1

January 17, 2005

Page

G.R. No. 160466

SPOUSES ALFREDO and SUSANA ONG, petitioners,

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255,
dated February 17, 2003, affirming the decision of the trial court denying
petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation
engaged in the manufacture and export of finished wood products.
Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer,
respectively.
On April 20, 1992, respondent Philippine Commercial International Bank
(now Equitable-Philippine Commercial International Bank or E-PCIB) filed a
case for collection of a sum of money 1 against petitioners-spouses.
Respondent bank sought to hold petitioners-spouses liable as sureties on
the three (3) promissory notes they issued to secure some of BMCs loans,
totalling five million pesos (P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its
business and applied for various loans, amounting to a total of five million
pesos, with the respondent bank. Petitioners-spouses acted as sureties for
these loans and issued three (3) promissory notes for the purpose. Under
the terms of the notes, it was stipulated that respondent bank may consider
debtor BMC in default and demand payment of the remaining balance of the
loan upon the levy, attachment or garnishment of any of its properties, or
upon BMCs insolvency, or if it is declared to be in a state of suspension of
payments. Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and
suspension of payments with the Securities and Exchange Commission

Page

(SEC) after its properties were attached by creditors. Respondent bank

considered debtor BMC in default of its obligations and sought to collect
payment thereof from petitioners-spouses as sureties. In due time,
petitioners-spouses filed their Answer.1awphi1.nt
On October 13, 1992, a Memorandum of Agreement (MOA) 2 was executed
by debtor BMC, the petitioners-spouses as President and Treasurer of BMC,
and the consortium of creditor banks of BMC (of which respondent bank is
included). The MOA took effect upon its approval by the SEC on November
27, 1992.3
Thereafter, petitioners-spouses moved to dismiss4 the complaint.
They argued that as the SEC declared the principal debtor BMC in a state of
suspension of payments and, under the MOA, the creditor banks, including
respondent bank, agreed to temporarily suspend any pending civil action
against the debtor BMC, the benefits of the MOA should be extended to
petitioners-spouses who acted as BMCs sureties in their contracts of loan
with respondent bank. Petitioners-spouses averred that respondent bank is
barred from pursuing its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses
appealed to the Court of Appeals which affirmed the trial courts ruling that
a creditor can proceed against petitioners-spouses as surety independently
of its right to proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by
respondent bank should be dismissed for three (3) reasons: First, the MOA
provided that during its effectivity, there shall be a suspension of filing or
pursuing of collection cases against the BMC and this provision should
benefit petitioners as sureties. Second, principal debtor BMC has been
placed under suspension of payment of debts by the SEC; petitioners
contend that it would prejudice them if the principal debtor BMC would
enjoy the suspension of payment of its debts while petitioners, who acted
only as sureties for some of BMCs debts, would be compelled to make the
payment; petitioners add that compelling them to pay is contrary to Article
2063 of the Civil Code which provides that a compromise between the
creditor and principal debtor benefits the guarantor and should not

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prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil
Code which provides that: "the guarantor may set up against the creditor
all the defenses which pertain to the principal debtor and are inherent in the
debt; but not those which are purely personal to the debtor." Petitioners
aver that if the principal debtor BMC can set up the defense of suspension
of payment of debts and filing of collection suits against respondent bank,
petitioners as sureties should likewise be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the
Civil Code is misplaced as these provisions refer to contracts of
guaranty. They do not apply to suretyship contracts. Petitionersspouses are not guarantors but sureties of BMCs debts. There is a sea of
difference in the rights and liabilities of a guarantor and a surety. A
guarantor insures the solvency of the debtor while a surety is an
insurer of the debt itself. A contract of guaranty gives rise to a
subsidiary obligation on the part of the guarantor. It is only after the
creditor has proceeded against the properties of the principal debtor and
the debt remains unsatisfied that a guarantor can be held liable to answer
for any unpaid amount. This is the principle of excussion. In a suretyship
contract, however, the benefit of excussion is not available to the
surety as he is principally liable for the payment of the debt. As the
surety insures the debt itself, he obligates himself to pay the debt if the
principal debtor will not pay, regardless of whether or not the latter is
financially capable to fulfill his obligation. Thus, a creditor can go directly
against the surety although the principal debtor is solvent and is able to pay
or no prior demand is made on the principal debtor. A surety is directly,
equally and absolutely bound with the principal debtor for the
payment of the debt and is deemed as an original promissor and
debtor from the beginning.5
Under the suretyship contract entered into by petitioners-spouses with
respondent bank, the former obligated themselves to be solidarily bound
with the principal debtor BMC for the payment of its debts to respondent
bank amounting to five million pesos (P5,000,000.00). Under Article 1216
of the Civil Code,6 respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of the MOA which

