G.R. No. 113931 - E. Zobel, Inc. vs. Court of Appeals

Case Summary (G.R. No. 113931)

Factual Background

Spouses Raul and Elea Claveria obtained a loan from Consolidated Bank and Trust Corporation in the principal sum of P2,875,000 to finance the purchase of two barges and one tugboat for their molasses business. The bank conditioned the loan on the execution of a chattel mortgage over the vessels and on the execution by E. Zobel, Inc. of a continuing guaranty in favor of the bank. The spouses executed the chattel mortgage and E. Zobel, Inc. executed the instrument titled “Continuing Guaranty.” The spouses defaulted at maturity. SOLIDBANK filed a complaint for sum of money with prayer for preliminary attachment against the spouses and E. Zobel, Inc.

Trial Court Proceedings

E. Zobel, Inc. moved to dismiss the complaint on the ground that its obligation was that of a guarantor whose liability had been extinguished under Article 2080, New Civil Code, because the bank had failed to register the chattel mortgage with the appropriate government agency and therefore the bank could not be subrogated to the rights secured by that mortgage. SOLIDBANK opposed, contending that the instrument created the relation of surety and not guaranty. The trial court denied the motion. The court interpreted the text of the instrument and held that, despite its title, the contract bound E. Zobel, Inc. as a surety and as an original promissor, joint and several with the borrower. The court therefore ruled Article 2080 inapplicable and ordered E. Zobel, Inc. to answer the complaint.

Court of Appeals Proceedings

E. Zobel, Inc. petitioned the Court of Appeals by certiorari, alleging grave abuse of discretion in the trial court’s denial of the motion to dismiss. The Court of Appeals found no grave abuse of discretion and dismissed the petition. A motion for reconsideration to the Court of Appeals was denied.

Issues Presented on Certiorari

E. Zobel, Inc. raised three principal issues before the Supreme Court: whether Article 2080, New Civil Code applied to its obligation under the continuing guaranty; whether the instrument constituted a guaranty or a contract of surety; and whether SOLIDBANK’s failure to register the chattel mortgage extinguished petitioner’s liability.

Parties’ Contentions

Petitioner contended that it was a guarantor whose obligation was collateral and distinct from the borrower, and that under Article 2080 it was released because the creditor could not be subrogated to the mortgage and preferences when the chattel mortgage was not registered. SOLIDBANK maintained that the Continuing Guaranty in fact created the relation of surety; that the instrument’s terms made petitioner an original promissor and joint and several obligor; and that even if Article 2080 were considered, the bank’s failure to register the chattel mortgage did not extinguish petitioner’s liability because petitioner bound itself irrespective of the existence or registration of collateral and waived defenses.

Supreme Court’s Determination of the Nature of the Obligation

The Court analyzed classical distinctions between surety and guaranty as reflected in authorities cited in the record. A contract of surety is accessory and makes the surety an original promissor who is bound with the principal by the same instrument and consideration; a guaranty is collateral, is often a separate undertaking and may discharge with indulgence of the creditor or without notice. Applying those tests to the instrument, the Court found that, notwithstanding its title “Continuing Guaranty,” the text unequivocally established an original, joint and several obligation by E. Zobel, Inc. The instrument recited that the undersigned was “now obligated to you as surety” and contained provisions by which SOLIDBANK need not exhaust remedies against the principal before holding the undersigned liable. The Court observed that the use of the word “guarantee” in commercial instruments often does not determine the legal nature of the undertaking when the parties’ intent and the instrument’s terms demonstrate a primary obligation. The Court therefore concluded that petitioner’s undertaking was that of a surety.

Application of Article 2080 and Precedent

Because the Court found the relationship to be one of surety and not guarantor, Article 2080, New Civil Code — which provides that guarantors are released when by some act of the creditor they cannot be subrogated to the rights, mortgages and preferences of the latter — did not apply. The Court relied on its prior ruling in Bicol Savings and Loan Association vs. Guinhawa, which held that Article 2080 is inapplicable where liability is as a surety. The Court thus rejected petitioner’s primary statutory argument.

