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327 Phil. 1097


[ G.R. No. 119845, July 05, 1996 ]




This has reference to a petition for review on certiorari of the decision of the Court of Appeals dated August 12, 1994, in CA-G.R. No. 38329 entitled, "Security Bank and Trust Co. plaintiff-appellant vs. Dynetics, Inc., defendant-appellant and Antonio M. Garcia, defendant-appellee," modifying the trial court's judgment dated March 9, 1992, in that said decision of the Court of Appeals held herein petitioner Antonio M. Garcia jointly and severally liable with then defendant-appellant Dynetics, Inc. to plaintiff-appellant Security Bank and Trust Co. for the unpaid obligation under the Export Loan Line in the amount of P24,743,935.35 and a Swap Loan Facility in the deficiency balance of P3,596,758.72, both of which amounts appear to have now ballooned to P2 billion due to interests, penalties, and attorney's fees (pp. 27-28, CA Decision; 175-176, Rollo). Dynetics, Inc. is not a petitioner herein and accepts its liability. The only issue is whether petitioner Garcia is jointly and severally liable with Dynetics, Inc. for such loan.

The relevant facts of the case are as follows:

On November 19, 1980, respondent Security Bank and Trust Co. (SBTC) granted Dynetics, Inc. a short-term EXPORT loan line in the amount of P25 million pursuant to an Advisory Letter-Agreement (Exh. A, A-1). The loan was secured by a deed of assignment with pledge on export letters of credit and/or purchase orders equivalent to 100% of their face value. The said credit line was subsequently renewed on various dates and in various amounts, the last renewal having been made on January 24, 1985 in the increased amount of P26 million evidenced by the Renewal Credit Line Agreement (Exh. B).

Pursuant to said Renewal Credit Line Agreement, Dynetics availed itself of the export loan for the period of February to May 1985 in the total amount of P25,074,906.16, executing and signing for said purpose 34 promissory notes of various dates covering the aforementioned period (Exhs. C to JJ), and trust receipts (pp. 7-8, CA Decision; pp. 155-156, Rollo).

Prior to this 1985 availment, particularly on April 20, 1982, Dynetics obtained another credit accommodation or SWAP loan from SBTC in the amount of $700,000.00. To secure payment thereof, petitioner Antonio Garcia, with Vicente B. Chuidian, executed an Indemnity Agreement in favor of SBTC on April 26, 1982 (Exh. NN).

It appears that Dynetics did not avail itself of this SWAP loan. Subsequently, however, in 1993, the SWAP loan facility was renewed in the reduced amount of $500,000.00 and it was this loan which Dynetics availed of in 1985 and concerning which it issued a promissory note (Exh. PP). The SWAP loan was renewed in 1984, this time on a quarterly basis, the last quarterly renewal having been made on April 22, 1985. By this time, SBTC required Dynetics to execute a continuing suretyship undertaking (Exh. OO, OO-1) in accordance with, and in pursuance of, which petitioner Garcia bound himself jointly and severally with Dynetics to pay all the latter's obligations with respondent SBTC. Subsequent thereto, however, and without the consent and knowledge of Garcia, SBTC required Dynetics to execute a chattel mortgage over various pieces of machinery to secure the SWAP loan (Exh. LL).

Dynetics failed to pay the SWAP loan upon its maturity on July 22, 1985, prompting SBTC to foreclose on the chattel mortgage. The mortgaged chattels were sold at public auction on September 15, 1985 to SBTC as highest bidder for the amount of P6,850,861.30. This amount was applied as partial payment of the SWAP loan, leaving a deficiency balance of P3,596,758.72.

Dynetics also defaulted in the payment of the EXPORT loan which amounted to over P464 million, exclusive of attorney's fees and costs, as of June 30, 1989 (Exh. KK).

In view of Dynetics' failure to settle its account with SBTC relative to the EXPORT loan and the deficiency balance of the SWAP loan, despite repeated demands, a complaint was filed in court by SBTC against Dynetics, petitioner Garcia, and his co-surety Vicente Chuidian for recovery of a sum of money.

Dynetics, in its answer, contended that the promissory notes had no consideration; that the names of the executive officers of SBTC were stamped on the blank promissory notes and that the chattel mortgage was not registered, hence it was converted into a pledge, thus barring recovery of the deficiency balance of the obligation after foreclosure, as the principal obligation was extinguished.

