PHILIPPINE NATIONAL BANK, PETITIONER, VS. THE HONORABLE COURT OF APPEALS AND THE PHILIPPINE PHOENIX SURETY AND INSURANCE, INC., RESPONDENTS.

Marino P. Rubin obtained from the Binalbagan Branch of petitioner Philippine National Bank
(Bank, for short) a 1954-1955 sugar crop loan in the
amount of P40,200.00, secured by
a chattel mortgage executed by Rubin as debtor-mortgagor and Jose
A. Campos as mortgagor.  As additional security, private respondent
Philippine Phoenix Surety and Insurance, Inc.
(Phoenix
for short) issued Surety Bond No. 88 for P10,000.00 in
favor of petitioner Bank.  Liability under said bond was to expire
one (1) year from the date thereof, unless within ten (10) days from its
expiration, the surety is notified of any existing obligations thereunder.

Three months later, petitioner Bank increased the loan from
P40,200.00 to P56,800.00, without the knowledge and
consent of private respondent
Phoenix.

When Rubin failed to liquidate said loan, petitioner
Bank demanded of private respondent
Phoenix that it make good its
undertaking as surety for Rubin up to the stated amount of P10,000.00.  Private respondent
Phoenix denied liability, resulting
in petitioner instituting a collection case against Rubin, his guarantors and
sureties, including private respondent
Phoenix.

The trial court ruled in favor of petitioner Bank, ordering,
among others, private respondent
Phoenix to
pay petitioner the sum of P10,000 upon failure of the
principal debtor Rubin and his guarantors to pay the judgment amount. 
On appeal, the Court of Appeals modified the trial court’s decision by
exonerating private respondent
Phoenix
from liability under its surety bond.  Hence, the instant petition
for review.

The discharge of private respondent
Phoenix from liability under Surety
Bond No. 88 is correct.  Contrary to petitioner’s thinking, the
contract in question is not a continuing chattel mortgage for which consent and
knowledge of the surety is unnecessary for an increase in the amount of the
principal obligation.  The contract of chattel mortgage itself
fixed the credits, loans, overdrafts, etc. and other valuable
consideration received thereunder at Forty Thousand
Two Hundred Pesos [P40,200.00].  The
undertaking under said contract was “for the purpose of securing their payment
including the interest thereon, the cost of collection and other obligations
owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect,
principal or secondary as appears in the accounts, books and records of the
mortgagee x x x.” [p. 179, Record on Appeal].  Applying the
principle of ejusdem generis, the term “other obligations” must be
limited to such as are of the same nature as interest and costs of
collection.  The term cannot be enlarged to include future
additional advances to debtor-mortgagor, much less be interpreted as a previous
authorization from the surety to increase the principal amount fixed in the
contract.

The increase in the indebtedness from P40,200.00 to P56,800.00 is material and prejudicial to private
respondent
Phoenix. 
While the liability of private respondent under the bond is limited to
P10,000.00, the increase in the amount of the debt
proportionally decreased the probability of the principal debtor being able to
liquidate the debt; thus, increasing the risk undertaken by the surety to answer
for the failure of the debtor to pay.  “A material alteration of
the principal contract, effected by the creditor and
principal debtor without the knowledge and consent of the surety, completely
discharges the surety from all liability in the contract of suretyship.” [Asiatic Petroleum Co.
vs. Hizon and David, 45 Phil. 532; Phil. National Bank vs.
Veraguth, 50 Phil. 253].

ACCORDINGLY, the decision of the Court of Appeals under
review is hereby affirmed.  Costs against
petitioner.