RODOLFO P. VELASQUEZ, PETITIONER, VS. COURT OF APPEALS, AND PHILIPPINE COMMERCIAL INTERNATIONAL BANK, INC., RESPONDENTS.

Velasquez versus Court of Appeals

The Case

This is a petition for review on certiorari brought by Rodolfo Velasquez against the Court of Appeals and the Philippine Commercial International Bank. The bank sued Velasquez and several co-defendants to collect the unpaid balance of a corporate loan, and Velasquez had bound himself as a surety. The case matters because it teaches how a surety contract is read together with the principal loan agreement, how novation is proved, and how a client is bound by the negligence of his counsel and by his own neglect. It is a compact review of the surety, the complementary contracts doctrine, and the requisites of extinctive novation.

Procedural History

The bank filed a complaint for a sum of money with preliminary attachment before the Regional Trial Court of Makati City. Velasquez and a co-defendant filed a joint answer denying personal liability and raising novation. At the pre-trial, Velasquez and his counsel failed to appear despite due notice, and he was declared in default. The trial court then rendered a summary judgment in favor of the bank, holding Velasquez and his co-defendant solidarily liable. Velasquez moved to lift the default and set aside the judgment, but the trial court denied the motion for lack of merit. He appealed to the Court of Appeals, which affirmed the trial court in full. His motion for reconsideration was denied, and he came to the Supreme Court by petition for review on certiorari.

Facts

Pick-up Fresh Farms, Incorporated, a corporation in which Velasquez was an officer and stockholder, applied with the bank for a loan under a government guarantee fund for small and medium enterprises. The loan agreement was executed, and promissory notes were signed by corporate officers for the borrower and for a related corporation. A chattel mortgage was constituted over equipment and machineries, and several individuals, including Velasquez, executed deeds of suretyship in favor of the bank.

When the borrower defaulted, the bank foreclosed the chattel mortgage, but the proceeds fell short of the obligation. The bank then sued to recover the remaining balance, with interest, penalties, exemplary damages, and attorney's fees. A writ of preliminary attachment was granted.

Velasquez failed to appear at the pre-trial despite notice and was declared in default. Judgment was rendered against him and a co-defendant for the balance with interest and attorney's fees. He sought relief, but the trial court and the Court of Appeals refused, finding that he had left the country and paid no attention to his case, and that his counsel had likewise been negligent.

Issues

• Whether or not the Court of Appeals erred in affirming the summary judgment despite the existence of genuine triable issues of fact.
• Whether or not Velasquez is personally liable under the deed of suretyship, or whether he signed only as an officer of the corporation.
• Whether or not the bank's acceptance of royalty payments from a franchise agreement novated the loan agreement and the suretyship.
• Whether or not the order of default should be set aside on the ground of the negligence of his counsel.

Applicable Provisions

Article 1374 of the Civil Code provides:

Article 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.

This provision anchors the rule that the surety contract and the loan agreement are read together to arrive at their true meaning.

Section 8 of Rule 8 of the Rules of Court, on the specific denial of a document's execution, is invoked by the Court when it notes that Velasquez never contested the deed of suretyship, resulting in an admission of its due execution and genuineness.

Section 2 of Rule 9 of the Rules of Court, on waiver of defenses not pleaded, is applied to the defense of overpayment raised for the first time on appeal.

Ruling

On the first issue, the Court held that the rule requiring the movant for a summary proceeding to show the absence of a genuine issue applies to a judgment on the pleadings, not to a summary judgment, which arises from facts already established or admitted at the pre-trial. A perusal of the deed of suretyship shows Velasquez's personal liability, making summary judgment proper.

On the second issue, the Court applied the complementary contracts construed together doctrine. The surety contract is an accessory contract and must be interpreted with its principal contract, the loan agreement, which expressly required Velasquez to execute a suretyship agreement. The Court also noted that Velasquez never contested the deed under Section 8 of Rule 8, so he admitted its due execution and genuineness.

On the third issue, the Court held that novation requires a new contract extinguishing an earlier one between the same parties. The franchise agreement was only between the borrower and a third person, and the bank was never a party to it. The bank's acceptance of royalty payments did not release the original debtor, so there was no novation.

On the fourth issue, the Court held that a client is bound by the mistakes of his counsel, more so by the result of his own negligence. Velasquez left for abroad and paid no attention to his case, so there was no fraud, accident, mistake, or excusable negligence warranting relief from the default.

Doctrine

A surety contract is an accessory contract and must be read together with its principal contract, the loan agreement, under the complementary contracts construed together doctrine, consistent with Article 1374 of the Civil Code. A party who fails to contest the due execution and genuineness of a document is deemed to have admitted it. Extinctive novation requires a previous valid obligation, the agreement of all parties to a new contract, the extinguishment of the old obligation, and the validity of the new one; there is no novation when the new contract is not between the same parties. A client is bound by the negligence of his counsel and by his own neglect.

Disposition

The petition was denied, and the decision of the Court of Appeals affirming the judgment against Velasquez was affirmed.

Remember This

The single line to memorize: a surety contract is read together with its principal loan agreement, and novation requires a new contract between the same parties. Examiners use this case to test the complementary contracts doctrine, the requisites of novation, and the binding effect of counsel's negligence.