ESTANISLAO AND AFRICA SINAMBAN, PETITIONERS, VS. CHINA BANKING CORPORATION, RESPONDENT.

Sinamban versus China Banking Corporation

The Case

This is a petition for review on certiorari brought by the spouses Estanislao and Africa Sinamban against China Banking Corporation, arising from a complaint for sum of money filed by the bank to recover the deficiency left after the extrajudicial foreclosure of a real estate mortgage. The spouses Sinamban had signed two promissory notes as solidary co-makers for the loans of their relatives, the spouses Danilo and Magdalena Manalastas, who were the principal borrowers. The case matters because it fixes the rules on the solidary liability of a co-maker, on the creditor's freedom to choose against whom to proceed, and on how auction proceeds are applied when several promissory notes are secured by a single mortgage.

Procedural History

China Banking Corporation sued the spouses Manalastas and the spouses Sinamban for sum of money before the Regional Trial Court of San Fernando City, Pampanga, Branch 45. The spouses Manalastas were declared in default. The spouses Sinamban and their counsel failed to appear at the pre-trial, so the trial court allowed the bank to present evidence ex parte, and judgment was rendered against all the defendants, ordering them to pay the deficiency jointly and severally.

On motion for reconsideration by the spouses Sinamban, the trial court set aside its decision as to them, holding that the auction proceeds were enough to cover the two promissory notes they had signed. On the bank's motion for reconsideration, the trial court set aside that order and reinstated its decision, this time holding the spouses Sinamban solidarily liable with the spouses Manalastas for a proportionate share of the deficiency on the two notes they co-signed.

The spouses Sinamban appealed to the Court of Appeals, which denied the appeal but modified the money judgment, allocating the deficiency among the three promissory notes. The spouses Sinamban then filed a petition for review on certiorari before the Supreme Court.

Facts

In February 1990, the spouses Manalastas executed a real estate mortgage in favor of China Banking Corporation over two parcels of land in Pampanga to secure a loan of 700,000 pesos intended as working capital for their rice milling business. Over the next few years, they amended the mortgage contract several times, progressively increasing their credit line, until it reached 2,450,000 pesos in March 1994.

Under this single credit line, the spouses Manalastas executed several promissory notes. In two of them, the spouses Sinamban signed as solidary co-makers: a note dated May 23, 1995 for 325,000 pesos, and a note dated February 26, 1991 for 1,300,000 pesos, the latter signed only by Estanislao Sinamban. A third note, dated April 24, 1995 for 1,800,000 pesos, was signed by the spouses Manalastas alone. Each note carried an acceleration clause, a penalty clause, and a stipulation for attorney's fees.

When the borrowers defaulted, the bank foreclosed the mortgage extrajudicially. At the auction sale held in May 1998, the bank submitted the highest bid of 4,600,000 pesos. By then the total obligation on the three notes stood at 5,401,975 pesos, leaving a deficiency of 1,758,427 pesos. The bank then sued to recover that deficiency. The spouses Sinamban denied recalling the execution of the notes, admitted signing some promissory note forms as co-makers at the request of their relatives, but insisted they received no benefit from the loans.

Issues

• Whether or not the Court of Appeals erred in not holding that the obligations of the spouses Sinamban under the two promissory notes they co-signed were more onerous than the obligation under the note signed by the spouses Manalastas alone, such that the auction proceeds should first be applied to the notes they signed.
• Whether or not the Court of Appeals erred in not holding that it is the spouses Sinamban, as debtors, who are given the choice under Article 1252 of the Civil Code to determine how the auction proceeds should be applied to their obligations.

Applicable Provisions

Article 2047 of the Civil Code provides:

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I, Book IV of this Code shall be observed. In so far as it is compatible with the provisions of this Title, the contract of guaranty shall also be governed by the provisions of this Title.

This provision makes the rules on solidary obligations govern a co-maker who binds himself solidarily with the principal debtor.

Article 1207 of the Civil Code provides:

There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

This is the basis for holding that a co-maker who signs as jointly and severally liable is bound solidarily.

Article 1216 of the Civil Code provides:

The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

This provision gives the bank the choice of proceeding against all the solidary debtors at once.

Article 1252 of the Civil Code provides:

He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, which of them must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due.

The Court holds this provision inapplicable, because it contemplates one debtor with several debts, whereas here there is one debt imputable to several debtors.

Ruling

On the first issue, the Court held that none of the three promissory notes is more onerous than the others. All three were obtained under a single credit line for the borrowers' rice milling business and were secured by a single real estate mortgage, so each note is covered by the same security, and the foreclosure benefits the co-makers proportionately. No note enjoys any priority or preference in payment.

On the second issue, the Court held that Article 1252 does not apply, because the situation it contemplates is a debtor with several debts due, while here the reverse is true, with each solidary debt imputable to several debtors. The choice belongs to the solidary creditor, the bank. The Court found, however, that the bank had opted to apply the entire auction proceeds to the aggregate of the three notes, as shown by its statement of account, and not first to the note signed by the spouses Manalastas alone as the Court of Appeals had concluded. The Court explained the liability of a co-maker in these words:

A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith.

Accordingly, the Court computed each note's share in the total deficiency in proportion to its outstanding balance, and held the spouses Sinamban solidarily liable with the spouses Manalastas only on the two notes they co-signed.

Doctrine

A co-maker who binds himself jointly and severally with the maker is directly and primarily liable on the debt, and the obligation is solidary under Article 1207 of the Civil Code because solidarity is expressly stated. Under Article 1216, the solidary creditor may proceed against any one, some, or all of the solidary debtors simultaneously. Article 1252 does not apply where one solidary debt is imputable to several debtors; the choice of application belongs to the creditor. Where several promissory notes under a single credit line are secured by a single mortgage, the auction proceeds are applied to the aggregate indebtedness, and each note bears a pro rata share of the deficiency.

Disposition

The Court modified the decision of the Court of Appeals, reducing the solidary liability of the spouses Sinamban to their proportionate shares of the deficiency on the two promissory notes they co-signed, with the spouses Manalastas solely liable on the note they signed alone.

Remember This

Memorize the line that a co-maker who signs as jointly and severally liable is directly and primarily liable, and that the solidary creditor, not the debtor, chooses whom to proceed against. Examiners use this case to test the solidary liability of co-makers and the correct application of Article 1252 of the Civil Code.