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provided for the suspension of payment and filing of collection suits against
BMC. Respondent banks right to collect payment from the surety exists
independently of its right to proceed directly against the principal debtor. In
fact, the creditor bank may go against the surety alone without prior
demand for payment on the principal debtor. 7
The provisions of the MOA regarding the suspension of payments
by BMC and the non-filing of collection suits by the creditor banks
pertain only to the property of the principal debtor BMC. Firstly, in
the rehabilitation receivership filed by BMC, only the properties of BMC were
mentioned in the petition with the SEC. 8 Secondly, there is nothing in the
MOA that involves the liabilities of the sureties whose properties are
separate and distinct from that of the debtor BMC. Lastly, it bears to stress
that the MOA executed by BMC and signed by the creditor-banks was
approved by the SEC whose jurisdiction is limited only to corporations and
corporate assets. It has no jurisdiction over the properties of BMCs officers
or sureties.1awphi1.nt
Clearly, the collection suit filed by respondent bank against petitionersspouses as sureties can prosper. The trial courts denial of petitioners
motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No
pronouncement as to costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Page

Page

G.R. No. 160324 November 15, 2005

INTERNATIONAL
FINANCE
CORPORATION,
vs.
IMPERIAL TEXTILE MILLS, INC.,* Respondent.

Petitioner,

DECISION
PANGANIBAN, J.:
he terms of a contract govern the rights and obligations of the contracting
parties. When the obligor undertakes to be "jointly and severally" liable, it
means
that
the
obligation
is
solidary.
If solidary liability was instituted to "guarantee" a principal obligation, the
law deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly that,
although denominated as a "Guarantee Agreement," the Contract was
actually a surety. Notwithstanding the use of the words "guarantee" and
"guarantor," the subject Contract was indeed a surety, because its terms
were clear and left no doubt as to the intention of the parties.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court,
assailing the February 28, 2002 Decision 2 and September 30, 2003
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 58471. The
challenged Decision disposed as follows:
"WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the
trial court is MODIFIED to read as follows:
"1. Philippine Polyamide Industrial Corporation is ORDERED to pay
[Petitioner] International Finance Corporation, the following amounts:
(a) US$2,833,967.00 with accrued interests as provided in the Loan
Agreement;
(b) Interest of 12% per annum on accrued interest, which shall be counted
from the date of filing of the instant action up to the actual payment;

(d) Costs of suit.

7
Page

(c) P73,340.00 as attorneys fees;

"2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is HELD
secondarily liable to pay the amount herein adjudged to [Petitioner]
International Finance Corporation."4
The assailed Resolution denied both parties respective Motions for
Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
"On December 17, 1974, [Petitioner] International Finance Corporation (IFC)
and [Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered
into a loan agreement wherein IFC extended to PPIC a loan of
US$7,000,000.00, payable in sixteen (16) semi-annual installments of
US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with
interest at the rate of 10% per annum on the principal amount of the loan
advanced and outstanding from time to time. The interest shall be paid in
US dollars semi-annually on June 1 and December 1 in each year and
interest for any period less than a year shall accrue and be pro-rated on the
basis of a 360-day year of twelve 30-day months.
"On December 17, 1974, a Guarantee Agreement was executed with x x x
Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation
(Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to
guarantee PPICs obligations under the loan agreement.
"PPIC paid the installments due on June 1, 1977, December 1, 1977 and
June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and
December 1, 1979 were rescheduled as requested by PPIC. Despite the
rescheduling of the installment payments, however, PPIC defaulted. Hence,
on April 1, 1985, IFC served a written notice of default to PPIC demanding
the latter to pay the outstanding principal loan and all its accrued interests.
Despite such notice, PPIC failed to pay the loan and its interests.

