G.R. No. L-31600. September 12, 1988
PRUDENTIAL BANK & TRUST CO., petitioner, vs. COMMUNITY BUILDERS CO., INC., et al., respondents.

FACTS

Prudential Bank extended an overdraft credit line to Community Builders Co., Inc. To secure this credit accommodation, two deeds of assignment were executed on the same day. The first deed assigned Community’s savings deposit with Prudential, authorizing the bank to apply the deposit to the loan upon default. The second deed assigned ten percent of Community’s receivables from a government construction contract to Prudential. This second deed explicitly stated it was executed “as security for the payment” of the P140,000.00 credit and any future accommodations. Alpha Insurance & Surety Co. also posted a surety bond to guarantee Community’s obligations up to P40,000.00.
Community’s overdraft account expired unpaid. Prudential, pursuant to the first deed, applied Community’s savings deposit (P159,405.63) to the obligation, leaving a claimed balance of P44,533.86. Upon Community’s failure to pay this balance, Prudential filed a collection suit against Community and Alpha. The trial court dismissed the complaint, ruling that the second deed of assignment constituted an outright sale of the receivables, not merely security, and thus extinguished the debt. Prudential and Alpha appealed.

ISSUE

Whether the second deed of assignment constitutes an outright sale of receivables or merely a security for the payment of Community’s loan obligations.

RULING

The Supreme Court reversed the trial court, ruling that the second deed was a security, not an outright sale. The Court applied cardinal rules of contract interpretation: where the terms are clear, the literal meaning controls, and the contemporaneous and subsequent acts of the parties are considered to judge their intention. The deed’s explicit language stated it was executed “as security for the payment” of the credit line. This clear stipulation must be given effect. The contemporaneous execution of two deeds—one covering the savings account and the other covering future collections—both for the same credit accommodation, indicates a unified plan to provide multiple layers of security for the loan.
Furthermore, the parties’ subsequent acts confirmed this intent. Prudential’s act of first exhausting the security under the first deed (the savings deposit) before demanding the balance is consistent with treating both assignments as collateral. Community’s failure to even attempt to collect the government receivables and turn them over to Prudential negates any claim that an absolute sale was intended, as such inaction shows a lack of good faith. Therefore, the second deed was an accessory contract of pledge or assignment by way of security. Consequently, Community remains liable for the unpaid balance. Alpha, as surety, is solidarily liable up to the bond’s P40,000.00 limit, and Community and its General Manager, Filadelfo Rojas, are liable to reimburse Alpha for any payment made under the bond.