The Release of One Surety Does Not Necessarily Affect the Liability of Others

Merrie Anne Tan v. First Malayan Leasing and Finance Corp., G.R. No. 254510, June 16, 2021

Imagine a scenario where you’ve signed on as a surety for a friend’s loan, only to find out later that another co-surety has been released from their obligation. You might wonder if this changes your own responsibility. This is exactly the situation that unfolded in a recent Supreme Court case in the Philippines, which clarified the nuances of suretyship and solidary obligations.

In the case of Merrie Anne Tan v. First Malayan Leasing and Finance Corp., the central issue revolved around the impact of releasing one surety on the liability of the remaining sureties. The case involved a loan taken by New Unitedware Marketing Corporation (NUMC), secured by a suretyship agreement involving multiple parties. When one of the sureties, Edward Yao, was released upon partial payment, the question arose whether this affected the solidary obligation of the remaining sureties, including Merrie Anne Tan.

Legal Context: Understanding Suretyship and Solidary Obligations

Suretyship is a legal concept where a person, known as the surety, guarantees the debt or obligation of another, the principal debtor. Under Philippine law, as outlined in Article 2047 of the Civil Code, a surety undertakes to be bound solidarily with the principal debtor. This means the surety’s liability is intertwined with the debtor’s, making them equally responsible for fulfilling the obligation.

A solidary obligation, as defined by Articles 1207 to 1222 of the Civil Code, allows the creditor to demand payment from any one of the solidary debtors, or all of them simultaneously. This is crucial in understanding the case, as it highlights the principle that the release of one surety does not necessarily absolve the others unless explicitly stated in the agreement.

To illustrate, consider a group of friends who co-sign a loan for a business venture. If one friend pays a portion and is released, the bank can still pursue the others for the remaining balance unless the agreement specifies otherwise.

Case Breakdown: The Journey of Merrie Anne Tan

The case began when NUMC obtained a loan from First Malayan Leasing and Finance Corporation (FMLFC) secured by a promissory note and a continuing surety undertaking signed by Merrie Anne Tan, Edward Yao, and others. When NUMC defaulted on the loan, FMLFC demanded payment from all parties involved.

During the legal proceedings, it was discovered that Yao had entered into a compromise agreement and paid FMLFC P980,000.00, leading to his release from the suretyship. This action prompted Tan to argue that the release of Yao should convert the solidary obligation into a divisible one, reducing her liability.

The Regional Trial Court (RTC) and the Court of Appeals (CA) both ruled that the release of Yao did not affect the solidary nature of the obligation for the remaining sureties. The Supreme Court upheld these decisions, stating:

"Clearly, as spelled out in the Receipt and Release, and consistent with its right as a creditor of solidary obligors under Article 1216, FMLFC proceeded against Yao, later released him from the suretyship upon payment of P980,000.00, and expressly reserved its right to proceed against NUMC and/or its remaining co-sureties."

The Court further clarified:

"The liability of Merrie Tan remains solidary with NUMC, regardless of partial payment by Yao, precisely because the kind of security she undertook was one of suretyship."

However, the Court did modify the penalty charges and attorney’s fees, finding them to be iniquitous and unconscionable when imposed simultaneously. The penalty charge was deemed compensatory, not punitive, and thus should not be added to liquidated damages.

Practical Implications: What This Means for You

This ruling reinforces the importance of understanding the terms of any suretyship agreement before signing. If you are considering becoming a surety, be aware that the release of one co-surety might not affect your liability unless the agreement explicitly states otherwise.

For businesses, this case underscores the need to draft clear and comprehensive surety agreements that outline the conditions under which a surety may be released. It also highlights the potential for courts to intervene and adjust penalties deemed excessive.

Key Lessons:

• Always read and understand the terms of a suretyship agreement thoroughly.
• Be aware that the release of one surety does not automatically reduce your liability unless specified in the contract.
• Seek legal advice to ensure that any suretyship agreement you enter into is fair and balanced.

Frequently Asked Questions

What is a surety?

A surety is a person who guarantees the debt or obligation of another, becoming equally responsible for its fulfillment.

What does ‘solidary obligation’ mean?

A solidary obligation means that each debtor is liable for the entire obligation, allowing the creditor to demand full payment from any one of them.

Can the release of one surety affect my liability as a co-surety?

Not necessarily. Unless the suretyship agreement specifies otherwise, the release of one surety does not affect the liability of the others.

What should I do if I’m asked to be a surety?

Thoroughly review the agreement and seek legal advice to understand your potential liabilities and the conditions under which you might be released.

How can I protect myself as a surety?

Ensure the agreement is clear on the conditions for release and consider negotiating terms that protect your interests.

ASG Law specializes in contract law and suretyship agreements. Contact us or email hello@asglawpartners.com to schedule a consultation.