2017 (GR. NO. 191274 ERMA INDUSTRIES VS. SECURITY BANK CORP.

)
Interests; Sureties; Accomodation Parties
FACTS: Erma Industries obtained from Security Bank Corp (SBC) a credit facility, the conditions for which
are found in the credit agreement executed by them. It is stated that its high ranking officers, Ernesto
Marcelo and Segio Ortiz would be bound jointly and severally with Erma Industries in case the latter
defaults in it its obligations.
Erma obtained various peso and dollar denominated loans evidenced by promissory notes. Commonly
found stipulations are that the interest of 7.5% for the dollar and 21% on the peso obligation per annum,
that interest not paid shall be compounded monthly from due, that there is a penalty charge of 2% per
month of the total outstanding principal and interest due and unpaid, and attorney’s fees.
Erma defaulted on the loan, Marcelo requested a restricting of the loan with SBC, offering a property he
owned. The title was received by SBC but approved only partial restructuring up to P5m. Erma was not
satisfied and requested another, this time for the entire obligation and offered as collateral another property
of Marcelo.
SBC refused this and demanded payment from Erma and its sureties in the amount of P18m and $280k
respectively. It filed a complaint with the RTC for payment of the loan, along with the stipulated penalties
and interests in the agreement. Erma requested the return of the title of the property but SBC retained
possession.
Erma filed their answer, and Ortiz for his part denied liability, because he claimed that he signed the
agreement only as an accommodation party and nominal surety, he also alleges that upon the restructuring
of the credit loan, which he was not informed of, his liability was extinguished by novation.
RTC adjudged Erma liable and ordered them to pay their debts, but instead of penalties found in the
agreement, RTC held those to be iniquitous and set a 12% legal interest per annum on the whole debt until
full payment. It also ordered Marcelo and Ortiz liable as sureties. On Ortiz’ liability, it found no restructuring
of the obligation.
CA affirmed the RTC decision. Petitioners now file a petition for review in the SC. Petitioners arguments are
that since both court have found the interest indeed excessive, it should’ve ordered them to pay the base
amount of their debts, not inclusive of the interests.
ISSUES: 1. WON the CA and RTC erred in finding the petitioners liable for the amount of their loans (P18m
and $280k interest inclusive)
2. WON the CA and RTC erred in finding the petitioners liable for 12% per annum until full payment
3. WON Ortiz’ liability is solidary
RULING: 1. No, the RTC respected the force of contracts between the two parties.
2. No, the RTC can adjust the interest to be imposed based on its discretion if it finds the former
unconscionable.
3. Yes, he signed as a surety. Even if he asserts that he is merely an accommodation party, a reading of
the instrument shows that he binds himself jointly and severally with the petitioner and his co-sureties.
RATIO: 1. The RTC already denied the additional penalty interests claimed by SBC for being iniquitous and
instead imposed a 12% legal interest on the total outstanding obligation. The CA found this fair as
compared to those wanted by SBC.
The petitioners contend that since the lower courts found that interests excessive, then the amounts
ordered paid should’ve been reduced to the actual unpaid principal values, excluding the interests and
penalty charges. They are mistaken.
The RTC did not delete the interests on the basis of Civil Code. That the obligatory force of contracts, not
otherwise contrary to law, morals, good customs or public policy as between the contracting parties. It cited
the provisions on interest, that if in case of delay and there was no agreement on the interest, the legal
interest of 6% per annum would be paid (Art 2209), that interest not paid when due shall be compounded
monthly from due date (Art 1959), and that interest due and unpaid may be added to the principal and earn
new interest (Art 2212)
2. What the RTC did was take into account the circumstances petitioners are facing, stating that the original
rate imposed by SBC would be iniquitous and tantamount to merciless forfeiture of property.
The CA in affirming acted in accordance to Art 1229 of the civil code which allows judges to equitably
reduce the penalties when there is partial or irregular compliance with the principal obligation, or when the
penalty would be iniquitous or unconscionable. This determination is addressed to the discretion of the
court.
3. A reading of the surety agreement would show that Ortiz’s liability is clear. He is bound by all the terms
and conditions and that his liability is solidary with the debtor and co-sureties.
Ortiz claims that he is a mere accommodation party, however it does not discharge him as a surety. The
court discussed the difference of an accommodation party and a compensated surety and that reasons why
they are treated differently.
1. Unlike the private surety, the corporate surety signs for cash and not for friendship. The private surety is
regarded as someone doing a rather foolish act for praiseworthy motives; the corporate surety, to the
contrary, is in business to make a profit and charges a premium depending upon the amount of guaranty
and the risk involved.
2. The corporate surety, like an insurance company, prepares the instrument, which is a type of contract of
adhesion whereas the private surety usually does not prepare the note or bond which he signs.
3. The obligation of the private surety often is assumed simply on the basis of the debtor's representations
and without legal advice, while the corporate surety does not bind itself until a full investigation has been
made.
In the case of the corporate surety, the rule of strictissimi juris is not applicable, and courts apply the rules
of interpretation of appertaining to contracts of insurance.
Petition Denied. CA decision Affirmed.