G.R. No. L-34959 - Philippine Commercial and Industrial Bank vs. Court of Appeals

Philippine Commercial and Industrial Bank (PCIB) filed a complaint on January 7, 1966, in the Court of First Instance (CFI) of Manila.
The complaint involved a loan transaction where defendants Community Builders, Inc. and Filadelfo Rojas borrowed P150,000 from PCIB.
Alpha Insurance and Surety Co., Inc. (ALPHA) issued Surety Bond No. G-1689 in the amount of P50,000 to guarantee payment of the loan.
The promissory note evidencing the loan was dated September 26, 1962, whereas the surety bond was executed earlier, on August 22, 1960.

In its answer with cross-claim against Community Builders and Rojas, ALPHA admitted the issuance of the surety bond.
ALPHA asserted several defenses:

The surety bond was issued for an amount (P50,000) less than the indebtedness claimed by PCIB (P150,000).
The bond was executed before the promissory note was created.
The debt was allegedly paid through the assignment of Filadelfo Rojas’ receivables from the Armed Forces of the Philippines.

PCIB contended that the answer admitted not only the execution of the bond but also, by reference, that the bond secured the promissory note.
The answer, however, included a specific denial in paragraphs addressing knowledge of the promissory note and the debt, thus creating an inconsistency regarding the relation between the bond and the note.

During the pre-trial conference, defendants Rojas and Community Builders failed to appear and were declared in default.
The trial judge’s pre-trial order summarized:

The existence of the loan evidenced by a promissory note dated September 26, 1962.
The execution of the surety bond (Surety Bond No. G-1689) in the amount of P50,000 to secure the said loan.
That the key issue for trial was whether the defendants had already paid the amount stated in the promissory note by virtue of the assignment of receivables.

ALPHA’s position, as reiterated both before trial (in its Memorandum and Motion for Reconsideration) and before the appellate court, maintained that:

The surety bond was limited to securing a discounting line credit of P50,000 for Community Builders.
The bond was executed before the promissory note was created, thereby questioning its relation to the debt evidenced by the promissory note.
The debt under the promissory note had been settled through the assignment of receivables, which was not an issue disposed of by the pre-trial order.

Ordering ALPHA, Rojas, and Community Builders to pay P50,000 plus attorney’s fees and costs.
Directing Rojas and Community Builders additionally to pay the remaining P100,000.

Rojas and Community Builders’ appeal was dismissed for lack of proper service.
ALPHA’s appeal was successful in reversing the CFI decision based on the argument that the surety bond did not pertain to the promissory note.

PCIB subsequently petitioned the Supreme Court, contending that the appellate court improperly ruled on a matter of fact not raised in the original pleadings or pre-trial order.

Whether the issue regarding the relation of the surety bond to the promissory note was properly raised and disposed of in the pleadings or at the pre-trial conference.

Did ALPHA’s answer, by admitting the existence of the surety bond, also amount to an admission that the bond secured the promissory note?
Was the pre-trial order, which limited the issues for trial, adequate in excluding or including the defense that the bond bore no relation to the promissory note?

Whether the surety bond executed by ALPHA, which was for a discounting line credit accommodation amounting to P50,000, could be held liable for the full debt of P150,000 as evidenced by the promissory note.

Determination of the contractual obligations assumed by ALPHA in the surety bond.
The impact of the temporal relationship – the surety bond being executed prior to the promissory note.

Whether the appellate court erred in reversing the lower court’s decision on the basis of these issues.

Considering judicial principles on the liberal construction of pleadings and the strict limitation of surety liability to what is contractually agreed.
The appropriateness of raising issues not voluntarily disposed of by the parties at pre-trial.