G.R. No. 191274. December 06, 2017
ERMA INDUSTRIES, INC., ERNESTO B. MARCELO AND FLERIDA O. MARCELO, PETITIONERS, VS. SECURITY BANK CORPORATION AND SERGIO ORTIZ-LUIS, JR., RESPONDENTS.

FACTS

Petitioner Erma Industries, Inc. obtained a credit facility from respondent Security Bank Corporation, secured by a Continuing Suretyship Agreement jointly and severally signed by petitioners Ernesto and Flerida Marcelo and respondents Sergio and Margarita Ortiz-Luis. Erma subsequently defaulted on its loan obligations. In 1994, Erma, through Ernesto Marcelo, requested a restructuring of the entire obligation and offered a property covered by TCT No. M-7021 as additional security, delivering the title to the bank. Security Bank approved only a partial restructuring. As no final agreement was reached, the bank filed a collection suit. During the proceedings, it amended its complaint to pray for the execution of a real estate mortgage over the offered property. Petitioners counterclaimed for the return of the title.

ISSUE

The core issues were: (1) whether the suretyship obligations of Sergio Ortiz-Luis, Jr. were extinguished by novation due to the proposed restructuring; (2) the validity of the stipulated interest and penalty charges; and (3) the propriety of ordering the return of the certificate of title.

RULING

The Supreme Court denied the petition, affirming the lower courts with modifications on the interest rate. First, the Court ruled that no novation occurred to extinguish the surety’s liability. Novation requires a clear intent to extinguish the old obligation and create a new one. Here, the proposed restructuring was never perfected because the parties did not agree on its terms—Erma insisted on full restructuring while the bank approved only a partial one. Consequently, the original loan and suretyship agreements remained in force, and respondent Sergio Ortiz-Luis, Jr. remained solidarily liable as a surety.
Second, the Court modified the imposed interest. While it upheld the stipulated interest rates on the principal obligations, it found the additional imposition of 12% per annum legal interest on the total amount due (which already included accrued interest and penalties) to be excessive and a form of in duplum, which is prohibited. The legal interest should apply only to the outstanding principal from judicial demand until full payment. The penalty charge of 2% per month was deemed iniquitous and reduced to 1% per month.
Finally, the Court ordered Security Bank to return TCT No. M-7021 to Ernesto Marcelo. Since no real estate mortgage was ever constituted over the property—the delivery of the title was merely for purposes of a proposed restructuring that did not materialize—the bank had no right to retain it. Retention under such circumstances constituted an involuntary deposit, obligating the bank to return the title upon demand.