Petitioner Garcia, for his part, asserted that no prior or written demand was made by SBTC or its counsel upon any of the defendants prior to the filing of the case in court, that the loans had long been paid and extinguished; and that the chattel mortgage discarded the Indemnity Agreement and the Continuing Suretyship.

After trial, Branch 58 of the Regional Trial Court of the National Capital Judicial Region stationed in Makati, rendered its Judgment on March 9, 1992, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and against defendant Dynctics Incorporated which is hereby ordered:

1) to pay plaintiff the principal sum of P24,743,935.35 as consequence of and in connection with the promissory notes (Exhs. C to JJ), plus accrued interests thereon, compounded quarterly effective from their respective maturity dates until fully paid, and monthly penalty charges of five percent (5%) of the total outstanding obligation and accrued interests due and unpaid;

2) to pay plaintiff the sum of P3,596,758.72 (or its dollar equivalent of US$187,550.97) as deficiency balance on the chattel mortgage (Exh. LL); and,

3) to pay plaintiff attorney's fees equivalent to twenty percent (20%) of the aforestated entire amounts due and outstanding, litigation expenses of P250,000.00, plus the costs of suit.

The case against defendant Antonio M. Garcia is hereby DISMISSED, together with said defendant's counterclaim for damages. Plaintiff is however ordered to pay defendant Garcia the amount of P100,000.00 as attorney's fees. Furthermore, the writ of preliminary attachment dated September 8, 1989 insofar only as affecting defendant Garcia's properties is hereby quashed, dissolved and/or lifted.

                                    (p. 11, RTC Decision; p. 193, Rollo.)

SBTC, as well as defendant Dynetics, appealed to the Court of Appeals.

On August 12, 1994, the Court of Appeals rendered its now assailed decision modifying that of the trial court by holding Garcia solidarily liable with Dynetics to SBTC for the unpaid balance under the EXPORT loan and deficiency balance on the SWAP loan, together with interest, attorney's fees, litigation expenses, and costs. Disposed thus respondent court:

WHEREFORE, foregoing premises considered, the judgment of the court a quo is hereby MODIFIED and defendant-appellant Dynetics and defendant-appellee Antonio Garcia are hereby ordered to pay jointly and severally unto plaintiff-appellee SBTC the following:

1.) P24,743,935.35 representing the unpaid principal obligation under the promissory notes sued upon, plus accrued interest, compounded quarterly reckoned from the respective maturity dates of the promissory notes until fully paid, and monthly penalty charges of 5% of the total outstanding obligation;

2.) P3,596,758.72 representing deficiency balance on the chattel mortgage with legal interest from 1 September 1989 (date of filing of complaint); and

3.) Attorney's fees equivalent to 20% of the amounts due and outstanding, and litigation expenses of P100,000.00, plus costs.

The award of attorney's fees in favor of appellee Antonio Garcia is eliminated and the writ of attachment issued by the court a quo over the shares of stock owned by appellee Antonio Garcia in Chemphil. is hereby declared to be valid and subsisting until full satisfaction of the aforementioned amounts.

                              (pp. 27-28, CA Decision; pp.175-176, Rollo)

A motion for reconsideration was seasonably filed by Garcia, but the same was denied by respondent court on April 7, 1995.

Hence, the instant petition filed on August 4, 1995, wherein Garcia assigns the following alleged errors:


The Court of Appeals erred in holding Garcia liable as surety for the export loans granted by SBTC to Dynetics because the suretyship he assumed was intended only for another loan, the SWAP LOAN facility.


The Court of Appeals erred in holding that the chattel mortgage executed by Dynetics on 26 April 1985 to secure the promissory note it issued upon availment of the SWAP LOAN facility ($500,000.00) did not replace and extinguish the 1983 suretyship undertaking of Garcia for the same obligation.


On the assumption that the SBTC claim against Garcia as surety is partly or wholly valid, the Court of Appeals erred in awarding so exorbitant amounts of damages, that is P1,747,359,429.30 as penalty charges (5% monthly of total outstanding obligation or 60% per year on the export loan, excluding those on the swap loan) and P408,652,357.42 as attorney's fees (20% of the amounts due and outstanding) on top of P267,558,663.80 as interest earning on the principal obligation of only P24,743,935.35 as export loan and P3,596,758.72 as SWAP LOAN.

