Sps. Toh v. Solidbank

SPOUSES VICKY TAN TOH and LUIS TOH, petitioners, vs.
SOLID
BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION
(FBPC)
FACTS:
An omnibus line credit facility worth P10M was extended in
favor of FBPC, by SOLID BANK CORP. The terms and conditions of the
agreement as well as the checklist of documents necessary to open
the credit line were stipulated in a "letter-advise" of the Bank. A
Continuing Guaranty was submitted along with other documents
essential for the credit facility. The Continuing Guaranty did not provide
fot yhr maximum limiy on the indebtedness that FBPC may incur.
16 June 1993, respondent FBPC started to avail of the credit
facility and secured letters of credit. FBPC opened 13 letters of credit
and executed a series of trust receipts over the goods allegedly
purchased from the proceeds of the loans.
13 January 1994, respondent Bank received information that
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had
fraudulently departed from their conjugal home. On 14 January 1994
the Bank served a demand letter upon FBPC and petitioner Luis Toh
invoking the acceleration clause in the trust receipts of FBPC and
claimed payment for P10,539,758.68 as unpaid overdue accounts on
the letters of credit plus interests and penalties within 24 hours from
receipt thereof Solid Bank also invoked the Continuing Guaranty
executed by petitioner-spouses Luis Toh and Vicky Tan Toh.
On 17 January 1994 respondent Bank filed a complaint for sum of
money.
Petitioners also contended that through FBPC Board Resolution,
petitioner Luis Toh was removed as an authorized signatory for FBPC
and replaced by respondent-spouses Ng Li and Padilla for all the
transactions of FBPC with respondent Bank. They even resigned from
their respective positions in FBPC. Finally, petitioners averred that
sometime in June 1993 they
obtained from respondent Kenneth Ng Li their exclusion from the

several surety agreements they had entered int.
ISSUE:
WON spouses TOH are discharged as sureties under the Continuing
Guaranty.
HELD:
This Court holds that the Continuing Guaranty is a valid and
binding contract of petitioner-spouses as it is a public document that
enjoys the presumption of authenticity and due execution. Similarly,
there is no basis for petitioners to limit their responsibility so long as
they were corporate officers and stockholders of FBPC. Nothing in the
Continuing Guaranty restricts their contractual undertaking to such
condition or eventuality.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the
surety agreement they signed so must we also hold respondent Bank
to its representations in the "letter-advise" of 16 May 1993.
Particularly, as to the extension of the due dates of the letters of credit,
we cannot exclude from the Continuing Guaranty the preconditions of
the Bank that were plainly stipulated in the "letter-advise."
Insofar as petitioners stipulate in the Continuing Guaranty that
respondent Bank "may at any time, or from time to time, in [its]
discretion x x x extend or change the time payment," this provision
even if understood as a waiver is confined per se to the grant of an
extension and does not surrender the prerequisites therefor as
mandated in the "letter-advise." In other words, the authority of the
Bank to defer collection contemplates only authorized extensions, that
is, those that meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its
discretion pursuant to the Continuing Guaranty, it should nonetheless
comply with the requirements that domestic letters of credit be
supported by fifteen percent (15%) marginal deposit extendible three
(3) times for a period of thirty (30) days for each extension, subject to
twenty-five percent (25%) partial payment per extension.
Furthermore, the assurance of the sureties in the Continuing
Guaranty that "[n]o act or omission of any kind on [the Bank's] part in
the premises shall in any event affect or impair this guaranty" must
also be read "strictissimi juris" for the reason that petitioners are only
accommodation sureties, i.e., they received nothing out of the security
contract they signed. An extension of the period for enforcing the
indebtedness does not by itself bring about the discharge of the
sureties unless the extra time is not permitted within the terms of the
waiver, i.e., where there is no payment or there is deficient settlement
of the marginal deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension releases the sureties.
Under Art. 2055 of the Civil Code, the liability of a surety is measured
by the terms of his contract, and while he is liable to the full extent
thereof, his accountability is strictly limited to that assumed by its
terms.
It is admitted by respondent Bank before the trial court that
several letters of credit were irrevocably extended for ninety (90) days
with alarmingly flawed and inadequate consideration - the
indispensable marginal deposit of fifteen percent (15%) and the
twenty-five percent (25%) prerequisite for each extension of thirty (30)
days.
The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions for exercising
the privilege are not covered by the waiver stipulated in the Continuing
Guaranty. Evidently, they constitute illicit extensions prohibited under
Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the
guaranty." As a result of these illicit extensions, petitioner-spouses Luis
Toh and Vicky Tan Toh are relieved of their obligations as sureties of
respondent FBPC under Art. 2079 of the Civil Code.
By the same token, there is no explanation on record for the
utter worthlessness of the trust receipts in favor of the Bank when
these documents ought to have added more security to the
indebtedness of FBPC. To be sure, the goods subject of the trust
receipts were not entirely lost since the security officer of respondent
Bank who conducted surveillance of FBPC even had the chance to
intercept the surreptitious transfer of the items under trust. In addition,
the attached properties of FBPC were perfunctorily abandoned by
respondent Bank although the bonds therefor were considerably
reduced by the trial court.
The consequence of these omissions is to discharge the surety,

petitioners herein, or at the very least, mitigate the liability of the
surety up to the value of the property or lien released If the creditor
has acquired a lien upon the property of a principal, the creditor at
once becomes charged with the duty of retaining such security, or
maintaining such lien in the interest of the surety, and any release or
impairment of this security as a primary resource for the payment of a
debt, will discharge the surety to the extent of the value of the
property or lien released x x x x [for] there immediately arises a trust
relation between the parties, and the creditor as trustee is bound to
account to the surety for the value of the security in his hands.
For the same reason, the grace period granted by respondent
Bank represents unceremonious abandonment and forfeiture of the
fifteen percent (15%) marginal deposit and the twenty-five percent
(25%) partial payment as fixed in the "letter-advise." These payments
are unmistakably additional securities intended to protect both
respondent Bank and the sureties in the event that the principal debtor
FBPC becomes insolvent during the extension period. Compliance with
these requisites was not waived by petitioners in the Continuing
Guaranty. For this unwarranted exercise of discretion, respondent Bank
bears the loss; due to its unauthorized extensions to pay granted to
FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as
sureties under the Continuing Guaranty.

Sps. Toh v. Solidbank

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What did the court rule regarding the sureties' liability?

SPOUSES VICKY TAN TOH and LUIS TOH, petitioners, vs.

obtained from respondent Kenneth Ng Li their exclusion from the

The consequence of these omissions is to discharge the surety,

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