A.M. No. P-38 - IN RE: Motion for Reconsideration of Administrative Order No. 353

On November 19, 1980, Security Bank and Trust Co. (SBTC) granted Dynetics, Inc. a short-term export loan line of ₱25,000,000 under an Advisory Letter-Agreement, secured by a deed of assignment with pledge of export letters of credit and purchase orders equivalent to 100% of their face value.
The credit line was renewed periodically, the last renewal being on January 24, 1985, increasing the facility to ₱26,000,000. Between February and May 1985, Dynetics availed itself of ₱25,074,906.16 under 34 promissory notes and corresponding trust receipts.

On April 20, 1982, Dynetics obtained a US$700,000 swap loan from SBTC; petitioner Antonio M. Garcia and Vicente B. Chuidian executed an Indemnity Agreement on April 26, 1982 to secure this obligation.
Dynetics did not immediately draw on the US$700,000 facility. The swap facility was later reduced to US$500,000, renewed quarterly (last on April 22, 1985), and secured by a Continuing Suretyship executed by Garcia; Dynetics issued a promissory note for this US$500,000 drawdown.
Dynetics defaulted on the swap loan due July 22, 1985. SBTC foreclosed on a chattel mortgage (executed without Garcia’s knowledge) over machinery and sold the collateral at public auction on September 15, 1985 for ₱6,850,861.30, resulting in a deficiency of ₱3,596,758.72.
Dynetics also defaulted on the export loan, accruing a balance of over ₱464,000,000 by June 30, 1989.

SBTC sued Dynetics, Garcia, and Chuidian for recovery of the unpaid balances. Dynetics challenged the promissory notes’ validity and security arrangements; Garcia argued lack of demand, prior payment, and that the chattel mortgage superseded his surety obligations.
The Regional Trial Court (Makati, Branch 58) rendered judgment on March 9, 1992: it held Dynetics liable for ₱24,743,935.35 (export loan principal) plus interest and penalties; ₱3,596,758.72 (swap deficiency); 20% attorney’s fees; litigation expenses; and costs. The complaint against Garcia was dismissed; SBTC was ordered to pay him ₱100,000 attorney’s fees and the attachment on his properties was lifted.
On August 12, 1994, the Court of Appeals modified the RTC decision and held Garcia jointly and severally liable with Dynetics for the unpaid export principal, swap deficiency, accrued interest, penalties, 20% attorney’s fees, litigation expenses of ₱100,000, and costs; it reinstated attachment on his shares.
Garcia’s motion for reconsideration was denied on April 7, 1995. He filed a petition for review on certiorari with the Supreme Court on August 4, 1995.

Does Garcia’s liability as surety under the Indemnity Agreement and Continuing Suretyship extend to Dynetics’s export loan?
Did the execution of the chattel mortgage extinguish Garcia’s obligations as surety for the swap loan?
Are the penalty charges and attorney’s fees awarded against Garcia reasonable?