Title
Tiu Hiong Guan vs. Metropolitan Bank and Trust Company
Case
G.R. No. 144339
Decision Date
Aug 9, 2006
Petitioners, as sureties, held jointly and severally liable for Sunta's unpaid obligations under a Continuing Surety Agreement, despite claims of force majeure and SEC Order.
suretyship
liability
promissory note

Case Summary (G.R. No. 144339)

Factual Background

Sometime in October 1990, petitioners applied for a continuing credit facility both for themselves and in behalf of their corporation, Sunta, and executed a Continuing Surety Agreement in their personal and official capacities. Under the agreement, petitioners jointly and severally obligated themselves to pay loans and other credit accommodations that petitioners and Sunta might incur, supposedly not exceeding P3,000,000. The agreement further stipulated that, upon default, the entire obligation would become due and payable without benefit of demand or notice, even if Sunta was dissolved, failed in business, became insolvent, or if a petition for bankruptcy or suspension of payments was filed in proceedings related to it.

On July 9, 1990, petitioners opened an irrevocable Commercial Letter of Credit (LC) for the purchase of raw materials amounting to P480,000 in favor of Sunta. After the materials were delivered to and placed under Sunta’s custody, petitioners, in their personal capacities, jointly and severally executed a Trust Receipt Agreement. On August 18, 1990, Sunta and petitioners, in their personal capacities, obtained a loan of P350,000.

After maturity, there was failure to pay and failure to comply with the terms of the surety and trust receipt agreements, as well as with the relevant sight draft and promissory note. As of February 15, 1993, the total unpaid obligation was P1,571,972.86. Respondent demanded payments reflecting (1) P741,599.64 on the promissory note, with interest and penalties, (2) P830,373.20 representing the value or proceeds held in trust under the trust receipt agreement, with stipulated interest and penalty charges, and (3) attorney’s fees.

RTC Proceedings and Judgment

In their Answer, petitioners admitted executing the Continuing Surety Agreement, but asserted that they signed not in their personal capacities but as officers of Sunta. They also claimed that none of them personally benefited from the loan transaction. They further alleged that two of them signed the LC merely as officers of Sunta. Petitioners attributed Sunta’s failure to pay to force majeure, describing a fire that “gutted down” Sunta’s factory buildings, equipment, machinery, raw materials, and finished products. They also invoked an SEC Order dated April 20, 1993 in SEC Case No. 4240, which allegedly suspended actions for claims against Sunta pending before any court or tribunal.

Petitioners maintained that the real party in interest concerning the actionable documents was Sunta, not petitioners who were allegedly acting only as agents and guarantors. They insisted that they should not be compelled to pay because Sunta was solvent and its assets had not been exhausted. They also argued that since Sunta later lost the finished products through fire, respondent still retained ownership over those goods, and thus the loss should fall upon respondent absent negligence, deceit, fraud, or excess of authority on their part.

The RTC ruled for respondent. It held that respondent had established, by preponderant proof, that petitioners were liable jointly and severally with Sunta under the undertakings they executed. The RTC ordered petitioners to pay: (a) P741,599.64 as of February 15, 1993, with interest at 28.792% per annum and penalty charges of 18% per annum until fully paid for the amount due on the promissory note; (b) P830,373.20 as of February 15, 1993, with interest at the current rate and penalty charges of 12% per annum until fully paid representing the value or proceeds under the trust receipt agreement; (c) attorney’s fees equivalent to 10% of the amount due; and (d) costs of suit. It dismissed petitioners’ counterclaim for lack of merit.

Appeal to the Court of Appeals

Petitioners appealed to the Court of Appeals. The appellate court affirmed the RTC in its Decision dated May 23, 2000. It denied reconsideration in its Resolution dated August 11, 2000. Petitioners thereafter came to the Supreme Court via a Rule 45 petition.

The Parties’ Contentions Before the Supreme Court

Petitioners framed the core issue as whether they could be held liable for the unpaid loan due respondent. They argued that their liability should not attach because they allegedly did not personally benefit from the loan, they claimed to have acted only as agents or officers for Sunta, and Sunta’s nonpayment was said to have been caused by force majeure (the fire) and by the SEC suspension order. They also contended that the trust receipt arrangement reflected that respondent retained ownership over the goods, making petitioners not responsible for losses unless negligence or wrongdoing was shown.

Respondent, as supported by the rulings of the lower courts as described in the record, maintained that petitioners were not mere guarantors but sureties whose undertakings made them jointly and severally liable. The Supreme Court’s narration of respondent’s position emphasized the contractual terms in the Continuing Surety Agreement and the promissory note, particularly the provisions making petitioners’ liability direct and immediate, and allowing respondent to proceed against the sureties with or without demand upon Sunta.

Legal Basis and Reasoning

The Court held that petitioners’ liability was governed strictly by the terms and conditions of their surety and loan undertakings. It characterized the Continuing Surety Agreement as a solidary suretyship that bound the sureties in relation to Sunta’s credit accommodations within the agreed ceiling. It noted that the suretyship provisions expressly stated that the sureties’ liability would become due upon default at the option of respondent and without demand or notice, even considering circumstances such as dissolution, failure in business, insolvency, or bankruptcy-related proceedings involving Sunta. The Court also treated the surety’s liability as one that was not dependent on the exhaustion of Sunta’s assets or the pursuit of remedies against Sunta.

The Court further stressed that, in such arrangements, solidary liability is a primary feature. It explained that a creditor may proceed against any solidary debtor or some or all of them simultaneously, and that suretyship arises from the surety’s solidary binding with the principal debtor for the purpose of fulfilling an obligation. Although suretyship is accessory to the principal obligation in the sense that it is secondary in origin, the Court held that the surety’s liability could be direct, primary, and absolute or equivalent to that of a regular party to the undertaking.

On petitioners’ insistence that none of them personally benefited from the transaction, the Court deemed the argument irrelevant. The Court held that a surety could become liable to the debt even without a direct personal interest in the obligation. It also ruled that the defenses anchored on force majeure or the SEC suspension order did not alter the contractual basis of liability. The Court treated the fire-related loss of goods as immaterial to the loan obligation that petitioners guaranteed through their suretyship.

As to the Trust Receipt Agreement, the Court held that it was merely a collateral agreement independent of the Continuing Surety Agreement, intended to serve as additional security for the loan. Accordingly, petitioners’ claims that respondent owned the goods and that petitioners should not be held responsible for their destruc

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