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"By virtue of PPICs failure to pay, IFC, together with DBP, applied for the
extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPIC, located
at Calamba, Laguna, with the regional sheriff of Calamba, Laguna. On July
30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of
extrajudicial sale. IFC and DBP were the only bidders during the auction
sale. IFCs bid was for P99,269,100.00 which was equivalent to
US$5,250,000.00 (at the prevailing exchange rate of P18.9084 = US$1.00).
The outstanding loan, however, amounted to US$8,083,967.00 thus leaving
a balance of US$2,833,967.00. PPIC failed to pay the remaining balance.
"Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to
pay the outstanding balance. However, despite the demand made by IFC,
the outstanding balance remained unpaid.
"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila
against PPIC and ITM for the payment of the outstanding balance plus
interests and attorneys fees.
"The trial court held PPIC liable for the payment of the outstanding loan plus
interests. It also ordered PPIC to pay IFC its claimed attorneys fees.
However, the trial court relieved ITM of its obligation as guarantor. Hence,
the trial court dismissed IFCs complaint against ITM.
xxxxxxxxx
"Thus, apropos the decision dismissing the complaint against ITM, IFC
appealed [to the CA]."5
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as the latter
exonerated ITM from any obligation to IFC. According to the appellate court,
ITM bound itself under the "Guarantee Agreement" to pay PPICs obligation
upon default.6 ITM was not discharged from its obligation as guarantor when
PPIC mortgaged the latters properties to IFC. 7 The CA, however, held that
ITMs liability as a guarantor would arise only if and when PPIC could not
pay. Since PPICs inability to comply with its obligation was not sufficiently
established, ITM could not immediately be made to assume the liability. 8

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The September 30, 2003 Resolution of the CA denied reconsideration. 9

Hence, this Petition.10
The Issues
Petitioner states the issues in this wise:
"I. Whether or not ITM and Grandtex11 are sureties and therefore, jointly and
severally liable with PPIC, for the payment of the loan.
"II. Whether or not the Petition raises a question of law.
"III. Whether or not the Petition raises a theory not raised in the lower
court."12
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC
for the payment of the loan.
The Courts Ruling
The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan
Agreement dated December 17, 1974, between IFC and PPIC; 13 and (2) the
Guarantee Agreement dated December 17, 1974, between ITM and
Grandtex, on the one hand, and IFC on the other. 14
IFC claims that, under the Guarantee Agreement, ITM bound itself as a
surety to PPICs obligations proceeding from the Loan Agreement. 15 For its
part, ITM asserts that, by the terms of the Guarantee Agreement, it was
merely a guarantor16 and not a surety. Moreover, any ambiguity in the
Agreement should be construed against IFC -- the party that drafted it. 17
Language of the

