Wake Up, Philippines!

The debt, not the debtor

Posted in Laws, Supreme Court Decisions by Erineus on February 11, 2009

What is the nature of the liability of a surety under a continuing surety agreement? Is the suretyship agreement limited only to a single transaction or does it contemplate series of transactions? These questions are answered in this case of Bobby.

The case arose from alleged acts of fraud committed by Bobby’s friend Noli, commonly known in banking circles as “kiting operation” where Bobby was also implicated as a co-conspirator together with the bank manager since his bank account was used in the transfer of funds to Noli’s bank account by way of debit and credit memos.

To cover the transaction, the bank manager suggested that Noli apply for a credit line with Bobby as surety. So Bobby signed a Continuing Surety Agreement binding himself and warranting to the bank, “the prompt payment of all overdrafts, promissory notes, letters of credit, drafts, bills of exchange and other obligations of every kind and nature for which the principal (Noli) may now be indebted or may hereafter become indebted to the creditor (bank). Bobby’s liability however was limited to P300,000 plus interest.

The credit line however did not materialize. Instead Noli subsequently executed and delivered two Promissory Notes (PN) of P150,000 each payable on July 16, 1986 and August 5, 1986 with 24% interest per annum and penalty of 1/10 of 1% per day of the total amount due from date of default until full payment.

When Noli failed to pay the obligation covered by the PNs, the bank sued him and Bobby as well as the bank manager because of the alleged acts of fraud and for failure to pay the PNs.

The RTC rendered a decision in favor of the bank. But the court initially dismissed the case against Bobby because it found that Bobby did not participate in the alleged “kiting operation” or connived with Noli in committing the alleged fraudulent acts. But on motion for reconsideration, the RTC reversed itself in so far as it dismissed the case against Bobby. Consequently Bobby was also held jointly and severally liable with Noli for P300,000 with 22% interest per annum until fully paid pursuant to the continuing surety agreement he signed.

Bobby questioned the decision rendering him liable. He argued that said continuing surety agreement was not perfected because the principal obligation, which is the credit line did not materialize. He said that he was not liable for the PNs executed by Noli because they were not yet in existence when he signed the surety agreement. Was Bobby correct?

No. The fact that Bobby signed the surety agreement prior to the execution of the PNs does not negate his liability. Of course a surety is not bound to any particular obligation until that principal obligation is born. But it does not mean that the agreement itself is not valid even before the principal obligation intended to be secured thereby is born. A bank or financing company which anticipates entering into a series of credit transactions normally requires the projected principal debtors to execute a continuing surety agreement along with their sureties. With such a surety agreement, there would be no need to execute a separate surety contract for each financing or credit accommodation extended to the principal debtor.

As surety, Bobby’s liability is joint and several. He does not insure the solvency of the debtor, but rather the debt itself. Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute, or equivalent to that of a regular party to the undertaking. A surety becomes liable for the debt and obligation of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter (Totanes vs. China Banking Corp. G.R. 179880, January 19, 2009).

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

A LAW EACH DAY (Keeps Trouble Away)
By Jose C. Sison

Updated February 11, 2009 12:00 AM

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