TIU HIONG GUAN, LUISA DE VERA TIU, JUANITO RELLERA AND PURITA RELLERA, PETITIONERS, VS. METROPOLITAN BANK & TRUST COMPANY, RESPONDENT.

Tiu Hiong Guan versus Metropolitan Bank and Trust Company

The Case

This is a petition for review brought by Tiu Hiong Guan, Luisa de Vera Tiu, Juanito Rellera, and Purita Rellera against Metropolitan Bank and Trust Company. The bank sued the petitioners to collect unpaid loans extended to their corporation, Sunta Rubberized Industrial Corporation, and to the petitioners themselves, who had signed a continuing surety agreement, a promissory note, and a trust receipt agreement. The petitioners resisted, insisting that they signed only as officers of the corporation, that none of them personally benefited, and that the corporation's factory had been destroyed by fire and its assets placed under a suspension order by the Securities and Exchange Commission. The case matters because it draws the clean line between a guarantor and a surety, and it teaches that a surety's liability is direct, primary, and absolute, measured strictly by the terms of the surety agreement.

Procedural History

The bank filed a complaint for collection in the Regional Trial Court of Manila, Branch 51. After trial, the court ruled in favor of the bank, ordering the petitioners to pay jointly and severally the amount due on the promissory note, the amount held in trust under the trust receipt agreement, both with interest and penalty charges, plus attorney's fees equivalent to ten percent of the amount due, and the costs of suit. The petitioners' counterclaim was dismissed for lack of merit.

The petitioners appealed to the Court of Appeals, which affirmed the trial court's decision in full. Their motion for reconsideration was denied. The petitioners then came to the Supreme Court by a petition for review under Rule 45 of the Rules of Court, raising a single question: whether they can be held liable for the unpaid loan due and owing to the bank.

Facts

Sometime in October 1990, the petitioners applied for a continuing credit facility for themselves and for their corporation, Sunta, and executed a Continuing Surety Agreement in their personal and official capacities. Under that agreement, they bound themselves jointly and severally to pay all loans and credit accommodations that they and Sunta might incur, supposedly not exceeding three million pesos. It was stipulated that upon default, notwithstanding Sunta's dissolution, failure in business, insolvency, or the filing of a petition for bankruptcy or suspension of payments, the whole obligation would become due and payable without benefit of demand or notice of payment.

Earlier, in July 1990, the petitioners opened an irrevocable commercial letter of credit for the purchase of raw materials amounting to 480,000 pesos in favor of Sunta. The materials were delivered and custody transferred to Sunta, after which a Trust Receipt Agreement was jointly and severally executed by the petitioners in their personal capacities. In August 1990, Sunta and the petitioners, again in their personal capacities, obtained a loan of 350,000 pesos.

After maturity, there was both a failure to pay and a failure to comply with the surety and trust receipt agreements, the sight draft, and the promissory note. The total unpaid obligation as of February 15, 1993 stood at 1,571,972.86 pesos. In their answer, the petitioners admitted executing the Continuing Surety Agreement but claimed they did so as officers of Sunta, not in their personal capacities. They attributed Sunta's failure to pay to force majeure, when fire gutted its factory buildings, equipment, machinery, raw materials, and finished products, and to a Securities and Exchange Commission order suspending all actions for claims against Sunta. They argued that the real party in interest was Sunta, which was solvent and whose assets had not yet been exhausted, and that as mere agents they could not be held responsible for the loss of goods still owned by the bank.

Issues

• Whether or not the petitioners may be held jointly and severally liable for the unpaid loan despite having signed the agreements in their official capacities as officers of Sunta.
• Whether or not the petitioners' liability as sureties is affected by the fact that none of them personally benefited from the loan transaction.
• Whether or not the fire that destroyed Sunta's factory and the suspension order of the Securities and Exchange Commission relieve the petitioners of liability.

Applicable Provisions

Article 2047 of the Civil Code defines the surety's undertaking:

By a contract of suretyship, one person binds himself solidarily with the principal debtor for the purpose of fulfilling an obligation.

This is the core provision: the petitioners bound themselves solidarily with Sunta, making their liability direct and primary rather than a mere guarantee of Sunta's solvency.

Article 1216 of the Civil Code governs the creditor's remedy against solidary debtors:

The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.

This provision supports the holding that the bank may proceed against Sunta alone, or against some or all of the petitioners, without first exhausting the corporation's assets.

Ruling

On the first issue, the Court held that the petitioners are liable in both their personal and official capacities. From the promissory note and the Continuing Surety Agreement, their liability is joint and several. They are not mere guarantors but sureties: they do not insure the solvency of the debtor, but rather the debt itself. They obligate themselves to pay the debt if the principal debtor will not pay, regardless of whether the latter is financially capable of fulfilling its obligation. The Court stressed that the liability of a surety is determined strictly on the basis of the terms and conditions set out in the surety agreement, and that solidary liability is one of its primary characteristics.

On the second issue, the Court held that it is irrelevant that none of the petitioners personally benefited from the loan transaction. A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter. The petitioners are considered as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.

On the third issue, the Court held that neither the fire nor the suspension order veers away from the fact of liability as sureties. Even though ownership over the goods remained with the bank, the loss thereof has nothing to do with the loan that the petitioners bound themselves to be solidarily liable for. The Trust Receipt Agreement is a mere collateral agreement independent of the Continuing Surety Agreement, serving as additional security for the loan. The Court closed with the familiar rule that parties are bound by the terms of their contract, which is the law between them.

Doctrine

A Bar candidate should retain these rules. First, a surety binds himself solidarily with the principal debtor, and his liability is direct, primary, and absolute, equivalent to that of a regular party to the undertaking. Second, the surety's liability is measured strictly by the terms of the surety agreement, and solidary liability is its primary characteristic. Third, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously, so the bank need not first exhaust the assets of the principal debtor. Fourth, the surety's lack of personal benefit from the loan is immaterial; he answers for the debt itself, not merely for the debtor's solvency. Fifth, a trust receipt agreement is a collateral agreement independent of the surety agreement, and loss of the goods covered by it does not extinguish the surety's liability on the loan.

Disposition

The Supreme Court denied the petition and affirmed the decision and resolution of the Court of Appeals, with costs against the petitioners.

Remember This

Memorize this line: a surety does not insure the solvency of the debtor, but rather the debt itself, so his liability is direct, primary, and absolute. Examiners use this case to test the distinction between a guarantor and a surety, and to ask whether a surety who signed in an official capacity and gained nothing personally can escape solidary liability.