This case clarifies that a surety remains liable for a debt even if the creditor releases the principal debtor’s collateral, especially when the surety agreement contains an express waiver of rights. The Supreme Court emphasized the enforceability of stipulations in surety agreements where the surety agrees to be bound regardless of the creditor’s actions concerning the collateral. This means that accommodation mortgagors and sureties must understand the extent of their obligations and the implications of waiving their rights in such agreements.

When Friendship Meets Finance: Examining Surety Obligations and Foreclosure Risks

The case of Rosalina Carodan versus China Banking Corporation revolves around a loan obtained by Barbara Perez and Rebecca Perez-Viloria from China Bank, secured by a real estate mortgage on Rosalina Carodan’s property and a surety agreement involving Rosalina and Madeline Carodan. When Barbara and Rebecca failed to pay the full loan amount, China Bank foreclosed on Rosalina’s property and sought to recover the deficiency. Rosalina argued that the release of Barbara and Rebecca’s properties from the mortgage extinguished her obligation as a surety, citing the principle of indivisibility of mortgage under Article 2089 of the Civil Code.

The central legal question before the Supreme Court was whether Rosalina, as a surety, remained liable for the deficiency despite China Bank’s release of the principal debtors’ properties. The court’s analysis hinged on the nature of a surety agreement and the specific stipulations contained therein. The Supreme Court affirmed the Court of Appeals’ decision, holding Rosalina jointly and severally liable with Barbara and Rebecca for the deficiency. The Court emphasized that Rosalina was not only an accommodation mortgagor but also a surety, as defined under Article 2047 of the Civil Code. An accommodation mortgagor is a third party who mortgages their property to secure another person’s debt, while a surety binds themselves solidarily with the principal debtor to ensure the debt is paid.

Art. 2047. By guaranty a person, called a guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarity with the principal debtor, the provisions of Section 4, Chapter 3, Title 1 of this Book shall be observed. In such case the contract is called a suretyship.

The distinction between a surety and a guarantor is crucial. A surety is an insurer of the debt, directly liable if the principal debtor defaults, whereas a guarantor is an insurer of the debtor’s solvency, liable only if the debtor cannot pay. The Court highlighted that Rosalina, as a surety, had assumed primary liability for the debt.

The Supreme Court also addressed Rosalina’s argument regarding the indivisibility of mortgage under Article 2089 of the Civil Code, which states that a mortgage is indivisible even if the debt is divided among the debtor’s heirs. However, the Court pointed out that this principle did not apply because the surety agreement contained an express waiver of rights. The agreement stipulated that the securities could be substituted, withdrawn, or surrendered at any time without notice to or consent by the surety. This waiver was critical in the Court’s decision.

The Surety(ies) expressly waive all rights to demand for payment and notice of non-payment and protest, and agree that the securities of every kind that are now and may hereafter be left with the Creditor its successors, indorsees or assigns as collateral to any evidence of debt or obligation, or upon which a lien may exist therefor, may be substituted, withdrawn or surrendered at any time, and the time for the payment of such obligations extended, without notice to or consent by the Surety(ies) x x x.

The Court emphasized that parties are bound by the terms of their contracts, and Rosalina had expressly agreed to the possibility of the securities being withdrawn or surrendered. This principle is enshrined in Article 1306 of the Civil Code, which allows contracting parties to establish stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Several Supreme Court cases support the ruling that a surety can waive their rights and agree to be bound even if the creditor takes actions that might otherwise discharge a surety. In PNB v. Manila Surety, the Court discharged the surety due to the creditor’s negligence, but in the present case, the surety agreement explicitly allowed the creditor to take the actions that Rosalina was contesting. Similarly, in E. Zobel Inc. v. CA, et al., the Court upheld a continuing guaranty despite the creditor’s failure to register a chattel mortgage, because the surety had waived any fault or negligence on the part of the creditor.

The practical implication of this decision is that individuals acting as sureties or accommodation mortgagors must carefully review and understand the terms of the agreements they sign. These agreements often contain clauses that waive certain rights and protections, making the surety liable even if the creditor takes actions that might seem detrimental to the surety’s interests. The duty to carefully read and understand the contract before signing is consistent with the principle of autonomy of contracts. The court’s decision serves as a cautionary reminder of the importance of understanding the full scope of one’s obligations when acting as a surety or accommodation mortgagor.

FAQs

What was the key issue in this case?	The key issue was whether a surety is liable for a deficiency after the creditor released the principal debtor’s collateral, given a waiver in the surety agreement.
What is an accommodation mortgagor?	An accommodation mortgagor is someone who mortgages their property to secure another person’s debt, without directly benefiting from the loan.
What is the difference between a surety and a guarantor?	A surety is directly liable for the debt if the principal debtor defaults, while a guarantor is only liable if the debtor cannot pay.
What does Article 2089 of the Civil Code state?	Article 2089 states that a pledge or mortgage is indivisible, even if the debt is divided among the debtor’s heirs.
What was the effect of the waiver clause in the surety agreement?	The waiver clause allowed the creditor to substitute, withdraw, or surrender securities without notice to or consent from the surety.
Can a surety waive their rights in a surety agreement?	Yes, a surety can waive their rights unless it is contrary to law, public order, public policy, morals, or good customs.
What is the significance of express stipulations in contracts?	Express stipulations in contracts are binding between the parties and must be complied with in good faith.
How did the court modify the lower court’s decision?	The court modified the interest rate imposed on the deficiency amount to comply with prevailing jurisprudence, imposing 12% interest until June 30, 2013, and 6% thereafter.

In conclusion, the Supreme Court’s decision in Carodan v. China Banking Corporation underscores the importance of understanding the obligations and potential risks associated with surety agreements. Parties must carefully review the terms of these agreements, particularly waiver clauses, to ensure they are fully aware of the extent of their liability. This ruling serves as a significant precedent for future cases involving surety agreements and the enforceability of waivers.

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: ROSALINA CARODAN, PETITIONER, VS. CHINA BANKING CORPORATION, RESPONDENT., G.R. No. 210542, February 24, 2016