SECURITY BANK AND TRUST COMPANY, Inc. vs RODOLFO M.

CUENCA
Panganiban, J. October 3, 2003 Extinguishment of Guaranty

I. Facts
* Creditor: Sccurity Bank and Trust Co.
Debtor: Sta. Ines Melale Corp.
Surety: Rodolfo Cuenca

A. Sta. Ines is a corporation engaged in logging operations. In 1980, it was

granted by Security Bank a credit line in the amount of Php 8M. To secure
payment, it executed a chattel mortgage over some of its machineries and
equipments. And as an additional security, its President and Chairman of the
Board of Directors Rodolfo Cuenca, executed an Indemnity agreement in
favor of Security Bank whereby he bound himself jointly and severally with
Sta. Ines. After Cuenca resigned, Sta. Ines obtained a Php 6M loan. Because
of its difficulty in making the amortization payments, in 1989 it requested
Security Bank a complete restructure of its indebtedness, which was
approved without prior notice to, or prior consent of Cuenca. Still it was
unable to pay.

B. Contention of the Petitioner

Security Bank insists that the 1989 Loan Agreement was a mere renewal or
extension of the Php 8M original accommodation, that Cuenca waived his right to
be notified of and to give consent to any substitution, renewal, extension, increase,
amendment, conversion or revival of the same, and that it was a continuing surety.

C. Contention of the Respondent

Cuenca argues that the 1989 agreement extinguished the obligation under
the 1980 credit accommodation by novation.

II. Issues
WON the 1989 Loan Agreement novated the original credit accommodation
and Cuenca’s liability under the Indemnity Agreement.

III. Ruling
The 1989 Loan Agreement extinguished by novation the obligation under the
1980 P8 million credit accommodation. It is essential in the law of suretyship that
any agreement between the creditor and the principal debtor that essentially
varies the terms of the principal contract without the consent of the surety, will
release the surety from liability. The 1989 Loan Agreement expressly stipulated
that its purpose was to liquidate, not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million credit facility.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety
of respondent, without even informing him, smacks of negligence on the part of
the bank and bad faith on that of the principal debtor. Since that Loan Agreement
constituted a new indebtedness, the old loan having been already liquidated, the
spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a
surety for the new loan.

♣ Dione Klarisse C. Guevara