10
Page

Contract

The premise of the Guarantee Agreement is found in its preambular clause,

which reads:
"Whereas,
"(A) By an Agreement of even date herewith between IFC and PHILIPPINE
POLYAMIDE INDUSTRIAL CORPORATION (herein called the Company), which
agreement is herein called the Loan Agreement, IFC agrees to extend to the
Company a loan (herein called the Loan) of seven million dollars
($7,000,000) on the terms therein set forth, including a provision that all or
part of the Loan may be disbursed in a currency other than dollars, but only
on condition that the Guarantors agree to guarantee the obligations of the
Company in respect of the Loan as hereinafter provided.
"(B) The Guarantors, in order to induce IFC to enter into the Loan
Agreement, and in consideration of IFC entering into said Agreement, have
agreed so to guarantee such obligations of the Company." 18
The obligations of the guarantors are meticulously expressed in the
following provision:
"Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely
and unconditionally guarantee, as primary obligors and not as sureties
merely, the due and punctual payment of the principal of, and interest and
commitment charge on, the Loan, and the principal of, and interest on, the
Notes, whether at stated maturity or upon prematuring, all as set forth in
the Loan Agreement and in the Notes."19
The Agreement uses "guarantee" and "guarantors," prompting ITM to base
its argument on those words. 20 This Court is not convinced that the use of
the two words limits the Contract to a mere guaranty. The specific
stipulations in the Contract show otherwise.
Solidary Liability
Agreed to by ITM

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11

While referring to ITM as a guarantor, the Agreement specifically stated that

the corporation was "jointly and severally" liable. To put emphasis on the
nature of that liability, the Contract further stated that ITM was a primary
obligor, not a mere surety. Those stipulations meant only one thing: that at
bottom, and to all legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily 21 liable with PPIC for
the latters obligations under the Loan Agreement with IFC. ITM thereby
brought itself to the level of PPIC and could not be deemed merely
secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC.
ITMs liability commenced only when it guaranteed PPICs obligation. It
became a surety when it bound itself solidarily with the principal obligor.
Thus, the applicable law is as follows:
"Article 2047. By guaranty, a person, called the guarantor binds himself to
the creditor to fulfill the obligation of the principal in case the latter should
fail to do so.
"If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In such case
the contract shall be called suretyship." 22
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil
Code on "Joint and Solidary Obligations." Relevant to this case is Article
1216, which states:
"The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected."
Pursuant to this provision, petitioner (as creditor) was justified in taking
action directly against respondent.
No Ambiguity in the
Undertaking

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12

The Court does not find any ambiguity in the provisions of the Guarantee
Agreement. When qualified by the term "jointly and severally," the use of
the word "guarantor" to refer to a "surety" does not violate the law. 23 As
Article 2047 provides, a suretyship is created when a guarantor binds itself
solidarily with the principal obligor. Likewise, the phrase in the Agreement -"as primary obligor and not merely as surety" -- stresses that ITM is being
placed on the same level as PPIC. Those words emphasize the nature of
their liability, which the law characterizes as a suretyship.
The use of the word "guarantee" does not ipso facto make the contract one
of guaranty.24 This Court has recognized that the word is frequently
employed in business transactions to describe the intention to be bound by
a primary or an independent obligation. 25 The very terms of a contract
govern the obligations of the parties or the extent of the obligors liability.
Thus, this Court has ruled in favor of suretyship, even though contracts were
denominated as a "Guarantors Undertaking" 26 or a "Continuing Guaranty."27
Contracts have the force of law between the parties, 28 who are free to
stipulate any matter not contrary to law, morals, good customs, public order
or public policy.29 None of these circumstances are present, much less
alleged by respondent. Hence, this Court cannot give a different meaning to
the plain language of the Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the premise provided in
the "Whereas" clause of the Guarantee Agreement. The execution of the
Agreement was a condition precedent for the approval of PPICs loan from
IFC. Consistent with the position of IFC as creditor was its requirement of a
higher degree of liability from ITM in case PPIC committed a breach. ITM
agreed with the stipulation in Section 2.01 and is now estopped from
feigning ignorance of its solidary liability. The literal meaning of the
stipulations control when the terms of the contract are clear and there is no
doubt as to the intention of the parties. 30
We note that the CA denied solidary liability, on the theory that the parties
would not have executed a Guarantee Agreement if they had intended to
name ITM as a primary obligor. 31 The appellate court opined that ITMs
undertaking was collateral to and distinct from the Loan Agreement. On this
point, the Court stresses that a suretyship is merely an accessory or a

