Totally and primarily liable; continuing suretyship
SOURCE: Totally and primarily liable. Jose C. Sison (A LAW EACH DAY. KEEPS TROUBLE AWAY). February 11, 2004. philstar.com/opinion/2004/02/11/238468/totally-and-primarily-liable. E-mail: jcson@info.com.ph.
This is a case about a continuing suretyship. The questions that arose here is whether a suretyship may be given to secure a future debt, the amount of which may not be known at the time the surety agreement is executed, and how much of the indebtedness a surety is liable. This is the case of Albert, the Senior Vice President of a Steel Company (PBM).
On July 21, 1977 Albert signed, in his personal capacity and not as Senior Vice President, a Deed of Suretyship in favor of a commercial bank (the bank) wherein he undertook the prompt payment without demand or notice the whole or part of the notes, drafts, overdrafts and other credit obligation on which PBM may now be indebted or may hereafter become indebted to the bank up to the amount of P10 million, upon default of PBM to pay the whole or part of said indebtedness. The said deed further stipulates that Albert‚s liability shall be solidary, direct and immediate and not contingent.
On March 13 and August 6, 1980, the bank approved the letters of credit (L/C) application of PBM for $591,043.00 and $156,000.00 respectively. Upon actual availments of the L/C, Albert as Senior VP of PBM accomplished and delivered to the bank trust receipts covering the merchandise subject of the L/Cs wherein PBM is given the right to sell the merchandise and turn over the entire proceeds to the bank as payment of the L/Cs. Albert further executed an undertaking for each trust receipt which uniformly provide that he jointly and severally undertakes and agrees to pay the bank on demand all sums and amounts of money arising out of or pertaining to, and/or in any manner connected with the trust receipts.
On April 27, 1981, PBM obtained another P3.5 million trust loan from the bank with Albert signing as co-maker of the promissory note evidencing the loan, binding himself jointly and severally to pay the bank said amount of P3.5 million 30 days after date with interest of 18 percent per annum plus 2 percent of the principal sum as penalty and liquidated damages.
PBM defaulted in the payment of the trust receipts and the trust loan. Then on April 1, 1982, PBM and Albert filed a petition for suspension of payments with the Securities and Exchange Commission (SEC) seeking to suspend payment of PBM‚s obligations and praying that it be allowed to continue its normal business operations free from interference of creditors. Among the listed creditors was the bank. Thereafter, the SEC placed all of PBM‚s assets, liabilities and obligations under a rehabilitation receiver which submitted a rehabilitation plan where its liabilities to the different creditors including the bank had been reduced.Ten months later, the bank filed a complaint in court against PBM and Albert seeking the recovery of the full amount of the obligations of PBM evidenced by the two trust receipt and promissory note. Later on, the bank withdrew its complaint against PBM since it has already been placed under receivership by the SEC. For his defense, Albert contended among others that: he is not liable for the obligations of PBM contracted after the execution of the Deed of Suretyship; and that his obligation if any is limited to the amount stated in PBM‚s rehabilitation plan. He cited Article 1222 of the Civil Code which allows a solidary debtor like him to avail himself of all defenses derived from the nature of the obligation, not only those personal to him.
PBM defaulted in the payment of the trust receipts and the trust loan. Then on April 1, 1982, PBM and Albert filed a petition for suspension of payments with the Securities and Exchange Commission (SEC) seeking to suspend payment of PBM‚s obligations and praying that it be allowed to continue its normal business operations free from interference of creditors. Among the listed creditors was the bank. Thereafter, the SEC placed all of PBM‚s assets, liabilities and obligations under a rehabilitation receiver which submitted a rehabilitation plan where its liabilities to the different creditors including the bank had been reduced.Ten months later, the bank filed a complaint in court against PBM and Albert seeking the recovery of the full amount of the obligations of PBM evidenced by the two trust receipt and promissory note. Later on, the bank withdrew its complaint against PBM since it has already been placed under receivership by the SEC. For his defense, Albert contended among others that: he is not liable for the obligations of PBM contracted after the execution of the Deed of Suretyship; and that his obligation if any is limited to the amount stated in PBM‚s rehabilitation plan. He cited Article 1222 of the Civil Code which allows a solidary debtor like him to avail himself of all defenses derived from the nature of the obligation, not only those personal to him.
Was Albert correct?
No. SOURCE: Totally and primarily liable. Jose C. Sison (A LAW EACH DAY. KEEPS TROUBLE AWAY). February 11, 2004. philstar.com/opinion/2004/02/11/238468/totally-and-primarily-liable. E-mail: jcson@info.com.ph.
Albert is liable for credit obligations contracted by PBM before and after the execution of the Deed of Suretyship. This is evident from the tenor of the deed itself referring to amounts PBM "may now be indebted or may hereafter become indebted" to the bank. Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis of the contract denominated as continuing surety. A continuing surety is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions generally for an indefinite time or until revoked.
The bank, as creditor, has the right under the surety agreement to proceed against Albert for the entire amount of PBM’s loan. In granting the loan, the bank required Albert‚s surety to insure full recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety. This is also very clear from Article 1216 of the Civil Code which provides that the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand against one of them shall not be an obstacle to those which may be subsequently directed against others, so long as the debt has not been fully collected (Philippine Blooming Mills Inc. vs. Court of Appeals and Traders Royal Bank. G.R. 142381 October 15, 2003).
SOURCE: Totally and primarily liable. Jose C. Sison (A LAW EACH DAY. KEEPS TROUBLE AWAY). February 11, 2004. philstar.com/opinion/2004/02/11/238468/totally-and-primarily-liable. E-mail: jcson@info.com.ph.
