This Supreme Court decision clarifies the extent of a surety’s liability when a creditor releases the principal debtor’s collateral. The Court ruled that Rosalina Carodan, as a surety, remained liable for the deficiency on a loan even after China Banking Corporation released the principal debtors’ properties. This decision reinforces the binding nature of surety agreements, particularly when they contain waivers of rights to demand payment, notice, and consent regarding the substitution or surrender of securities. This means sureties must understand the full scope of their obligations and the implications of waivers within these agreements, as they may be held responsible for debts even if the creditor alters the initial security arrangements.

Accommodation Mortgagor’s Predicament: Can a Surety Escape Liability After Principal’s Release?

The case revolves around a loan obtained by Barbara Perez and Rebecca Perez-Viloria from China Banking Corporation (China Bank). To secure the loan, Barbara, Rebecca, and Rosalina Carodan executed a Real Estate Mortgage over Rosalina’s property. Additionally, Barbara, Rebecca, Rosalina, and Madeline Carodan entered into a Surety Agreement, guaranteeing the payment of the loan. When Barbara and Rebecca failed to fulfill their loan obligations, China Bank foreclosed on Rosalina’s property but was still left with a deficiency. The central legal question is whether Rosalina, as a surety, remains liable for this deficiency after China Bank released the properties of the principal debtors, Barbara and Rebecca.

Rosalina argued that the release of the principal debtors’ properties extinguished her obligation as a surety, citing the indivisibility of mortgage under Article 2089 of the Civil Code. However, the Court disagreed, emphasizing the nature of a surety agreement and the waivers contained therein. The Court underscored Rosalina’s dual role as both an accommodation mortgagor and a surety. As an accommodation mortgagor, Rosalina voluntarily encumbered her property to secure the loan of Barbara and Rebecca, making her liable regardless of whether she directly benefited from the loan proceeds. Moreover, as a surety, Rosalina bound herself solidarily with the principal debtors, meaning she was directly and equally responsible for the debt.

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 Supreme Court cited the case of Belo v. PNB, stating:

An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did not benefit from the same. The validity of an accommodation mortgage is allowed under Article 2085 of the New Civil Code which provides that (t)hird persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. An accommodation mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as such.

The Court distinguished between a guarantor and a surety, emphasizing that a surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. This distinction is critical because a surety’s obligation is primary and direct, whereas a guarantor’s obligation is secondary and contingent upon the debtor’s inability to pay. The surety agreement in this case contained express waivers that significantly impacted Rosalina’s rights and obligations. Specifically, Rosalina waived her rights to demand payment, receive notice of non-payment, and protest. More importantly, she agreed that the securities could be substituted, withdrawn, or surrendered at any time without her consent or notice.

Due to these waivers, China Bank’s release of the principal debtors’ properties did not discharge Rosalina from her obligations as a surety. The Court emphasized that parties are bound by the terms of their contracts unless such terms are contrary to law, morals, good customs, public order, or public policy. Since the waivers in the surety agreement were not contrary to any of these principles, Rosalina was bound by them. This ruling aligns with established jurisprudence that upholds the enforceability of waivers in surety agreements, as seen in cases like E. Zobel Inc. v. CA, et al. where the Court upheld the validity of a continuing guaranty despite the creditor’s failure to register the mortgage. Here’s a comparison between the arguments presented:

Rosalina’s Argument	China Bank’s Argument
Release of principal debtors’ properties extinguished her obligation as a surety.	Rosalina waived rights to demand payment, notice, and consent regarding security changes.
Violation of indivisibility of mortgage under Article 2089 of the Civil Code.	Surety agreement terms were not contrary to law, morals, good customs, public order, or public policy.

The Court clarified that a mortgage is merely a security for indebtedness and not a satisfaction of it. Therefore, if the proceeds from the foreclosure sale are insufficient to cover the debt, the mortgagee is entitled to claim the deficiency from the debtor. This right is well-established in Philippine jurisprudence. The Supreme Court has consistently held that creditors are not precluded from recovering any unpaid balance on the principal obligation simply because they chose to extrajudicially foreclose the real estate mortgage. Furthermore, it is essential to note that the liability of a surety is joint and several with the principal debtor. This means that the creditor can proceed against either the principal debtor or the surety, or both, to recover the debt.

While the Court affirmed Rosalina’s liability for the deficiency amount, it modified the interest rate imposed by the lower courts. The Court adjusted the interest rates to comply with prevailing jurisprudence, imposing 12% legal interest per annum from January 13, 2000, until June 30, 2013, and 6% legal interest per annum from July 1, 2013, until full payment. This adjustment reflects the evolving legal standards regarding interest rates in the Philippines. The Supreme Court’s decision underscores the importance of carefully reviewing and understanding the terms of surety agreements, particularly the waivers contained therein. Sureties should be aware that they may be held liable for the debt even if the creditor takes actions that might otherwise discharge their obligation, such as releasing the principal debtor’s collateral. This case serves as a reminder that surety agreements are binding contracts with significant legal consequences.

FAQs

What was the key issue in this case?	The key issue was whether a surety remains liable for a debt deficiency after the creditor releases the principal debtor’s collateral.
What is an accommodation mortgagor?	An accommodation mortgagor is someone who mortgages their property to secure another person’s debt, even if they don’t benefit from the loan.
What is the difference between a guarantor and a surety?	A guarantor insures the debtor’s solvency, while a surety insures the debt itself, holding primary liability.
What is a surety agreement?	A surety agreement is a contract where a person (surety) agrees to be responsible for another’s debt if they fail to pay.
What is the significance of waivers in a surety agreement?	Waivers can prevent the surety from asserting certain rights, such as requiring notice before the creditor takes action.
Can a creditor recover a deficiency after foreclosing a mortgage?	Yes, the creditor can recover the deficiency if the foreclosure sale doesn’t cover the full debt amount.
What does it mean to be jointly and severally liable?	Joint and several liability means each party is responsible for the entire debt amount.
What was the interest rate imposed in this case?	The court imposed 12% legal interest from January 13, 2000, to June 30, 2013, and 6% from July 1, 2013, until full payment.

In conclusion, this case provides valuable insights into the liabilities and responsibilities of sureties in loan agreements, particularly when waivers are involved. It highlights the importance of understanding the full implications of surety agreements before entering into such contracts. Given the complexities of surety agreements and mortgage laws, seeking legal advice is crucial to protect one’s rights and interests.

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 v. China Banking Corporation, G.R. No. 210542, February 24, 2016