The Supreme Court’s decision in Benedicto v. Yujuico clarifies the obligations of a surety in loan restructuring agreements, particularly when modifications like currency conversion occur. The Court ruled that a simple agreement to convert a loan from Philippine pesos to U.S. dollars does not automatically release the surety from their obligations. A surety remains liable unless there is an express and unequivocal release or a complete incompatibility between the original and modified agreements. This ruling emphasizes the importance of clear contractual terms and the enduring nature of comprehensive surety agreements in financial transactions.

Currency Conversion Confusion: When Does Loan Modification Release a Surety?

This case revolves around GTI Sportswear Corporation’s (GTI) Omnibus Credit Line with Far East Bank and Trust Company (now Bank of the Philippine Islands, and later substituted by Philippine Investment One (SPV-AMC), Inc. or PIO). Benedicto Yujuico, as GTI’s president, secured this credit line with a Comprehensive Surety Agreement, making him personally liable. When GTI faced difficulties, a Loan Restructuring Agreement (LRA) was signed. Later, GTI requested conversion of the loan to U.S. dollars, which the bank initially appeared to approve but later denied due to unmet conditions. The central legal question is whether this attempted currency conversion constituted a novation, thereby releasing Yujuico from his surety obligations.

The Regional Trial Court (RTC) initially ruled in favor of GTI and Yujuico, stating that the attempted conversion resulted in novation, thus extinguishing Yujuico’s obligations as a surety. However, the Court of Appeals (CA) reversed this decision, holding that no such novation occurred, and Yujuico remained liable. The Supreme Court (SC) ultimately affirmed the CA’s decision, providing critical insights into the requirements for novation and the interpretation of surety agreements.

One of the key issues raised by Yujuico was whether Far East Bank’s (now PIO) appeal should have been dismissed because they had already partially executed the RTC’s decision by converting the loan. Yujuico relied on the principle established in Verches v. Rios, which states that a party cannot appeal a judgment after voluntarily executing it. The Supreme Court, however, distinguished this case, clarifying that there was no actual execution of the judgment. The bank merely acknowledged the obligation to convert the loan as directed by the RTC, but this acknowledgment did not equate to a satisfaction of the judgment because the conversion was never actually completed.

To distill the foregoing, the party, who is barred from appealing and claiming that he has not recovered enough, must have recovered a judgment upon a claim which is indivisible and, after its rendition, has coerced by execution full or partial satisfaction. Thus, having elected to collect from the judgment by execution, he has ratified it, either in toto or partially, and should be estopped from prosecuting an appeal inconsistent with his collection of the amount adjudged to him.

Thus, the SC proceeded to examine the issue of novation. The Civil Code governs novation, specifically Articles 1291 and 1292. Article 1291 outlines how obligations can be modified, including changing the object or principal conditions, substituting the debtor, or subrogating a third person in the creditor’s rights. Article 1292 further clarifies that for an obligation to be extinguished by another, it must be explicitly declared, or the old and new obligations must be entirely incompatible.

ART. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.

The Supreme Court emphasized that there was no express declaration of novation in the records. There was no document explicitly stating that the agreement to convert the loan from pesos to U.S. dollars would cancel the Loan Restructuring Agreement or the Omnibus Credit Line. Rather, the communications between GTI and the bank indicated a recognition of the LRA’s continued validity. GTI even assured the bank that the other terms of the restructuring agreement would be followed, which is inconsistent with an intent to create a full novation. To have an implied novation, it must be proved that the old and new obligations are incompatible in all aspects. This incompatibility was not present in this situation.

The Court also noted that the only modification introduced by the attempted conversion was the currency in which the loan was to be paid. The interest rate was also affected, but these changes were insufficient to constitute a complete novation. The Court referenced the 1912 case of Zapanta v. De Rotaeche, where an agreement providing a method and more time for satisfying a judgment was deemed not to extinguish the original obligation but merely to delay the creditor’s right to execution. The principle here is that modifying payment terms does not, by itself, extinguish the underlying debt or related surety agreements. This ruling reinforces that unless a new agreement fundamentally alters the nature of the obligation, the original agreement remains in effect.