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13

collateral to a principal obligation. 32 Although a surety contract is secondary

to the principal obligation, the liability of the surety is direct, primary and
absolute; or equivalent to that of a regular party to the undertaking. 33 A
surety becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations
constituted by the latter.34
ITMs Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA erred in
declaring the former secondarily liable. 35 A surety is considered in law to be
on the same footing as the principal debtor in relation to whatever is
adjudged against the latter.36 Evidently, the dispositive portion of the
assailed Decision should be modified to require ITM to pay the amount
adjudged in favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities allegedly
justifying the denial of the present Petition. Before the trial court and the
CA, IFC had allegedly instituted different arguments that effectively changed
the corporations theory on appeal, in violation of this Courts previous
pronouncements.37 ITM further
claims that the main issue in the present case is a question of fact that is
not cognizable by this Court.38
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal
Petitioners arguments before the trial court (that ITM was a "primary
obligor") and before the CA (that ITM was a "surety") were related and
intertwined in the action to enforce the solidary liability of ITM under the
Guarantee Agreement. We emphasize that the terms "primary obligor" and
"surety" were premised on the same stipulations in Section 2.01 of the
Agreement. Besides, both terms had the same legal consequences. There
was therefore effectively no change of theory on appeal. At any rate, ITM

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14

failed to show to this Court a disparity between IFCs allegations in the trial
court and those in the CA. Bare allegations without proof deserve no
credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition for
Review,39 the Court has recognized exceptions, 40 one of which applies to the
present case. The assailed Decision was based on a misapprehension of
facts,41 which particularly related to certain stipulations in the Guarantee
Agreement -- stipulations that had not been disputed by the parties. This
circumstance compelled the Court to review the Contract firsthand and to
make its own findings and conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision
and Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is
declared a surety to Philippine Polyamide Industrial Corporation. ITM is
ORDERED to pay International Finance Corporation the same amounts
adjudged against PPIC in the assailed Decision. No costs.
SO ORDERED.

15
Page

G.R. No. 113931 May 6, 1998

E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R. CLAVERIA,
respondents.

MARTINEZ, J.:

Page

16

This petition for review on certiorari seeks the reversal of the decision 1 of
the Court of Appeals dated July 13, 1993 which affirmed the Order of the
Regional Trial Court of Manila, Branch 51, denying petitioner's Motion to
Dismiss the complaint, as well as the Resolution 2 dated February 15, 1994
denying the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name
"Agro Brokers," applied for a loan with respondent Consolidated Bank and
Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight
Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the
purchase of two (2) maritime barges and one tugboat 3 which would be used
in their molasses business. The loan was granted subject to the condition
that respondent spouses execute a chattel mortgage over the three (3)
vessels to be acquired and that a continuing guarantee be executed by
Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc., in
favor of SOLIDBANK. The respondent spouses agreed to the arrangement.
Consequently, a chattel mortgage and a Continuing Guaranty 4 were
executed.
Respondent spouses defaulted in the payment of the entire obligation upon
maturity. Hence, on January 31, 1991, SOLIDBANK filed a complaint for sum
of money with a prayer for a writ of preliminary attachment, against
respondents spouses and petitioner. The case was docketed as Civil Case
No. 91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as
guarantor of the loan was extinguished pursuant to Article 2080 of the Civil
Code of the Philippines. It argued that it has lost its right to be subrogated
to the first chattel mortgage in view of SOLIDBANK's failure to register the
chattel mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not
applicable because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which
reads:

