In Simeon M. Valdez vs. China Banking Corporation, G.R. No. 155009, April 12, 2005, the Supreme Court affirmed that a surety remains liable for a debt even if the creditor grants the principal debtor an extension of time to pay, provided the surety did not consent to the extension. This ruling reinforces the binding nature of surety agreements, highlighting that sureties must fulfill their obligations to creditors unless explicitly released or discharged under specific legal grounds. This case clarifies that mere delay in filing an action does not discharge a surety from their obligations.

When a Signature Binds: Valdez’s Surety and the Unwavering Debt to China Bank

The case revolves around a credit agreement between China Banking Corporation (Chinabank) and Creative Texwood Corporation (CREATIVE), where Chinabank granted CREATIVE a US$1,000,000.00 credit facility for importing raw materials. Simeon M. Valdez, as CREATIVE’s president, also executed a surety agreement, binding himself to ensure the prompt payment of the promissory note. When CREATIVE failed to meet its obligations, Chinabank sued both CREATIVE and Valdez. Valdez contested his liability, arguing that the credit agreement was fictitious, he signed in his official capacity, and any extension granted to CREATIVE without his consent should release him from his surety obligations. The trial court ruled in favor of Chinabank, holding Valdez jointly and severally liable with CREATIVE. The Court of Appeals affirmed this decision, prompting Valdez to elevate the case to the Supreme Court.

The Supreme Court addressed several key issues raised by Valdez. First, Valdez argued that the dismissal of Chinabank’s appeal from the trial court’s decision vacated the entire judgment, rendering his appeal moot. The Court rejected this, citing Section 9(3) of Batas Pambansa Blg. 129, which grants the Court of Appeals exclusive appellate jurisdiction over final judgments of regional trial courts. Once Valdez invoked this jurisdiction by filing his appeal, the Court of Appeals retained the authority to resolve it, irrespective of the dismissal of Chinabank’s appeal. The Court emphasized the principle that jurisdiction, once acquired, continues until the case is finally terminated, as stated in Tinitigan vs. Tinitigan, 100 SCRA 619, 634.

Valdez further contended that Chinabank failed to prove adequate consideration for the credit agreement. He claimed that Chinabank did not present evidence of drawdowns from the credit line by CREATIVE, such as shipping documents related to importations. The Supreme Court dismissed this argument, pointing out that Valdez had waived this defense by not raising it in his initial answer. According to Rule 9, Section 1 of the Rules of Court, defenses not raised in the answer are deemed waived. The Court highlighted that Valdez’s answer contained admissions that CREATIVE received proceeds from the agreement and made substantial payments, contradicting his claim of lack of consideration.

Moreover, the Supreme Court pointed out the inconsistency in Valdez’s claims, noting that in his answer, he admitted CREATIVE received the proceeds and made payments.

“9. That while answering defendant did affix his signature to Annex C’ [surety agreement] as co-obligor, he did so merely to accommodate his co-defendant corporation who actually received the proceeds thereof and if ever the co-defendant corporation has been unable to pay its obligation to the plaintiff the same was due to the acts and/or omissions of co-defendant corporation”.

“14. Defendants have already made a substantial payment on the said account but which plaintiff in bad faith did not properly applied and credited to defendants’ account.”

Valdez also argued that an inconsistency between the US$875,468.72 demanded by Chinabank and the US$1,000,000.00 promissory note suggested an unconsented extension of the loan, relieving him of his surety obligations. The Court dismissed this argument as an attempt to introduce a new factual issue late in the proceedings. His initial answer did not indicate any intent to raise an issue based on this inconsistency. Citing Philippine Ports Authority vs. City of Iloilo, 406 SCRA 88, 93, the Court reiterated that issues not brought to the trial court’s attention cannot be raised for the first time on appeal.

The court also addressed the issue of whether the extension of time granted to the debtor, CREATIVE, without the surety’s consent, extinguished the guaranty under Article 2079 of the Civil Code. Article 2079 states that “An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty.” However, the Court found that Valdez failed to prove that such an extension was indeed granted and that he did not consent to it. The Court emphasized that the mere failure of the creditor to demand payment after the debt has become due does not, in itself, constitute an extension of time.

In conclusion, the Supreme Court upheld the Court of Appeals’ decision, affirming Valdez’s liability as a surety. The Court emphasized that having freely assumed the obligations of a surety, Valdez could not evade those obligations by raising factual issues not properly presented before the lower courts. The case serves as a reminder of the binding nature of surety agreements and the importance of raising all relevant defenses at the earliest opportunity.

FAQs

What was the key issue in this case?	The key issue was whether Simeon Valdez, as a surety, was liable for the debt of Creative Texwood Corporation to China Banking Corporation, despite arguments of lack of consideration and an alleged unconsented extension of the loan.
What is a surety agreement?	A surety agreement is a contract where one party (the surety) guarantees to a creditor that a third party (the principal debtor) will fulfill its obligations. If the principal debtor fails to perform, the surety is liable to the creditor for the debt or obligation.
Can a surety be released from their obligations if the creditor extends the payment period to the debtor?	Under Article 2079 of the Civil Code, if the creditor grants an extension to the debtor without the surety’s consent, the surety is released from their obligations. However, the surety must prove that such an extension was granted and that they did not consent to it.
What does it mean to waive a defense?	Waiving a defense means voluntarily giving up the right to use a particular argument or legal claim in a case. In this case, Valdez waived his defense of lack of consideration by not raising it in his initial answer to the complaint.
What is the significance of Rule 9, Section 1 of the Rules of Court?	Rule 9, Section 1 of the Rules of Court states that defenses and objections not raised in the answer to a complaint are deemed waived. This rule ensures that parties present all their defenses at the outset of the case.
Why did the Supreme Court dismiss Valdez’s argument about the inconsistency in the loan amount?	The Supreme Court dismissed this argument because Valdez raised it for the first time on appeal, without presenting it to the trial court. Issues not raised in the lower court cannot be raised for the first time on appeal.
What is the role of the Court of Appeals in this case?	The Court of Appeals has appellate jurisdiction over final judgments of regional trial courts. It reviewed the trial court’s decision and affirmed that Valdez was liable as a surety.
What is the practical implication of this ruling for sureties?	The ruling reinforces that sureties are bound by their agreements and must fulfill their obligations unless specifically released under the law. It underscores the importance of understanding the risks and obligations associated with being a surety.

This case illustrates the importance of understanding the full extent of obligations assumed under a surety agreement. It also highlights the necessity of raising all relevant defenses at the earliest stage of litigation. The Supreme Court’s decision underscores the principle that parties must adhere to their contractual commitments, and attempts to evade liability based on belatedly raised issues will not be favorably considered.

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: Simeon M. Valdez vs. China Banking Corporation, G.R. No. 155009, April 12, 2005