The Supreme Court further supported its finding by highlighting the nature of the Comprehensive Surety Agreement executed by Yujuico. This agreement was not limited to a single transaction but contemplated a future course of dealing, covering a series of transactions for an indefinite period until revoked. This characteristic is vital. The language of the surety agreement was broad enough to encompass the loan obligation under the restructuring agreement even after the attempted currency conversion. This meant that Yujuico’s guarantee extended to any and all indebtedness of every kind, whether existing at the time of execution or arising afterward.

The Court highlighted that the novation contemplated in Article 1215 of the Civil Code is a total or extinctive novation, not a partial one. Article 1215 states that novation, compensation, or remission of the debt by any of the solidary creditors or with any of the solidary debtors shall extinguish the obligation. However, this applies only when the entire obligation is extinguished. Because there was no total novation, the surety agreement remained in effect, and Yujuico remained liable as a surety. As noted in Sandico, Sr. v. Piguing, novation results in two stipulations: one to extinguish an existing obligation and another to substitute a new one in its place. It must be declared in unequivocal terms.

This case underscores the principle that surety agreements are interpreted strictly against the surety but also in light of the specific terms and conditions of the agreement. For a surety to be released, there must be a clear and unequivocal act by the creditor that alters the principal obligation or prejudice the surety’s rights. Absent such an act, the surety remains bound.

FAQs

What was the key issue in this case?	The central issue was whether the attempted conversion of a loan from Philippine pesos to U.S. dollars constituted a novation, thereby releasing the surety from their obligations. The court had to determine if the agreement was express, incompatible, and extinguished the first loan to create a total novation.
What is a Comprehensive Surety Agreement?	A Comprehensive Surety Agreement is a type of guarantee that covers a series of transactions or debts, existing now or in the future, for an indefinite period until revoked. This contrasts with a surety agreement limited to a specific transaction.
What is novation?	Novation is the substitution or alteration of an obligation by a subsequent one that either cancels or modifies the preceding one. It can be express (explicitly stated) or implied (when the old and new obligations are entirely incompatible).
What is the difference between total and partial novation?	Total novation extinguishes the old obligation entirely, whereas partial novation merely modifies the old obligation, leaving its essence intact. Total novation releases the surety, but partial novation does not.
What did the Court rule about the attempted currency conversion?	The Court ruled that the attempted currency conversion was, at best, a partial, modificatory novation because there was no express agreement to extinguish the original loan. The change in currency and interest rate was insufficient to constitute a complete novation.
Why was the surety not released from his obligations?	The surety was not released because the Comprehensive Surety Agreement he executed covered all present and future debts of the borrower, and the attempted novation was only partial. The court found no express release or complete incompatibility that would extinguish the surety’s obligation.
What is the significance of Verches v. Rios in this case?	Verches v. Rios establishes that a party cannot appeal a judgment after voluntarily executing it. However, the Supreme Court distinguished this case because the bank had not actually executed the RTC decision; it had only acknowledged the obligation to convert the loan.
What legal provisions govern novation?	Articles 1291 and 1292 of the Civil Code govern novation. Article 1291 outlines how obligations can be modified, and Article 1292 clarifies the requirements for an obligation to be extinguished by another.
How are surety agreements interpreted?	Surety agreements are generally interpreted strictly against the surety. However, the interpretation also depends on the specific terms and conditions of the agreement itself.

In conclusion, the Benedicto v. Yujuico case offers crucial guidance on the nuances of loan restructuring, novation, and surety agreements. It highlights the need for clear contractual language and a thorough understanding of the obligations assumed under surety agreements. This decision reinforces the principle that absent a clear and express intention to extinguish the original obligation, a surety remains bound by their guarantee.

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: Benedicto V. Yujuico v. Far East Bank and Trust Company, G.R. No. 186196, August 15, 2018