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17

After a careful consideration of the matter on hand, the Court finds the
ground of the motion to dismiss without merit. The document referred to as
"Continuing Guaranty" dated August 21, 1985 (Exh. 7) states as follows:
For and in consideration of any existing indebtedness to you of Agro
Brokers, a single proprietorship owned by Mr. Raul Claveria for the payment
of which the undersigned is now obligated to you as surety and in order to
induce you, in your discretion, at any other manner, to, or at the request or
for the account of the borrower, . . .
The provisions of the document are clear, plain and explicit.
Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the
title of the document is "Continuing Guaranty", the Court's interpretation is
not limited to the title alone but to the contents and intention of the parties
more specifically if the language is clear and positive. The obligation of the
defendant Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the letter of
January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff it is
requesting that the chattel mortgage on the vessels and tugboat be waived
and/or rescinded by the bank inasmuch as the said loan is covered by the
Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the
claim of the defendant now that the chattel mortgage is an essential
condition of the guaranty. In its letter, it said that because of the Continuing
Guaranty in favor of the plaintiff the chattel mortgage is rendered
unnecessary and redundant.
With regard to the claim that the failure of the plaintiff to register the chattel
mortgage with the proper government agency, i.e. with the Office of the
Collector of Customs or with the Register of Deeds makes the obligation a
guaranty, the same merits a scant consideration and could not be taken by
this Court as the basis of the extinguishment of the obligation of the
defendant corporation to the plaintiff as surety. The chattel mortgage is an
additional security and should not be considered as payment of the debt in
case of failure of payment. The same is true with the failure to register,
extinction of the liability would not lie.

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18

WHEREFORE, the Motion to Dismiss is hereby denied and defendant E.

Zobel, Inc., is ordered to file its answer to the complaint within ten (10) days
from receipt of a copy of this Order. 5
Petitioner moved for reconsideration but was denied on April 26, 1993.

Thereafter, petitioner questioned said Orders before the respondent Court of

Appeals, through a petition for certiorari, alleging that the trial court
committed grave abuse of discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the
dispositive portion of which reads:
WHEREFORE, finding that respondent Judge has not committed any grave
abuse of discretion in issuing the herein assailed orders, We hereby DISMISS
the petition.
A motion for reconsideration filed by petitioner was denied for lack of merit
on February 15, 1994.
Petitioner now comes to us via this petition arguing that the respondent
Court of Appeals erred in its finding: (1) that Article 2080 of the New Civil
Code which provides: "The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the creditor they
cannot be subrogated to the rights, mortgages, and preferences of the
latter," is not applicable to petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing guaranty is that of a surety;
and (3) that the failure of respondent SOLIDBANK to register the chattel
mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the
"Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or a
surety.
A contract of surety is an accessory promise by which a person binds
himself for another already bound, and agrees with the creditor to satisfy
the obligation if the debtor does not. 7 A contract of guaranty, on the other
hand, is a collateral undertaking to pay the debt of another in case the
latter does not pay the debt. 8

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19

Strictly speaking, guaranty and surety are nearly related, and many of the
principles are common to both. However, under our civil law, they may be
distinguished thus: A surety is usually bound with his principal by the same
instrument, executed at the same time, and on the same consideration. He
is an original promissor and debtor from the beginning, and is held,
ordinarily, to know every default of his principal. Usually, he will not be
discharged, either by the mere indulgence of the creditor to the principal, or
by want of notice of the default of the principal, no matter how much he
may be injured thereby. On the other hand, the contract of guaranty is the
guarantor's own separate undertaking, in which the principal does not join.
It is usually entered into before or after that of the principal, and is often
supported on a separate consideration from that supporting the contract of
the principal. The original contract of his principal is not his contract, and he
is not bound to take notice of its non-performance. He is often discharged
by the mere indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is
the insurer of the solvency of the debtor and thus binds himself to pay if the
principal is unable to pay while a surety is the insurer of the debt, and he
obligates himself to pay if the principal does not pay. 10
Based on the aforementioned definitions, it appears that the contract
executed by petitioner in favor of SOLIDBANK, albeit denominated as a
"Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce SOLIDBANK to extend
credit to respondent spouses. This can be seen in the following stipulations.
For and in consideration of any existing indebtedness to you of AGRO
BROKERS, a single proprietorship owned by MR. RAUL P. CLAVERIA, of legal
age, married and with business address . . . (hereinafter called the
Borrower), for the payment of which the undersigned is now obligated to
you as surety and in order to induce you, in your discretion, at any time or
from time to time hereafter, to make loans or advances or to extend credit
in any other manner to, or at the request or for the account of the Borrower,
either with or without purchase or discount, or to make any loans or
advances evidenced or secured by any notes, bills receivable, drafts,
acceptances, checks or other instruments or evidences of indebtedness . . .