Effect of Failure to Register the Chattel Mortgage

The Court addressed petitioner’s alternate contention that, even if characterized as a surety, SOLIDBANK’s failure to register the chattel mortgage nevertheless extinguished petitioner’s liability. The Court found that the Continuing Guaranty expressly bound petitioner “irrespective of the existence, value or condition of any collateral” and included waivers that precluded reliance on acts or omissions of the bank to impair the guaranty. The instrument authorized the bank to make the indebtedness due at its option upon cert

Case Syllabus (G.R. No. 113931)

Parties and Posture

E. ZOBEL, INC. was the petitioner who executed a written instrument denominated "Continuing Guaranty" in favor of CONSOLIDATED BANK AND TRUST CORPORATION (now SOLIDBANK).
SPOUSES RAUL AND ELEA R. CLAVERIA were the borrowers who obtained a loan to finance the purchase of two barges and one tugboat.
CONSOLIDATED BANK AND TRUST CORPORATION (now SOLIDBANK) filed a complaint for sum of money with prayer for preliminary attachment against the borrowers and E. ZOBEL, INC. after the borrowers defaulted.
The Regional Trial Court of Manila, Branch 51, denied E. ZOBEL, INC.'s motion to dismiss on the ground that the instrument evidenced an undertaking as surety.
The Court of Appeals dismissed the petition for certiorari seeking review of the trial court's orders.
The Supreme Court affirmed the decision of the Court of Appeals and imposed costs against E. ZOBEL, INC.

Key Facts

The borrowers obtained a loan in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos ( P 2, 875,000.00) to finance maritime vessels for their molasses business.
The loan was conditioned upon execution of a chattel mortgage over the vessels and the execution of a continuing guaranty in favor of the bank by E. ZOBEL, INC.
The borrowers defaulted on the loan upon maturity, prompting CONSOLIDATED BANK AND TRUST CORPORATION (now SOLIDBANK) to file suit on January 31, 1991.
E. ZOBEL, INC. moved to dismiss asserting that Article 2080 of the Civil Code released guarantors when the creditor cannot be subrogated to rights and that the bank failed to register the chattel mortgage.
CONSOLIDATED BANK AND TRUST CORPORATION (now SOLIDBANK) opposed the motion contending that the instrument created the obligation of a surety and not a guarantor.
The trial court and the Court of Appeals agreed with the bank that the instrument established suretyship and denied relief to E. ZOBEL, INC.

Contract Terms

The instrument expressly stated that the undersigned was "now obligated to you as surety" and that the undersigned "agrees to guarantee, and does hereby guarantee, the punctual payment" of indebtedness.
The instrument bound the undersigned jointly and severally to the obligations of the borrower and allowed the bank to declare indebtedness due and payable upon specified defaults without prior demand or notice.
The instrument authorized the bank to sell collateral and apply proceeds against obligations and expressly waived any right of redemption by the undersigned.
The instrument contained an express waiver of the benefits under Article 1837 (beneficio division) and declared the liability of the undersigned to be joint and several.
The instrument provided that the undersigned remained bound "irrespective of the existence, value or condition of any collateral" and that no act or omission by the bank would affect the guaranty.

Legal Issues

Whether the instrument denominated "Continuing Guaranty" obligated E. ZOBEL, INC. as a guarantor or as a surety.
Whether Article 2080 of the Civil Code applied to release E. ZOBEL, INC. from liability because the bank could not be subrogated to the rights of the creditor due to failure to register the chattel mortgage.
Whether the bank's failure to register the chattel mortgage extinguished the obligation of E. ZOBEL, INC. under the instrument.

Parties' Contentions

E. ZOBEL, INC. contended that the instrument was a guaranty and that Article 2080 released guarantors when, by some act of the creditor, they cannot be subrogated to the rights and preferences of the creditor, which allegedly occurred because the chattel mortgage was not registered.
CONSOLIDATED BANK AND TRUST CORPORATION (now SOLIDBANK) contended that the instrument created the liability of a surety whose obligation is original and primary and thus Article 2080 was inapplicable.
E. ZOBEL, INC. further argued that the bank's failure to register the chat