Title
Velasquez vs. Court of Appeals
Case
G.R. No. 124049
Decision Date
Jun 30, 1999
Velasquez, a PUFFI officer, was held personally liable under a suretyship for a defaulted loan. The Supreme Court affirmed summary judgment, citing negligence, lack of novation, and waived defenses.
summary judgment
personal liability
loan agreement

Case Summary (G.R. No. 124049)

Loan Agreement, Security Documents, and Foreclosure

In December 1994, PUFFI applied for the GFSME-backed loan with PCIB. The parties executed the loan agreement on 16 April 1985. For security, promissory notes numbered TL 121231 for PHP 4,000,000.00 and TL 121258 for PHP 3,500,000.00 were signed by Inigo A. Nebrida and Mariano N. Canilao Jr. as officers of PUFFI and Aircon and Refrigeration Industries, Inc. (ARII). A chattel mortgage was also executed by ARII over its equipment and machineries in favor of PCIB.

In addition, petitioner and the other signatory officers—Nebrida and Canilao Jr.—executed deeds of suretyship in favor of PCIB. Separate deeds of suretyship were executed by Cesar R. Dean and Artemio L. Raymundo. When PUFFI defaulted, PCIB foreclosed the chattel mortgage. The proceeds of the sale amounted to PHP 678,000.00, leaving an unpaid balance that PCIB then sought to recover by filing the civil action.

Complaint, Preliminary Attachment, and Petitioner’s Default

PCIB filed a complaint for a sum of money with preliminary attachment. The RTC granted the writ of preliminary attachment on 9 October 1989. Petitioner and Canilao filed a joint answer with counterclaim, denying personal liability and interposing novation as a defense.

At the pre-trial scheduled on 11 April 1989, petitioner and counsel failed to appear despite due notice. On motion of PCIB, the RTC declared petitioner in default and granted summary judgment as against Canilao. PCIB and Canilao submitted their position papers. Petitioner remained in default because he did not move to lift the order of default. Nonetheless, petitioner adopted Canilao’s position paper through an ex parte manifestation. An ex parte hearing proceeded against petitioner, after which the RTC rendered judgment.

RTC Summary Judgment and Dismissal as to Unserved Defendants

On 20 June 1990, the RTC rendered a summary judgment in favor of PCIB, holding petitioner and Canilao solidarily liable to pay PHP 7,227,624.48, plus annual interest of 17%, and PHP 700,000.00 as attorney’s fees, with costs of suit. The RTC dismissed the case without prejudice as to other defendants because they had not been properly served with summons.

Petitioner sought reconsideration on 31 July 1990, praying for the lifting of the order of default and the setting aside of the summary judgment. The RTC denied the motion on 13 September 1991 for lack of merit.

Court of Appeals Review and Issues Raised

Petitioner appealed, and the Court of Appeals affirmed the RTC judgment in toto in its 28 September 1995 decision. Petitioner’s subsequent motion for reconsideration was denied. Petitioner then filed the present petition, asserting that the CA committed reversible error in sustaining summary judgment despite alleged genuine triable issues of fact, and in refusing to set aside the default order.

Legal Arguments for Reversal

Petitioner relied on the ruling in Viajar v. Estenzo to claim that, in summary proceedings, the movant bears the burden of clearly showing the absence of a genuine issue of fact, and that any doubt should be resolved against the movant. He maintained that his answer raised triable issues, specifically: first, denial of personal liability because he allegedly signed the deed of suretyship as an officer of ARII; second, alleged acceptance by PCIB of royalty payments that petitioner claimed were fruits of a franchise agreement and that, in his view, novated the loan and suretyship agreements; and third, the propriety of payment of the entire debt.

Petitioner also argued that addresses used on the suretyship deeds, being those of ARII, indicated that he signed in an official corporate capacity rather than personally. He further invoked the contract of adhesion doctrine, contending that ambiguities should be construed against PCIB.

Lastly, petitioner sought relief from the order of default, asserting that his counsel had been given a special power of attorney because petitioner could not attend pre-trial due to prior commitments abroad, and that petitioner should not be bound by counsel’s negligence.