Page

20

upon which the Borrower is or may become liable as maker, endorser,

acceptor, or otherwise, the undersigned agrees to guarantee, and does
hereby guarantee, the punctual payment, at maturity or upon demand, to
you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or
owing to you by the Borrower, together with any and all expenses which
may be incurred by you in collecting all or any such instruments or other
indebtedness or obligations hereinbefore referred to, and or in enforcing any
rights hereunder, and also to make or cause any and all such payments to
be made strictly in accordance with the terms and provisions of any
agreement (g), express or implied, which has (have) been or may hereafter
be made or entered into by the Borrower in reference thereto, regardless of
any law, regulation or decree, now or hereafter in effect which might in any
manner affect any of the terms or provisions of any such agreements(s) or
your right with respect thereto as against the Borrower, or cause or permit
to be invoked any alteration in the time, amount or manner of payment by
the Borrower of any such instruments, obligations or indebtedness; . . .
(Emphasis Ours)
One need not look too deeply at the contract to determine the nature of the
undertaking and the intention of the parties. The contract clearly disclose
that petitioner assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor. It bound itself
jointly and severally to the obligation with the respondent spouses. In fact,
SOLIDBANK need not resort to all other legal remedies or exhaust
respondent spouses' properties before it can hold petitioner liable for the
obligation. This can be gleaned from a reading of the stipulations in the
contract, to wit:
. . . If default be made in the payment of any of the instruments,
indebtedness or other obligation hereby guaranteed by the undersigned, or
if the Borrower, or the undersigned should die, dissolve, fail in business, or
become insolvent, . . ., or if any funds or other property of the Borrower, or
of the undersigned which may be or come into your possession or control or
that of any third party acting in your behalf as aforesaid should be attached
of distrained, or should be or become subject to any mandatory order of
court or other legal process, then, or any time after the happening of any

Page

21

such event any or all of the instruments of indebtedness or other obligations

hereby guaranteed shall, at your option become (for the purpose of this
guaranty) due and payable by the undersigned forthwith without demand of
notice, and full power and authority are hereby given you, in your discretion,
to sell, assign and deliver all or any part of the property upon which you
may then have a lien hereunder at any broker's board, or at public or
private sale at your option, either for cash or for credit or for future delivery
without assumption by you of credit risk, and without either the demand,
advertisement or notice of any kind, all of which are hereby expressly
waived. At any sale hereunder, you may, at your option, purchase the whole
or any part of the property so sold, free from any right of redemption on the
part of the undersigned, all such rights being also hereby waived and
released. In case of any sale and other disposition of any of the property
aforesaid, after deducting all costs and expenses of every kind for care,
safekeeping, collection, sale, delivery or otherwise, you may apply the
residue of the proceeds of the sale and other disposition thereof, to the
payment or reduction, either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned whether or not except
for disagreement such liabilities or obligations would then be due, making
proper allowance or interest on the obligations and liabilities not otherwise
then due, and returning the overplus, if any, to the undersigned; all without
prejudice to your rights as against the undersigned with respect to any and
all amounts which may be or remain unpaid on any of the obligations or
liabilities aforesaid at any time (s).
xxx xxx xxx
Should the Borrower at this or at any future time furnish, or should be
heretofore have furnished, another surety or sureties to guarantee the
payment of his obligations to you, the undersigned hereby expressly waives
all benefits to which the undersigned might be entitled under the provisions
of Article 1837 of the Civil Code (beneficio division), the liability of the
undersigned under any and all circumstances being joint and several;
(Emphasis Ours)
The use of the term "guarantee" does not ipso facto mean that the contract
is one of guaranty. Authorities recognize that the word "guarantee" is
frequently employed in business transactions to describe not the security of

