G.R. No. L-31600 - Prudential Bank and Trust Co. vs. Community Builders Co., Inc.

Prudential Bank & Trust Co. (Prudential) extended an overdraft credit line to Community Builders Co., Inc. (Community) on current accounts.
In exchange for this credit accommodation, Community agreed to provide security for its obligations by executing two deeds of assignment.

Both deeds of assignment were executed on the same day that the credit line was granted.
The first deed dealt with Community’s savings deposit, while the second deed concerned receivables from a government contract.

Stipulated that in consideration of the “loan, overdraft or credit accommodation” extended by Prudential, Community assigned to the bank all its rights, title, and interest in the sum of P100,000.00 along with interest, derived from its savings deposit (Savings Account No. 9827).
Provided that, in the event the loan was not paid on demand or at maturity, Prudential was expressly authorized to apply the savings deposit to settle Community’s indebtedness.

Recited that Community, for the credit line and as security for the payment of P140,000.00 (plus interest) and for future financial accommodations, assigned its rights, title, and interest in 10% of all collections under its contract with the Republic of the Philippines—after deducting 10% for governmental retentions.
The “collections” referred to receivables from a contract for the construction of the Airmen’s Dormitory and Mess Building for the Armed Forces of the Philippines.
Evidenced by the use of the word “security,” the deed was intended to secure Community’s loan obligations rather than to effect an outright sale of receivables.

Alpha Insurance Co., Inc. posted a surety bond (the following day) in the amount of P40,000.00 to guarantee Community’s obligations under the credit line.
An indemnity agreement was executed, wherein Filadelfo Rojas, Community’s General Manager, assumed personal liability to cover potential claims under Alpha’s bond.

Community’s overdraft account expired without payment of the advances taken.
Prudential applied the savings deposit (amounting to P159,405.63) to partially settle Community’s indebtedness, leaving a remaining balance of P44,533.86 unpaid despite repeated demands from Prudential.
Prudential filed a suit in the Manila Court of First Instance against Community and Alpha Insurance Co., Inc. for collection of the unpaid balance.
In its answer, Alpha Insurance Co., Inc. set up a cross-claim against Community and later filed a third-party complaint against Filadelfo Rojas based on the indemnity agreement.
The lower court rendered a judgment dismissing Prudential’s complaint as well as Alpha’s claims, holding that the deed of assignment of collections operated to release the defendants from their obligations.
Both Prudential and Alpha appealed the judgment; the appeal was forwarded to the Supreme Court as it raised only questions of law.

Whether the second deed of assignment—pertaining to 10% of the collections from Community’s contract with the Republic—was intended to serve as security for Community’s obligation or was to be considered an outright sale (assignment) of receivables.
Whether the use of the term “security” in the deed should be given its plain, literal meaning, thereby reflecting the parties’ true intention.

Determining the role of contemporaneous acts (such as the posting of the surety bond and the execution of the indemnity agreement) in establishing the contractual intent.
Assessing whether the deeds, when read in conjunction with the credit line agreement and subsequent conduct, clearly indicate that security was meant to cover Community’s financial obligations.

Whether Community remains liable for the balance outstanding under the credit arrangement.
To what extent Alpha Insurance Co., Inc. is solidarily liable under its surety bond, and the corresponding obligations of Community and Filadelfo Rojas to reimburse Alpha for amounts disbursed.