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In 1980, Dynetics Inc., through its president, acquired a P25M export loan from Security Bank. In 1982, a credit accommodation (SWAP loan) was opened by Security Bank in favor of Dynetics allowing it to acquire an additional $700k loan. This loan was secured by an Indemnity Agreement signed by Antonio Garcia acting as a surety. This loan was not availed of by Dynetics however.
In 1993, the SWAP loan was renewed but it was reduced to $500k. This time, Dynetics availed of it. Garcia still acted as surety but there was no Indemnity Agreement involved. Later, Dynetics, without Garcia’s knowledge, executed several Chattel Mortgages in favor of Security Bank.
Dynetics defaulted from paying. Security Bank foreclosed the mortgages. The proceeds were applied to the SWAP loan leaving a balance of P3.5M. The Export loan has a balance of P464M.
Security Bank is now demanding Garcia, as surety, to pay for the deficiency in both loans.
ISSUE: Whether or not Garcia is liable for both loans.
HELD: No. The Indemnity Agreement specifically secured the $700k SWAP loan which was not availed of. The Continuing Suretyship, on the other hand, specifically secured the reduced $500k SWAP loan. The Indemnity Agreement is not involved in the reduced SWAP loan. There was no reason for Security Bank to require the execution of the Continuing Suretyship if its intention were to have the earlier Indemnity Agreement secure the SWAP loan in both the original and in the reduced amounts.
Garcia is not liable for the deficiency on the SWAP loan because Dynetics executed chattel mortgages in view of the export loan in favor of Security Bank. And this was without Garcia’s knowledge. This does not technically release Garcia as surety but since it is a chattel mortgage which has nothing to do with Garcia (it does not bind him), then the deficiency will have to be shouldered by Dynetics.