Philippine National Bank v. Honorable Court of Appeals
REITERATIONFacts
The Antecedents: Marino P. Rubin obtained a sugar crop loan of P40,200.00 from the Philippine National Bank (PNB), secured by a chattel mortgage and a surety bond issued by Philippine Phoenix Surety and Insurance, Inc. (Phoenix) for P10,000.00. PNB subsequently increased the loan to P56,800.00 without the knowledge and consent of Phoenix. Procedural History: When Rubin failed to pay, PNB demanded payment from Phoenix. Phoenix denied liability, leading PNB to file a collection case. The trial court ruled in favor of PNB, ordering Phoenix to pay P10,000.00. The Court of Appeals modified the decision, exonerating Phoenix. The Petition: PNB filed a petition for review, arguing that the Court of Appeals erred in exonerating Phoenix.
Issue(s)
Whether the increase in the loan amount without the surety's consent discharges the surety from liability. Whether the chattel mortgage contract was a continuing one that allowed for increases in the principal obligation without notice to the surety.
Ruling
The Supreme Court affirmed the decision of the Court of Appeals, exonerating Philippine Phoenix Surety and Insurance, Inc. from liability under its surety bond.
Ratio Decidendi
On the issue of whether the increase in the loan amount without the surety's consent discharges the surety from liability: The Court held that the increase in the indebtedness from P40,200.00 to P56,800.00 was material and prejudicial to the surety, Phoenix. While the surety's liability was limited to P10,000.00, the increase in the debt proportionally decreased the probability of the principal debtor being able to liquidate the debt. This increased the risk undertaken by the surety. The Court reiterated the principle that "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." This principle was applied in previous cases such as Asiatic Petroleum Co. vs. Hizon and David and Phil. National Bank vs. Veraguth. On the issue of whether the chattel mortgage contract was a continuing one that allowed for increases in the principal obligation without notice to the surety: The Court distinguished the contract in question from a continuing chattel mortgage. The chattel mortgage contract explicitly fixed the secured amount at P40,200.00. The phrase "other obligations" in the mortgage contract, when applied with the principle of ejusdem generis, was limited to obligations of the same nature as interest and costs of collection. It could not be enlarged to include future additional advances to the debtor-mortgagor, nor could it be interpreted as a previous authorization from the surety to increase the principal amount fixed in the contract. Therefore, the increase in the loan was not covered by the original chattel mortgage in a manner that would dispense with the surety's consent.
Main Doctrine
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.