GR 119845; (July, 1996) (Digest)
G.R. No. 119845 July 5, 1996
ANTONIO M. GARCIA, petitioner, vs. COURT OF APPEALS and SECURITY BANK & TRUST COMPANY, respondents.
FACTS
Security Bank and Trust Company (SBTC) granted Dynetics, Inc. an Export Loan Line and a separate Swap Loan Facility. Petitioner Antonio M. Garcia executed an Indemnity Agreement and a Continuing Suretyship in favor of SBTC, binding himself jointly and severally with Dynetics for the latter’s obligations. Subsequently, without Garcia’s knowledge or consent, SBTC required Dynetics to execute a chattel mortgage over specific machinery to secure the Swap Loan. Dynetics defaulted on both loans. SBTC foreclosed on the chattel mortgage, applied the auction proceeds to the Swap Loan, and sought to recover the resulting deficiency balance and the unpaid Export Loan from both Dynetics and Garcia.
ISSUE
Whether petitioner Antonio M. Garcia is jointly and severally liable with Dynetics, Inc. for the deficiency balance of the Swap Loan after the foreclosure of the chattel mortgage.
RULING
No. The Supreme Court reversed the Court of Appeals and held Garcia not liable for the Swap Loan deficiency. The Court’s ruling rests on the principle of novation by substitution of securities and the binding nature of judicial admissions. During trial, SBTC’s counsel explicitly admitted that the bank, with respect to the Swap Loan, “did away with the Indemnity Agreement and the Continuing Surety, opting instead to rely solely on the chattel mortgage.” This judicial admission is conclusive and binds SBTC. By accepting the chattel mortgage as the sole security for the Swap Loan without Garcia’s consent, SBTC effectively discharged Garcia from his suretyship for that particular obligation. Furthermore, Garcia was not a party to the chattel mortgage contract. Applying the principle of relativity of contracts, a contract cannot bind or prejudice a third person like Garcia who did not consent to it. Therefore, liability for the deficiency after the foreclosure of the chattel mortgage lies solely with the mortgagor, Dynetics, Inc.