Involved in the case at bar are two loans - an EXPORT loan and a SWAP loan obtained by Dynetics from SBTC, with Garcia as surety in the SWAP loan. The controversy arose when Dynetics failed to pay said loans, giving rise to the issue of whether or not petitioner Garcia as surety is liable jointly and solidarily with Dynetics to SBTC for the unpaid obligations of Dynetics under both the EXPORT loan and the SWAP loan, together with the interests, penalty charges, attorney's fees, litigation expenses , and costs, by virtue of the Indemnity Agreement (Exh. NN) and the Continuing Suretyship (Exh. OO, OO-1). In other words, does the liability of Garcia as surety in the SWAP loan cover or extend to the EXPORT loan?

It is the stand of Garcia that he is not liable as surety to SBTC for the EXPORT loan because the Indemnity Agreement and Continuing Suretyship he executed covered only the SWAP loan, which, however, were later replaced and extinguished by the chattel mortgage executed by Dynetics in favor of SBTC.

On the other hand, SBTC contends that Garcia is liable for both the EXPORT loan and SWAP loan transactions by virtue of the comprehensive provisions of the Indemnity Agreement (Exh. NN) and the Continuing Suretyship (Exh. OO, OO-1) he signed and executed jointly and severally with Dynetics in favor of SBTC.

After a painstaking study of the records before us, we find for petitioner Garcia. We hold that he is not liable for the EXPORT loan. Stated differently, Garcia's liability as surety for the SWAP loan under the Indemnity Agreement and the Continuing Surety, if any at all, does not extend to the EXPORT loan.

In holding Garcia liable for both the EXPORT loan and the SWAP loan, respondent Court of Appeals relied heavily on the provisions of the Indemnity Agreement dated April 26, 1982 executed by Garcia together with Dynetics (Exh. NN) that:

. . .Antonio Garcia . . .

hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment, upon demand and without benefit of excusion, of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodations including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodations, as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books, and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made or hereafter executed by and between the parties . . .

                                            (p. 349, Rollo).

At first glance, from the words "as well as of the amount or amounts of such other obligations, . . . that the client may owe the BANK," it would appear that SBTC was also referring to the obligation of Dynetics under the EXPORT loan. But the above quoted phrase, to our mind, and contrary to the claim of SBTC, did not impose on Garcia the obligation to pay the EXPORT loan in addition to the SWAP loan. Particular attention must be paid to the statement appearing on the face of the Indemnity Agreement (Exh. NN) "evidenced by those certain loan documents dated April 20, 1982" (Exh. I-B Garcia). From this statement, it is clear that the Indemnity Agreement refers only to the loan documents of April 20, 1982 which is the SWAP loan. It did not include the EXPORT loan. Hence, petitioner cannot be held answerable for the EXPORT loan.

The Indemnity Agreement specifically secured the $700,000.00 SWAP loan which was not availed of. The Continuing Suretyship, on the other hand, specifically secured the reduced $500,000.00 SWAP loan. The Indemnity Agreement is not involved in the reduced SWAP loan. There was no reason for SBTC to require the execution of the Continuing Suretyship if its intention were to have the earlier Indemnity Agreement secure the SWAP loan in both the original and in the reduced amounts. It may be added that the execution of this Continuing Suretyship for the reduced amount of the SWAP loan confirms our conclusion that SBTC's "present and hereafter obligation" clauses are not binding on Garcia, and that a particular collateral secures only such obligation identified in the document evidencing the security.

Other important considerations negate respondent court's finding that petitioner's liability as surety under the SWAP loan extends or covers the EXPORT loan.

Reviewing once more the record, it may be noticed that EXPORT loan was secured by:

1.  A Deed of Assignment with pledge on the export LC's and PO's equivalent to 100% of their face value, equivalent to 100% of their face value (Par. 3, Letter-Agreement, Exh. A, pp. 242-243, Rollo), by virtue of which the right of the assignor is transferred to the assignee, who would then be allowed to proceed against the debtor. This assignment had the effect similar to that of a sale (Wyco Sales Corp. vs. BA Finance Corp., 200 SCRA 637 [1991]).