Summary Judgment Under Rule 35 and the Distinction from Rule 34

The Court did not accept petitioner’s reliance on Viajar v. Estenzo, because the rule invoked applied to summary proceedings under Rule 34 (judgment on the pleadings), not to summary judgment under Rule 35, which was the kind of disposition made by the RTC in this case. The Court explained that under Rule 35, the rationale differs because the summary judgment arises from facts already established or admitted during prior pre-trial, unlike Rule 34 where the judge relies primarily on the movant’s allegations.

Interpretation of the Suretyship and the Effect of Failure to Properly Contest the Document

On petitioner’s contention that he had no personal liability and that he signed only as an officer, the Court held that a perusal of the deed of suretyship showed petitioner’s personal liability under the loan contract. The Court treated petitioner’s asserted factual and interpretive defenses as insufficient to create a triable issue for summary judgment.

The Court further grounded its approach on the “complementary contracts construed together” doctrine enunciated in National Power Corporation v. CA. Under this doctrine, the surety bond must be read in its entirety and together with the principal contract. The Court emphasized that certain stipulations cannot be segregated to control in isolation, because the surety contract is merely an accessory contract and must be interpreted with the principal contract, which here was the loan agreement. The Court referenced the principle in Art. 1374 of the Civil Code that various stipulations shall be interpreted together, giving doubtful clauses the sense they may derive from the contract as a whole.

Applying these principles, the Court found no doubt as to the parties’ intention that petitioner would be personally liable under the deed of suretyship. The Court cited a specific stipulation in the loan agreement on loan security, which provided for suretyship agreements to be executed by named individuals including Velasquez, in form and substance acceptable to the lender.

The Court added that petitioner would have had a different matter had he properly contested the deed of suretyship under Sec. 8, Rule 8 of the Rules of Court. His omission was treated as fatal because it resulted in admission of the due execution and genuineness of the contract. The Court stated that such an admission eliminates defenses on authenticity and due execution, including claims that the document was spurious, counterfeit, of different import, or that signatures were forged or unauthorized.

No Novation Based on Royalty Payments from a Franchise Agreement

Petitioner’s novation theory was also rejected. The Court reiterated that extinctive novation requires, among other things, that the new contract involves the same parties as the old contract and that all parties agree to extinguish the earlier obligation and replace it with a new valid one.

The Court held that there was no novation because the franchise agreement between PUFFI and Arturo Rosales did not include PCIB and contained no reference to the subject loan agreement. PCIB’s act was limited to accepting royalty payments out of the franchise. The Court characterized that acceptance as beyond the franchise agreement’s immediate scope, but not as conflicting with the payment arrangement in the loan agreement. Thus, the Court treated the royalty acceptance as insufficient to extinguish the loan and suretyship obligations.

In support, the Court cited Magdalena Estates Inc. v. Rodriguez, holding that a monetary obligation is not novated in a new instrument which ratifies the old or merely changes terms of payment and supplements rather than extinguishes the earlier agreement, and that accepting guarantees or payments from third persons does not constitute novation absent an agreement that the original debtor be released. The Court therefore found no genuine triable issue on novation.

Overpayment and Waiver

As to the defense of overpayment, the Court noted that petitioner raised it for the first time. It therefore treated the defense as waived under Sec. 2, Rule 9 of the Rules of Court, and thus declined to discuss it.

Nature of the RTC Disposition and the Binding Effect of Default

The Court distinguished the RTC disposition. It noted that, insofar as petitioner was concerned, the RTC decision was not truly a summary judgment on the merits, because the case proceeded against him as a default—the RTC conducted an ex parte hearing against petitioner after he was declared in default.

Even so, the Court held that the RTC still did not act with grave abuse of discretion. The Court also addressed petitioner’s attempt to escape responsibility for counsel’s negligence by invoking the special power of attorney and petitioner’s inability to attend pre-trial due to commitments abroad.

The Court held that the failure of counsel to attend pre-trial prejudiced petitioner’s interests. It further observed that the negligence was not solely attributable to counsel. The Court cited findings that petitioner had appointed Atty. Rodolfo Vega as attorney-in-fact for the pre-trial, but Vega failed to appear; accordingly, petitioner was declared in default. The Court also pointed out that the order of default was sent to petitioner’s counsel and received by him as early as 10 May 1989, yet no steps were taken to lift or reconsider it. Consequently, petitioner was found guilty of negligence because, after leaving for abroad and appointing counsel, he apparently paid no further attention to his case until he received the decision.

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