Philippine National Bank v. Veraguth
REITERATIONFacts
The Antecedents: The Philippine National Bank (PNB) granted a credit of P40,000 in current account to "La Union de Agricultores de Negros y Panay, Inc." (the Union) on January 18, 1919, secured by a bond (Exhibit A) executed by the defendants. Subsequently, on September 11, 1919, PNB granted the Union an additional credit of P30,000, also in current account, secured by a separate bond (Exhibit B). When the Union discontinued business relations with PNB on June 30, 1922, it had an outstanding overdraft of P34,241.77, which, with interest, amounted to P41,432.55. PNB sought to recover this sum jointly and severally from the defendants. Procedural History: The defendants denied liability, alleging that the P40,000 obligation secured by Exhibit A had been extinguished by payments made by the Union, and that they were not liable for the P30,000 credit secured by Exhibit B as they did not sign that bond. The trial court absolved some of the defendants, leading to PNB's appeal. The Petition: PNB appealed the trial court's decision, assigning errors in the court's findings, particularly concerning the liability of the sureties.
Issue(s)
Whether the defendants, as sureties for the P40,000 credit, are liable for the additional P30,000 credit granted to the principal debtor. Whether the obligation secured by Exhibit A has been extinguished by payments made by the principal debtor.
Ruling
The Supreme Court affirmed the decision of the trial court, absolving the defendants from liability for the additional P30,000 credit and finding that the P40,000 obligation secured by Exhibit A had been settled. The Court held that the sureties were not liable for the increased credit as they did not consent to the alteration of the principal contract, and that payments made by the principal debtor extinguished the debt according to the priority of time.
Ratio Decidendi
On the liability for the additional P30,000 credit: The Court held that the defendants, who executed bond Exhibit A guaranteeing a credit not exceeding P40,000, were not liable for the additional P30,000 credit granted by PNB to the Union. This is based on Article 1827 of the Civil Code, which states that guaranty cannot be presumed and cannot be extended beyond its specified limits. Furthermore, the Court cited 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. The increase in credit without the sureties' consent constituted such a material alteration. On the extinguishment of the P40,000 obligation: The Court applied the principle of application of payments in running accounts, citing Article 1924, No. 3 of the Civil Code and commentaries by Manresa, as well as external authorities like R.C.L. The rule is that credits have preference among themselves in the order of priority of the dates of the documents. In running accounts, payments are applied to extinguish debts according to the priority of time, meaning the first sums paid in are deemed to extinguish the earliest debts. Based on Exhibit C, the payments made by the Union from March 3, 1919, to September 11, 1924, totaling P105,972.66, were sufficient to extinguish the initial P40,000 credit secured by the appellees, thereby relieving them of their obligation under Exhibit A.
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 on the contract of suretyship. In running accounts, payments are applied to extinguish debts according to the priority of time, meaning the oldest debts are extinguished first.