Security Bank and Trust Company, Inc. vs. Rodolfo M. Cuenca

1. SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M.
CUENCA
DOCTRINE: An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The 1989 Loan Agreement expressly stipulated that its purpose was to “liquidate,”
not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989
Loan Agreeement, which had alledgedly extended the original P8 million credit facility. Hence, his obligation
as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states
that “[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty.
An essential alteration in the terms of a Loan Agreement without the consent of the surety extinguishes
the latter’s obligation. The submission that only the borrower, not the surety, is entitled to be notified of any
modification in the original loan accommodation is untenablesuch theory is contrary to the to the principle that
a surety cannot assume an obligation more onerous than that of the principal. That the Indemnity Agreement is
a continuing surety does not authorize the lender to extend the scope of the principal obligation inordinately; A
continuing guaranty is one which covers all transaction, including those arising in the future, which are within
the description or contemplation of the contract of guaranty, until the expiration or termination thereof.
FACTS:
Security Bank granted a credit line in the amount of 8 million pesos in favour of Sta. Ines, a corporation engaged
in logging operations and in which Rodolfo Cuenca is the President. In order to secure payment, Sta. Ines
executed a chattel mortgage over some of its machineries and equipments and as an additional security Cuenca
executed an Indemnity Agreement where he bound himself jointly and severally with Sta. Ines and without the
benefit of excussion of whatever amount the client may be indebted to the bank by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s). After Cuenca resigned, Sta. Ines was able to obtained a loan
of 6 million pesos, but was unable to pay the amortization payments and requested Security Bank a complete
restructure of its indebtedness which was approved and without prior notice to or consent of Cuenca. Despite
that Sta. Ines was still unable to pay. As a result Security Bank made failed attempts to demand from Sta. Ines
and Cuenca the fulfillment of their obligation, thus a complaint was filed and a decision in favour of Security
Bank was rendered which held Cuenca liable. On appeal, Cuenca contends that the original agreement of 8
million loan was extinguished by novation when the obligation under the 6 million loan and subsequent
restructuring was granted.
ISSUE:
Whether Cuenca is liable as a surety to the 6 million loan under the Indemnity Agreement?
HELD:
NO. The Indemnity Agreement is a continuing surety and as such does not authorize the bank to extend the scope
of the principal obligation inordinately. A surety being an onerous undertaking, a surety agreement is strictly
construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules
of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans
obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear
stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto. This is
especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the
corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel
the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.

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1. SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M.

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