Garcia v. CA

G.R. No. 119845 (July 5, 1996)

Antonio M. Garcia is liable only for Dynetics' SWAP loan; EXPORT loan claim dismissed.

Facts:

This case involves a dispute between Antonio M. Garcia (petitioner) and Security Bank and Trust Company (SBTC) regarding the liability for unpaid loans taken by Dynetics, Inc. (Dynetics), a corporation for which Garcia served as a surety. On November 19, 1980, SBTC granted Dynetics a short-term export loan line amounting to P25 million, which was secured by a deed of assignment and pledge on export letters of credit. This loan was renewed several times, with the last renewal on January 24, 1985, increasing the amount to P26 million.

In addition to the export loan, Dynetics also obtained a SWAP loan from SBTC, initially for $700,000 on April 20, 1982, which was later renewed in a reduced amount of $500,000. Garcia, along with Vicente B. Chuidian, executed an Indemnity Agreement on April 26, 1982, binding themselves jointly and severally to pay any amounts Dynetics owed to SBTC under the SWAP loan. However, the SWAP loan was not availed of initially, and when it was renewed, SBTC required Dynetics to execute a continuing suretyship agreement, which Garcia also signed.

Dynetics defaulted on both the export loan and the SWAP loan, leading SBTC to file a complaint against Dynetics, Garcia, and Chuidian for recovery of the amounts owed. The trial court initially dismissed the case against Garcia, but SBTC appealed, leading to the Court of Appeals holding Garcia jointly and severally liable for the unpaid obligations under both loans.

Legal Issues:

  1. Is Antonio M. Garcia liable as a surety for the export loan granted to Dynetics by SBTC, in addition to his liability for the SWAP loan?
  2. Did the execution of the chattel mortgage by Dynetics affect Garcia's liability under the Indemnity Agreement and Continuing Suretyship?
  3. Are the penalty charges and attorney's fees awarded by the Court of Appeals excessive?

Arguments:

  • Petitioner Garcia's Arguments:

    • Garcia contended that his liability as a surety was limited to the SWAP loan and did not extend to the export loan. He argued that the Indemnity Agreement and Continuing Suretyship were specifically for the SWAP loan and that the chattel mortgage executed by Dynetics extinguished any obligations under the earlier agreements.
    • He also claimed that SBTC failed to make a prior written demand for payment before filing the case and that the loans had already been paid and extinguished.

  • Respondent SBTC's Arguments:

    • SBTC argued that the comprehensive language of the Indemnity Agreement and Continuing Suretyship included all obligations of Dynetics, including the export loan. They maintained that Garcia was liable for both loans due to the nature of the agreements he signed.
    • SBTC contended that the chattel mortgage did not release Garcia from his obligations as a surety.

Court's Decision and Legal Reasoning:

The Supreme Court reversed the decision of the Court of Appeals, ruling that Garcia was not liable for the export loan. The Court found that the Indemnity Agreement and Continuing Suretyship specifically referred to the SWAP loan and did not encompass the export loan. The language of the agreements indicated that they were intended to secure only the obligations related to the SWAP loan, and the Court emphasized that the two loan transactions were distinct and separate.

The Court also noted that the chattel mortgage executed by Dynetics did not alter Garcia's obligations under the Indemnity Agreement, as it was entered into without his knowledge. However, SBTC's counsel had made a judicial admission during the trial that the chattel mortgage secured only the SWAP loan, which further supported the conclusion that Garcia was not liable for the deficiency balance of the SWAP loan.

The Court highlighted the principle that any ambiguity in a surety agreement should be resolved in favor of the surety, and since the terms of the Indemnity Agreement were vague regarding the inclusion of the export loan, it was interpreted against SBTC.

Significant Legal Principles Established:

  1. The liability of a surety is limited to the specific obligations outlined in the surety agreement, and any ambiguity in such agreements should be construed in favor of the surety.
  2. Judicial admissions made during trial are binding and cannot be contradicted unless shown to have been made through palpable mistake.
  3. Contracts can only bind the parties who entered into them, and third parties cannot be held liable for obligations arising from contracts they did not sign or were unaware of.