Understanding the Validity of Contracts and the Rights of Sureties

Genotiva v. Banco De Oro Unibank, Inc., G.R. No. 213796, June 28, 2021

Imagine being in a situation where you’re pressured into signing a contract to secure a loan, only to find out later that your property is at risk of being foreclosed. This is exactly what happened to the Genotivas, a couple caught in a legal battle with Banco De Oro Unibank, Inc. (BDO) over a real estate mortgage. Their case, which reached the Philippine Supreme Court, sheds light on the complexities of surety contracts and the protection of property rights. At the heart of the matter was whether the Genotivas’ consent to the contract was vitiated by duress and whether BDO had the right to apply a deposit meant for redemption to another account.

The Genotivas, involved in a business venture, had secured a loan for their company, Goldland Equity, Inc., with BDO. When one of them, Violet, retired, she was unable to receive her retirement benefits until they agreed to mortgage their property to secure the loan. Later, when they tried to redeem their property with a deposit, BDO applied it to the loan’s interest instead, leading to a legal dispute over the validity of the mortgage and the application of the deposit.

Legal Context: Suretyship, Duress, and Property Rights

In the Philippines, a surety contract is governed by the Civil Code, particularly under Article 1216, which allows a creditor to proceed against any one of the solidary debtors. A surety is someone who guarantees the debt of another, and in this case, the Genotivas were sureties for Goldland’s loan. The concept of duress, or intimidation, is also crucial. According to Article 1335 of the Civil Code, duress exists when a person is compelled to give consent due to a reasonable and well-grounded fear of an imminent and grave evil.

Property rights are protected under the Philippine Constitution, which states that no person shall be deprived of property without due process of law. This principle is vital in cases involving mortgages and foreclosures, ensuring that property owners are treated fairly and legally.

Key provisions in this case include:

Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

This provision highlights the creditor’s rights against sureties, but it does not allow them to take property without due process.

Case Breakdown: The Genotivas’ Journey Through the Courts

The Genotivas’ legal battle began when they filed a complaint against BDO, alleging that their consent to the real estate mortgage was vitiated by duress because BDO withheld Violet’s retirement benefits until they agreed to the mortgage. The Regional Trial Court (RTC) initially ruled in their favor, declaring the mortgage voidable due to undue influence.

However, the Court of Appeals (CA) reversed this decision, arguing that BDO had the right to withhold Violet’s benefits due to her existing liability as a surety. The CA held that the Genotivas voluntarily offered to mortgage their property in exchange for the release of the benefits.

The Supreme Court, in its final ruling, upheld the validity of the mortgage contract, stating:

“It is important to differentiate consent that is reluctantly but freely given, on one hand from consent that was obtained through duress or any other vice of consent, on the other. Contracts entered into with reluctance are not necessarily voidable.”

However, the Court found that BDO’s application of the P500,000 deposit to Goldland’s loan interest was improper:

“BDO may not precipitously deprive them of their property without due process of the law. The manner by which it enforced the surety contract violates the basic principle of due process.”

The procedural steps in this case included:

• The Genotivas filed a complaint in the RTC, seeking to declare the mortgage void and recover their deposit.
• The RTC ruled in their favor, but BDO appealed to the CA.
• The CA reversed the RTC’s decision, prompting the Genotivas to appeal to the Supreme Court.
• The Supreme Court partially granted the Genotivas’ petition, upholding the mortgage’s validity but ordering BDO to return the deposit with interest.

Practical Implications: Protecting Your Property and Understanding Surety Contracts

This ruling has significant implications for individuals and businesses involved in surety contracts. It emphasizes the importance of understanding the terms of such agreements and the rights of sureties. Property owners must be aware that while they can be held liable as sureties, creditors cannot simply take their property without due process.

Businesses should carefully review any surety contracts and consider the potential risks to their assets. For individuals, it’s crucial to seek legal advice before agreeing to act as a surety, especially when personal property is involved.

Key Lessons:

• Consent to a contract, even if given reluctantly, does not necessarily make it voidable.
• Creditors must respect the due process rights of sureties and cannot unilaterally apply payments to different accounts.
• Always consult with a legal professional before entering into a surety contract to understand your obligations and rights.

Frequently Asked Questions

What is a surety contract?

A surety contract is an agreement where one party (the surety) guarantees the debt or obligation of another party (the principal debtor) to a third party (the creditor).

Can a creditor withhold benefits until a surety agrees to a mortgage?

Yes, if the surety has an existing liability to the creditor, as was the case with Violet’s retirement benefits and her obligation under the Deed of Suretyship.

What constitutes duress in a contract?

Duress occurs when a person is compelled to give consent due to a reasonable and well-grounded fear of an imminent and grave evil, as defined by Article 1335 of the Civil Code.

Can a creditor apply a deposit meant for redemption to another account?

No, as ruled in this case, a creditor must respect the surety’s due process rights and cannot unilaterally apply a deposit to a different account without consent.

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

Seek legal advice to understand the terms and potential risks, especially if your property is involved.

How can I protect my property rights as a surety?

Ensure that any agreements are clear and that you understand your rights under the law. If your property is at risk, consult with a lawyer to explore your options.

ASG Law specializes in property law and surety contracts. Contact us or email hello@asglawpartners.com to schedule a consultation.