GR L 29587; (November 1975) (Digest)
G.R. No. L-29587 November 28, 1975
PHILIPPINE NATIONAL BANK, petitioner, vs. LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS, respondents.
FACTS
Petitioner Philippine National Bank (PNB) extended a crop loan to sugar planter Augusto R. Villarosa, secured by a chattel mortgage on his standing crops and by surety bonds from three companies, including respondent Luzon Surety Co., Inc. for P10,000. The chattel mortgage contract explicitly stated that the mortgagee (PNB) could “increase or decrease the amount of the loan as well as the installment as it may deem convenient.” The original credit line was increased, and Villarosa subsequently defaulted. PNB filed a complaint for collection against Villarosa and the sureties. The Court of First Instance held them jointly and severally liable, but the Court of Appeals reversed the decision as to Luzon Surety, absolving it from liability.
ISSUE
Whether the Court of Appeals erred in absolving Luzon Surety Co., Inc. from liability on its surety bond.
RULING
Yes, the Court of Appeals erred. The Supreme Court reversed its decision and reinstated the trial court’s judgment holding Luzon Surety liable. The legal logic is twofold. First, the defense of material alteration of the principal obligation is untenable. The alterations, in the form of increases to the credit line, were expressly authorized by Paragraph 4 of the Chattel Mortgage, which was referred to in the surety bond itself. The intent to secure future indebtedness was clear from the contract’s terms. Following precedent, where such an intent is evident, it controls, and the surety is not released by such consented-to modifications. Second, regarding liability for interest exceeding the bond’s face value, the surety can be held liable for interest from the time judicial action is commenced. This increased liability stems not from the contract but from the surety’s default and the necessity of collection. Consequently, Luzon Surety is liable for its P10,000 bond, plus legal interest computed from the filing of the complaint on June 8, 1960.