G.R. No. 138544; October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA, respondent.

FACTS

Petitioner Security Bank and Trust Company (SBTC) granted Sta. Ines Melale Corporation (SIMC) an ₱8 million credit line effective until November 30, 1981. As additional security, respondent Rodolfo M. Cuenca, then SIMC’s President and Chairman, executed an Indemnity Agreement on December 17, 1980, binding himself solidarily with SIMC for the credit accommodation, including its “substitutions, renewals, extensions, increases, amendments, conversions and revivals.” SIMC drew ₱6.1 million on November 26, 1981. In 1985, Cuenca resigned from SIMC and his shares were subsequently sold at public auction.
After Cuenca’s separation from SIMC, the corporation obtained six additional loans from SBTC between 1985 and 1986, aggregating over ₱6.3 million. In 1988, SBTC and SIMC, without notifying or obtaining Cuenca’s consent, executed a loan restructuring agreement covering all obligations. When SIMC defaulted, SBTC sued both SIMC and Cuenca for the unpaid balance. The Regional Trial Court held them jointly and severally liable.

ISSUE

Whether respondent Rodolfo M. Cuenca, as a surety, remains liable for the loans obtained by SIMC after his separation from the corporation and for the subsequent restructuring agreement executed without his knowledge or consent.

RULING

No. The Supreme Court affirmed the Court of Appeals’ decision releasing Cuenca from liability. The Court emphasized that a contract of suretyship is a strictissimi juris undertaking, construed strictly against the creditor. The 1980 Indemnity Agreement, while a continuing surety, was anchored on the specific ₱8 million credit line expiring in November 1981. The subsequent loans obtained from 1985 to 1986 and the 1988 restructuring were material alterations to the principal obligation. Fundamental fairness requires the creditor to notify the surety and obtain consent to such alterations, as they potentially increase the surety’s risk. SBTC failed to do so, and there was no clear stipulation where Cuenca waived these rights.
Crucially, Cuenca was no longer a principal officer or stockholder of SIMC when the later obligations were incurred. He therefore lacked the capacity to influence the debtor’s repayment and had no reason to bind himself to new obligations. The surety’s liability is co-extensive with that of the principal debtor only for the obligation contemplated at the time of the suretyship. The extensions and restructuring executed without the surety’s consent discharged him from liability for those subsequent agreements.