In Gaerlan v. Philippine National Bank, the Supreme Court clarified that the release of one guarantor from a Joint and Solidary Agreement (JSA) does not automatically absolve the remaining guarantors. This case underscores the principle that each surety is independently liable, and unless explicitly stated, the release of one surety does not discharge the others. The court affirmed the continued liability of Doroteo Gaerlan, despite a prior court decision releasing Spouses Jaworski from the same JSA, because the causes of action and subject matter in the two cases were distinct.

Business Divorce and Bank Loans: Who Pays When Partnerships Dissolve?

The legal battle began when Supreme Marine Company, Inc. (SMCI) and MGG Marine Services, Inc. (MGG) secured a significant loan from Philippine National Bank (PNB) to finance the construction of an oil tanker. As part of the loan agreement, Doroteo Gaerlan, representing MGG, and Robert Jaworski, representing SMCI, along with their spouses, signed a Joint and Solidary Agreement (JSA). This JSA bound them jointly and severally to repay the loan should the companies default. To further secure the loan, the Gaerlans also executed a Real Estate Mortgage over their property in favor of PNB.

Subsequently, Jaworski and Gaerlan underwent a “business divorce,” documented in a Memorandum of Agreement (MOA). This MOA stipulated that Gaerlan would assume responsibility for the PNB loan in exchange for full ownership of the oil tanker. PNB was informed of this agreement and, through a Board Resolution, appeared to consent to the arrangement. Later, when SMCI and MGG defaulted on their loan obligations, PNB initiated foreclosure proceedings on the Gaerlans’ mortgaged property.

The legal complexities deepened when the Spouses Jaworski filed an action for declaratory relief, seeking to be released from their obligations under the JSA based on the MOA and PNB’s alleged consent. The Regional Trial Court (RTC) ruled in favor of the Jaworskis, effectively releasing them from the JSA. This decision was upheld by the Court of Appeals (CA) and became final. In response, Gaerlan filed a supplemental complaint, arguing that the nullification of the JSA for the Jaworskis should also nullify the Real Estate Mortgage on his property, as it was merely an accessory to the JSA. He contended that since the principal obligation under the JSA was extinguished for the Jaworskis, it should also be extinguished for him.

The central issue before the Supreme Court was whether the RTC’s decision releasing the Jaworskis from the JSA constituted res judicata, thereby also releasing Gaerlan and nullifying the Real Estate Mortgage. The doctrine of res judicata prevents parties from relitigating issues that have already been decided by a competent court. It has two aspects: bar by prior judgment and conclusiveness of judgment. The court found neither applicable in this case, as the causes of action and subject matter differed between the Jaworski’s case for declaratory relief and Gaerlan’s case for nullification of contract.

In explaining the concept of res judicata, the Court cited Section 47, Rule 39 of the Revised Rules of Court, stating:

…a final judgment or decree on the merits by a court of competent jurisdiction is conclusive of the rights of the parties or their privies in all later suits on points and matters determined in the former suit.

The Supreme Court held that the prior judgment in favor of the Jaworskis did not extend to Gaerlan. While the Jaworskis were released due to the “business divorce” and PNB’s apparent consent to the MOA, Gaerlan’s liability as a surety remained intact. The court emphasized that a surety’s obligation is direct, primary, and equally binding with the principal debtor. The release of one surety does not automatically discharge the others unless the terms of the agreement explicitly provide otherwise.

Furthermore, the Court noted that Gaerlan had effectively substituted SMCI as the principal borrower, with PNB’s knowledge and consent. This substitution further solidified Gaerlan’s responsibility for the loan. Gaerlan’s attempt to argue that the interest rates imposed by PNB were usurious was also dismissed due to lack of evidence. The Court reiterated that while it has the power to temper iniquitous interest rates, the borrower must prove that the rates are indeed exorbitant, which Gaerlan failed to do.

The Supreme Court upheld the Court of Appeals’ decision, reinforcing the principle that contractual obligations must be honored. The court cannot relieve parties from their voluntarily assumed responsibilities simply because the agreement proved to be a poor investment.

FAQs

What was the key issue in this case?	The primary issue was whether a prior court decision releasing co-guarantors from a Joint and Solidary Agreement (JSA) also released the remaining guarantor, Doroteo Gaerlan, and nullified the Real Estate Mortgage on his property.
What is a Joint and Solidary Agreement (JSA)?	A JSA is an agreement where multiple parties agree to be jointly and severally liable for a debt or obligation. This means each party is responsible for the entire debt, and the creditor can pursue any one of them for full payment.
What does “res judicata” mean?	“Res judicata” is a legal doctrine that prevents the same parties from relitigating issues that have already been decided by a competent court. It has two aspects: bar by prior judgment and conclusiveness of judgment.
How did the “business divorce” affect the case?	The “business divorce,” documented in a Memorandum of Agreement (MOA), led to the release of Spouses Jaworski from the JSA because PNB seemingly consented to Gaerlan assuming the full loan responsibility in exchange for the oil tanker ownership.
Why was Gaerlan still held liable despite the Jaworskis’ release?	Gaerlan was held liable because the court determined that the decision releasing the Jaworskis was based on their specific circumstances and did not invalidate the entire JSA. As a surety, Gaerlan’s obligation remained direct and primary.
What is a surety’s responsibility?	A surety is bound equally and absolutely with the principal debtor, and their liability is immediate and direct. The creditor can pursue the surety for the full debt if the principal debtor defaults.
Did the court address the issue of usurious interest rates?	Yes, but the court dismissed Gaerlan’s claim of usurious interest rates because he failed to present sufficient evidence to prove that the rates were exorbitant.
What was the final ruling of the Supreme Court?	The Supreme Court affirmed the Court of Appeals’ decision, holding that the Real Estate Mortgage was valid and enforceable, and that Gaerlan remained liable for the loan despite the release of the Jaworskis.

The Gaerlan v. PNB case illustrates the importance of clearly defining the scope and conditions of surety agreements. The ruling emphasizes that the release of one guarantor does not automatically discharge others, and each guarantor’s liability is determined by the specific terms of the agreement and the circumstances of the case. Parties entering into surety agreements should carefully consider the potential consequences and seek legal advice to ensure their rights and obligations are clearly defined.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: DOROTEO C. GAERLAN v. PHILIPPINE NATIONAL BANK, G.R. No. 217356, September 07, 2016