Title
Philippine Blooming Mills Inc. vs. Court of Appeals
Case
G.R. No. 142381
Decision Date
Oct 15, 2003
A surety's solidary liability for corporate obligations under a Deed of Suretyship remains enforceable despite the principal debtor's SEC rehabilitation, with computed interest and reduced attorney’s fees.
trust receipt
credit accommodation
rehabilitation plan
A

Case Summary (G.R. No. 240255)

Nature of the Dispute

TRB sued PBM and Ching to collect corporate credit accommodations comprising: (1) obligations under two Letters of Credit secured by Trust Receipts (Trust Receipt No. 106 — US$591,043; Trust Receipt No. 113 — US$155,460.34), and (2) a P3,500,000 trust loan evidenced by a notarized Promissory Note. TRB sought solidary recovery from Ching under a Deed of Suretyship and as co-maker of the promissory note after PBM defaulted and was placed under SEC rehabilitation.

Principal Contracts and Undertakings

Ching executed, in his personal capacity, a Deed of Suretyship (21 July 1977) by which he bound himself “as primary obligor(s) and not as mere guarantor(s)” to answer solidarily for PBM’s indebtedness to TRB up to P10,000,000, expressly covering amounts “may now be indebted or may hereafter become indebted.” The deed waived notices of acceptance, presentment, demand, protest and notice of dishonor, and provided for attorney’s fees equivalent to 10% of the total indebtedness in the event of judicial proceedings.

Letters of Credit, Trust Receipts, and Undertakings

TRB granted PBM Letters of Credit in 1980 which were covered by trust receipts acknowledging TRB’s ownership of the merchandise. PBM (through Ching) executed separate Undertakings accompanying each trust receipt, acknowledging the obligation to pay on demand all sums called by the bank and consenting that the bank could cancel the trust, take possession of goods, and sell them upon default. The Undertakings left the interest rate blank, creating reliance on the legal rate where no express interest was stipulated.

Promissory Note for Trust Loan

PBM obtained a P3,500,000 trust loan (27 April 1981). Ching co-signed the notarized Promissory Note, which stipulated an 18% per annum interest rate, a 2% per annum penalty in case of nonpayment, an additional 10% as attorneys’ fees, and a clause empowering TRB to set off deposits or hold other property as security.

Default, SEC Rehabilitation, and Initial Procedural Posture

PBM defaulted on the trust receipts and the trust loan. PBM and Ching filed for suspension of payments with the SEC; the SEC placed PBM under rehabilitation receivership. TRB thereafter sued PBM and Ching in the trial court; TRB withdrew the complaint against PBM after the SEC receivership, but proceeded against Ching. The trial court denied Ching’s motion to dismiss (finding PD No. 1758 and SEC proceedings did not divest courts of jurisdiction over Ching personally), leading to appellate and prior Supreme Court litigation concerning whether Ching could be sued separately.

Prior Supreme Court Determination on Separate Liability

In earlier proceedings (Traders Royal Bank v. Court of Appeals), this Court held that the SEC’s rehabilitation jurisdiction over PBM did not extend to private individuals like Ching, who remained subject to suit in regular courts as an individual surety. That determination established that TRB could proceed separately against Ching despite the SEC rehabilitation of PBM.

Trial Evidence, TRB Computation, and Board Resolution

TRB presented testimony and a Statement of Account showing the corporate defaults and accruing interest, computing Ching’s liability as of 31 October 1991 at P19,333,558.16. Ching produced TRB Board Resolution No. 5935 (8 June 1990), which proposed a settlement reducing PBM’s account to P1.373 million and writing off P4.278 million, but TRB’s witness testified that the Board’s conditional settlement terms were never complied with or implemented and that the bank refused to confirm a receiver-prepared document that would have released Ching from his suretyship.

Trial Court Decision

The Regional Trial Court declared Ching liable to TRB in the amount of P19,333,558.16 as of 31 October 1991, with legal interest from that date and an award of 5% attorney’s fees. The court relied on the unconditional and solidary nature of the Deed of Suretyship and the absence of proof by Ching of any full or partial payment.

Court of Appeals Ruling

The Court of Appeals affirmed the trial court’s holding that Ching had not denied the genuineness or execution of the loan documents and could therefore be presumed liable absent proof of payment. The appellate court, however, modified the quantum, lowering Ching’s liability from P19,333,558.16 to P15,773,708.78 and fixed legal interest at 12% per annum. The Court of Appeals denied Ching’s motion for reconsideration, prompting the present petition.

Issues Raised on Review

Ching principally argued that: (1) the Deed of Suretyship could not cover obligations incurred after its execution; (2) TRB’s taking possession of goods prevented fulfillment of the trust receipts and discharged Ching; and (3) his liability should be limited to the amount allocated to PBM under the SEC-approved rehabilitation plan (P1,373,415), or otherwise reduced under Article 1222 of the Civil Code.

Supreme Court’s Determination on Res Judicata and Scope of Review

The Supreme Court found the petition meritless in substance and characterized part of the petition as an attempt to relitigate the already-decided question of Ching’s separable liability, which earlier holdings had resolved. The Court treated the prior ruling that Ching could be sued separately as having preclusive effect on that issue; the remaining controversy related to the precise amount of Ching’s liability, which the Court proceeded to determine.

Suretyship for Future Debts and Continuing Guaranty

The Court confirmed that the Deed of Suretyship plainly covered future debts, citing Civil Code Article 2053 and jurisprudence (DiAo) recognizing that a guaranty may secure future debts and may be construed as a continuing guaranty where the terms indicate coverage of transactions “now or hereafter” arising. The Deed explicitly referred to debts PBM “may hereafter become indebted,” thus encompassing obligations contracted after 21 July 1977.

Effect of Rehabilitation Plan on Surety’s Liability

The Court rejected Ching’s argument that PBM’s rehabilitation plan limited his liability. It held that a surety who contractually agrees to answer for the principal debtor’s obligations cannot escape full liability simply because the principal debtor became insolvent or underwent rehabilitation; Article 1216 permits the creditor to proceed against any one solidary debtor until the debt is fully collected. The Board resolution that purported to reduce PBM’s exposure was not implemented and therefore could not operate to release or reduce Ching’s contractual suretyship.

Liability for Trust Receipts Despite Bank’s Possession of Goods

The Court addressed Ching’s contention that TRB’s and other banks’ seizure of PBM inventories (including goods under trust receipts) prevented performance and discharged him. The Court reiterated that the Trust Receipts and Undertakings expressly permitted TRB to cancel the trust and take possession of the goods upon default; PD No. 115 (Trust Receipts Law) similarly grants the entruster the right to retake and sell the goods and to apply proceeds to the indebtedness. Accordingly, TRB’s repossession did not release PBM or Ching from liability; in fact, the Trust Receipt regime contemplates retention of liability for any deficiency after sale.

Applicable Interest Rules and Computations

Where loan documents left the interest rate blank (Trust Receipts and Letter of Undertaking), the Court applied the legal rate of

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