecting the surety contract refer only to those occurring "in the premises" — those that have been the subject of the waiver — and stretch to no other.

• Illicit Extension Discharging the Surety (Article 2079, Civil Code) — An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. An extension is illicit when it does not comply with the preconditions stipulated in the governing credit agreement, such as the required marginal deposit and partial payment per extension. The surety is released because the illicit extension constitutes a conscious, separate, and binding agreement to extend the due date, not a mere failure or delay in demanding payment.

• Impairment or Release of Security Discharging the Surety (Article 2080, Civil Code) — Guarantors, even if solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter. The creditor is charged with the duty of retaining security or maintaining liens in the interest of the surety, and any release or impairment of such security discharges the surety to the extent of the value of the property or lien released.

• Material Alteration of the Principal Contract — If the suretyship contract was made upon the condition that the principal shall furnish the creditor additional security, and the security being furnished is afterwards released by the creditor, the surety is wholly discharged, without regard to the value of the securities released, for such a transaction amounts to an alteration of the main contract.

• "Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank 'may at any time, or from time to time, in [its] discretion x x x extend or change the time payment,' this provision even if understood as a waiver is confined per se to the grant of an extension and does not surrender the prerequisites therefor as mandated in the 'letter-advise.'" — This passage defines the scope of the surety's waiver: the Bank's authority to extend is limited to authorized extensions that meet the terms of the "letter-advise," and the waiver does not surrender the preconditions for extension.

• "The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code, '[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty.'" — This is the ratio decidendi applying Article 2079 to the facts: extensions without the required marginal deposit and partial payment are illicit and discharge the surety.

• "The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080 of the Civil Code, or at the very least, mitigate the liability of the surety up to the value of the property or lien released." — This passage applies Article 2080 to the Bank's failure to preserve securities, establishing the alternative ground for discharging the sureties.

• "if the suretyship contract was made upon the condition that the principal shall furnish the creditor additional security, and the security being furnished under these conditions is afterwards released by the creditor, the surety is wholly discharged, without regard to the value of the securities released, for such a transaction amounts to an alteration of the main contract." — This formulation from the cited treatise, adopted by the Court, establishes that release of conditioned security constitutes a material alteration of the principal contract, wholly discharging the surety.

• Garcia vs. Court of Appeals, G.R. No. 80201, 20 November 1990, 191 SCRA 493 — Followed. Established that a corporate officer who signs a surety agreement in his personal capacity is personally bound and cannot take refuge in the limited liability doctrine, having waived it by his own acts.
• Philippine National Bank vs. Court of Appeals, No. L-33174, 4 July 1991, 198 SCRA 767 — Followed. Held that any doubt on the terms and conditions of a surety agreement should be resolved in favor of the surety.
• Pacific Tabacco Corporation vs. Lorenzana, 102 Phil. 234 (1957) — Cited for the principle that accommodation sureties who received nothing out of the security contract are entitled to have waivers read strictissimi juris.
• People's Bank and Trust Company vs. Tambunting, No. L-29666, 29 October 1971, 42 SCRA 119 — Cited for the proposition that Article 2080 of the Civil Code applies to surety agreements, guaranty and surety being cognate contracts.
• Macondray and Company, Inc. vs. Piñon, No. L-13817, 31 August 1961, 2 SCRA 1109 — Cited for the principle that omission or negligence of the creditor in failing to safe-keep security results in material alteration of the principal contract and releases the surety.
• Fortune Motors vs. Court of Appeals, G.R. No. 112191, 7 February 1997, 267 SCRA 653 — Cited in support of the proposition that a surety's commitment remains in full force until written revocation is served upon the creditor.

• Article 2055, Civil Code — Provides that the liability of a surety is measured by the terms of his contract; while liable to the full extent thereof, his accountability is strictly limited to that assumed by its terms. Applied to confine the sureties' waivers to acts occurring "in the premises" of the Continuing Guaranty.
• Article 2079, Civil Code — Provides that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty." Applied to discharge the sureties because the Bank granted extensions of letters of credit without the required marginal deposit and partial payment, constituting illicit extensions.
• Article 2080, Civil Code — Provides that "[t]he guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter." Applied to discharge the sureties due to the Bank's perfunctory abandonment of attached properties and failure to preserve the marginal deposit and partial payment securities.
• Rule 131, Section 3(o), Rules of Court — Establishes the presumption that all matters within an issue raised in a case were laid before the court and passed upon it. Applied to reject the due process claim against the Court of Appeals.

Quisumbing, Austria-Martinez, and Tinga, JJ., concurred. Callejo, Sr., J., was on leave.