2.  Trust Receipts (Pars. 2 & 3, Exh. B, Renewal Credit Line, p. 246, Rollo) which is a separate and independent security transaction intended to aid in financing importers whereby the imported goods are held as security by the lending institution for the loan obligation.

In this regard, Justice Melencio-Herrera's statements in Vintola vs. Insular Bank of Asia and America, (150 SCRA 578 [1987]), later re-echoed in Nacu vs. Court of Appeals, (231 SCRA 237 [1994]), are instructional, to wit:

... A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up a bank extends a loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit and a security feature which is the covering trust receipt.

xxx  xxx  xxx

A trust receipt therefore is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. "It secures an indebtedness and there can be no such thing as security interest that secures no obligation . . ."

. . . as elucidated in Samo vs. People [footnote deleted] "a trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased."

                                                        (at pp. 583-584.)

Thus, by virtue of the trust receipt agreement, SBTC should proceed against the trust receipt because the bank, through said trust receipt agreement theoretically acquired ownership of the imported personal property (Nacu vs. Court of Appeals, supra.).

3. Thirty-four Promissory notes - (Exh. C to JJ, pp. 245-346, Rollo) signed by Dynetics' Vice-President for Treasury and Finance, making the latter liable on its due date for the amount.

4.  Hold-Out Arrangement Proviso (Par. 6, Exh. B) providing, for the right of SBTC to apply even without notice to the debtor, in payment of and all obligations of Dynetics, whatever funds or property of Dynetics which may be under the control or possession of SBTC on deposit or otherwise.

5.  Deposit Balances-to be maintained subject to hold-out, authorizing SBTC to apply all deposit funds of Dynetics in payment of its unpaid obligations.

Prescinding from the foregoing, it is obvious that the EXPORT loan was more than fully secured. SBTC can proceed against these securities in payment of said loan.

The EXPORT loan transaction and SWAP loan transaction are totally alien to each other. Noteworthy is the fact that the EXPORT loan, its renewal of credit line containing the trust receipts and hold-out provisos were extended to Dynetics and the only participation of Garcia was to sign in his capacity as President of Dynetics. The promissory notes were signed by the Vice-President for Treasury and Finance Luvina Maglaya for Dynetics. On the other hand, the SWAP loan was applied for and extended to Dynetics as principal, with Garcia as surety under the Indemnity Agreement. While Garcia is a party in both transactions, he acted in different capacities.

Clearly, the two loan transactions involved two sets of parties. The Indemnity Agreement signed by Garcia is a distinct contract and can not in anyway be related to the EXPORT loan.

Even if we momentarily disregard the foregoing circumstances, and confine ourselves to the provisions of the Indemnity Agreement, still the conclusion can not be escaped that the same does not cover the EXPORT loan. To say otherwise would be to make the provision too comprehensive and all-encompassing as to amount to absurdity.

The phrase "such other obligations" in the Indemnity Agreement is vague, equivocal, and patently ambiguous. It raises doubt as to its real meaning. It is, therefore, subject to interpretation. If the parties intended the 1982 SWAP loan to apply to and cover the 1980 EXPORT loan transaction, SBTC should have clearly and categorically stated so in the said Indemnity Agreement. Respondent bank failed in this regard.

It is a well-stated legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety (Philippine National Bank vs. Court of Appeals, 198 SCRA 767 [1991]). Ambiguous contracts are construed against the party who caused the ambiguity (De Leon vs. Court of Appeals, 186 SCRA 345 [1990]).

An additional point to consider is that the Indemnity Agreement is set out in a printed contract form of SBTC. Its provisions appear to be the standard stipulations imposed by SBTC upon all persons seeking to secure surety bonds. To this extent, the Indemnity Agreement is a contract of adhesion, having been prepared by respondent SBTC. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care (Orient Air Services and Hotel Representatives vs. Court of Appeals, 197 SCRA 645 [1991]; Nacu vs. Court of Appeals, 231 SCRA 237 [1994]; De Leon vs. Court of Appeals, 186 SCRA 345 [1990]; Equitable Banking Corporation vs. Intermediate Appellate Court, 161 SCRA 518 [1988]; Eastern Assurance and Surety Corp. vs. IAC, 179 SCRA 562 [1989]). To be more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it (Orient Air Service and Hotel Representatives vs. Court of Appeals, supra; Cadalin vs. POEA's Administrator, 238 SCRA 721 [1994]).

