In Yulim International Company Ltd. v. International Exchange Bank, the Supreme Court affirmed the solidary liability of partners who signed a Continuing Surety Agreement for a partnership’s loan. This means that the bank can pursue individual partners for the full debt, regardless of whether the loan directly benefited their families. The ruling underscores the binding nature of surety agreements and the importance of understanding the extent of one’s liability when acting as a surety for a principal debtor.

When a Deed Isn’t Enough: Solidary Guarantees and Partnership Debts

Yulim International Company Ltd., along with its capitalist partners James Yu, Jonathan Yu, and Almerick Tieng Lim, sought to overturn a Court of Appeals (CA) decision holding the partners jointly and severally liable with Yulim for its loan obligations to International Exchange Bank (iBank), now Union Bank of the Philippines. The case originated from a credit facility granted by iBank to Yulim, secured by a Chattel Mortgage and a Continuing Surety Agreement executed by the partners. Yulim defaulted on its loan, leading iBank to file a complaint for sum of money with replevin. The partners argued that the assignment of a condominium unit to iBank served as full payment of the loan. The central legal question was whether the partners could be held solidarily liable for Yulim’s debt, despite their claim of payment through the property assignment.

The Supreme Court (SC) found no merit in the petition. The individual partners executed a Continuing Surety Agreement, guaranteeing the full payment of Yulim’s credit accommodations. Article 2047 of the Civil Code defines suretyship, where a surety binds themselves solidarily with the principal debtor. The court emphasized that under Article 1207 of the Civil Code, solidary liability exists when the obligation expressly states it, or when the law or the nature of the obligation requires it. Here, the Continuing Surety Agreement explicitly stated that the partners were jointly and severally liable with Yulim, meaning iBank could pursue any of them for the full amount of the debt.

The SC highlighted the significance of the terms within the Continuing Surety Agreement. The agreement stated that the partners “jointly and severally with the PRINCIPAL, hereby unconditionally and irrevocably guarantee full and complete payment when due, whether at stated maturity, by acceleration, or otherwise, of any and all credit accommodations that have been granted” to Yulim. This clearly indicated their intention to be bound as sureties, directly and primarily responsible for Yulim’s debt. Moreover, the agreement stipulated that their liability was “direct, immediate, and not contingent upon the pursuit [by] the BANK of whatever remedies it may have against the PRINCIPAL of other securities.”

Regarding the claim of payment through the assignment of the condominium unit, the Court found the evidence unpersuasive. The SC emphasized that iBank’s letter of May 4, 2001, merely acknowledged the collaterals provided for the loans and the consolidation of the promissory notes. It did not indicate an agreement that the Deed of Assignment would extinguish the debt. On the contrary, Section 2.01 of the Deed of Assignment stated that it was a mere “interim security for the repayment of any loan granted and those that may be granted in the future by the BANK to the ASSIGNOR and/or the BORROWER, for compliance with the terms and conditions of the relevant credit and/or loan documents thereof.”

The Court interpreted the Deed of Assignment as a temporary security rather than a payment. Further, Section 2.02 of the Deed stipulated that upon the issuance of the title to the condominium unit, Yulim would “immediately execute the necessary Deed of Real Estate Mortgage in favor of the BANK to secure the loan obligations of the ASSIGNOR and/or the BORROWER.” This clearly indicated the intention to create a real estate mortgage, not to transfer ownership as full payment. The SC noted that the Deed of Assignment even included a resolutory condition stating that it would become null and void once the title was delivered to iBank, and the Deed of Real Estate Mortgage was executed.

The SC distinguished between payment by cession under Article 1255 of the Civil Code and dacion en pago under Article 1245. The former involves the assignment of all the debtor’s property to multiple creditors, while the latter is the alienation of property to a single creditor in satisfaction of a debt. The Court found that the Deed of Assignment did not constitute a dacion en pago, as it lacked evidence of a contemplated sale of the condominium unit with the outstanding loan as consideration. The intent was clearly to provide security, not to extinguish the debt through a transfer of ownership.

FAQs

What is a Continuing Surety Agreement?	It is an agreement where a person guarantees the debt of another for current and future obligations, ensuring payment to the creditor.
What does it mean to be jointly and severally liable?	It means that each debtor is responsible for the entire debt. The creditor can demand the full amount from any one of them.
What is the difference between suretyship and guaranty?	In suretyship, the surety is primarily liable with the debtor. In guaranty, the guarantor is only liable if the debtor fails to pay.
What is dacion en pago?	It is a way to extinguish a debt by transferring ownership of property to the creditor as payment. The law on sales governs it.
What is payment by cession?	It is when a debtor assigns all of their property to creditors. The debtor is only released up to the net proceeds from the assigned property.
Why was the Deed of Assignment not considered payment?	The Deed stated it was an interim security, not a payment. The parties intended to create a real estate mortgage later, not a sale.
Can a surety agreement be limited?	Yes, the agreement can specify the amount and scope of the surety’s liability. However, clear and express terms are necessary for such limitations.
What is the significance of Article 2047 of the Civil Code?	It defines the contract of suretyship. It outlines the surety’s solidary liability with the principal debtor, making them directly responsible for the debt.

This case underscores the importance of carefully reviewing surety agreements and understanding the potential liabilities they entail. The decision serves as a reminder that solidary liability can have significant financial consequences for individual partners in a business venture, especially when guarantees are provided for loan obligations.

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: Yulim International Company Ltd. v. International Exchange Bank, G.R. No. 203133, February 18, 2015