The foregoing pronouncements are, of course, based on Article 1377 of the Civil Code which provides:

Art 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

On the matter of petitioner's liability for the deficiency balance under the SWAP LOAN, it is of course correct to say that the chattel mortgage executed between Dynetics and SBTC was merely for additional security which did not alter, affect, or modify the terms and conditions of the Indemnity Agreement executed between Garcia and SBTC, even if, it must be admitted, the chattel mortgage was entered into without the knowledge of or notice to Garcia. Hence, Garcia, contrary to his submission, was not released as surety by virtue of execution of the aforementioned chattel mortgage.

Nonetheless, under the prevailing facts of the case, we believe that Garcia still cannot be held liable for the deficiency of P3,596,758.72, the reason being that SBTC expressly and judicially waived the Indemnity Agreement (Exh. NN) and the Continuing Surety (Exh. OO) through no less than Atty. Bello, counsel for SBTC, during the cross-examination by petitioner's lawyer of one of SBTC's witnesses, thusly:


But, I'm not asking what the counsel is after. I'm trying to show that the Swap Agreement is not covered by a Continuing Agreement of Mr. Garcia, because, the Swap Loan Agreement is . . .


But we are willing to admit, Your Honor.


There was a statement, that the Continuing Agreement did not cover the Swap Agreement.


I'm admitting that as far as the Swap Loan is concerned, this was secured; the chattel mortgage only secured the swap loan.


Considering then, for that matter that I will stop asking Mrs. Marquez between the relations of the Swap Loan Agreement, and the Continuing Suretyship.


I was saying that the chattel mortgage more or less, secures the swap loan.

                                             (tsn, May 10, 1991 p. 36-37)

In fine, insofar as the SWAP loan was concerned, SBTC did away with the Indemnity Agreement and the Continuing Surety, opting instead to rely solely on the chattel mortgage. The aforequoted declarations of Atty. Bello in the course of the trial are conclusive. Such admission is binding and no amount of contradictory evidence can offset it.

... Judicial admissions verbal or written made by the parties in the pleadings or in the course of the trial or other proceedings in the same case are conclusive, no evidence being required to prove the same and cannot be contradicted unless shown to have been made through palpable mistake or that no such admission was made. (Philippine American General Insurance Co. Inc. vs. Sweet Lines Inc., 212 SCRA 194; 204 [1992])

We cannot allow SBTC at this time to water down the admission it made in open court, more so after the opposing party relied upon such judicial admission and accordingly dispensed with further proof of the fact already admitted. An admission made by a party in the course of the proceedings does not require proof. The record here does not show any attempt on the part of SBTC to contradict such judicial admission on the ground of palpable mistake.

Finally, it should be noted that the chattel mortgage was entered into by Dynetics and SBTC. Garcia was not a party to the chattel mortgage nor was he aware of the contract or its provisions. It is a basic principle in law that contracts can only bind the parties who had entered into it, and it cannot favor or prejudice a third person (Oreano vs. Court of Appeals, 211 SCRA 40 [19921). Only those who are parties to contracts are liable for their breach. Parties to a contract cannot thereby impose any liability on one who, under its terms, is a stranger to the contract. And considering that it is Dynetics which executed the chattel mortgage, the liability for the deficiency therefor, must be adjudged against Dynetics alone.

With the conclusions thus reached, we find it unnecessary to discuss the issue concerning the reasonableness of the damages awarded, the penalty charges, and attorney's fees the Court of Appeals ordered Garcia to pay SBTC.

WHEREFORE, the decision of respondent Court of Appeals dated August 12, 1994 in its CA-G.R. CV No. 38329 is hereby REVERSED and SET ASIDE insofar as it held petitioner Antonio M. Garcia jointly and severally liable with Dynetics, Inc. to SBTC, and a new decision is hereby entered DISMISSING the complaint against petitioner Antonio M. Garcia.


Narvasa, C.J., Davide, Jr., and Francisco, JJ., concur.
Panganiban, J., took no part.

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