Page

22

the debt but an intention to be bound by a primary or independent

obligation. 11 As aptly observed by the trial court, the interpretation of a
contract is not limited to the title alone but to the contents and intention of
the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil
Code, relied upon by petitioner, finds no application to the case at bar. In
Bicol Savings and Loan Association vs. Guinhawa, 12 we have ruled that
Article 2080 of the New Civil Code does not apply where the liability is as a
surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to
register the chattel mortgage did not release petitioner from the obligation.
In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner
bound itself to the contract irrespective of the existence of any collateral. It
even released SOLIDBANK from any fault or negligence that may impair the
contract. The pertinent portions of the contract so provides:
. . . the undersigned (petitioner) who hereby agrees to be and remain bound
upon this guaranty, irrespective of the existence, value or condition of any
collateral, and notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application, renewal or extension, and
notwithstanding also that all obligations of the Borrower to you outstanding
and unpaid at any time(s) may exceed the aggregate principal sum herein
above prescribed.
This is a Continuing Guaranty and shall remain in full force and effect until
written notice shall have been received by you that it has been revoked by
the undersigned, but any such notice shall not be released the undersigned
from any liability as to any instruments, loans, advances or other obligations
hereby guaranteed, which may be held by you, or in which you may have
any interest, at the time of the receipt of such notice. No act or omission of
any kind on your part in the premises shall in any event affect or impair this
guaranty, nor shall same be affected by any change which may arise by
reason of the death of the undersigned, of any partner (s) of the
undersigned, or of the Borrower, or of the accession to any such partnership
of any one or more new partners. (Emphasis supplied)

Page

23

In fine, we find the petition to be without merit as no reversible error was

committed by respondent Court of Appeals in rendering the assailed
decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby
AFFIRMED. Costs against the petitioner.
SO ORDERED.
Regalado, Melo and Puno, JJ., concur.
Mendoza, J., took no part.

24
Page

G.R. No. 127405

September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
RESOLUTION
YNARES-SANTIAGO, J.:
The inherent powers of a Court to amend and control its processes and
orders so as to make them conformable to law and justice includes the right
to reverse itself, especially when in its honest opinion it has committed an
error or mistake in judgment, and that to adhere to its decision will cause
injustice to a party litigant.1
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a
Motion for Reconsideration of our Decision dated October 4, 2000. They
maintain that there was no partnership between petitioner Belo, on the one
hand, and respondent Nenita A. Anay, on the other hand; and that the latter
being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that,
indeed, petitioner Belo acted merely as guarantor of Geminesse Enterprise.
This was categorically affirmed by respondent's own witness, Elizabeth
Bantilan, during her cross-examination. Furthermore, Bantilan testified that
it was Peter Lo who was the company's financier. Thus:
Q
- You mentioned a while ago the name William Belo. Now, what is the
role of William Belo with Geminesse Enterprise?

Page

25

A
- William Belo is the friend of Marjorie Tocao and he was the guarantor
of the company.
What do you mean by guarantor?

A
- He guarantees the stocks that she owes somebody who is Peter Lo
and he acts as guarantor for us. We can borrow money from him.
Q

You mentioned a certain Peter Lo. Who is this Peter Lo?

Peter Lo is based in Singapore.

What is the role of Peter Lo in the Geminesse Enterprise?

He is the one fixing our orders that open the L/C.

You mean Peter Lo is the financier?

Yes, he is the financier.

Q
And the defendant William Belo is merely the guarantor of
Geminesse Enterprise, am I correct?
A

Yes, sir2

The foregoing was neither refuted nor contradicted by respondent's

evidence. It should be recalled that the business relationship created
between petitioner Tocao and respondent Anay was an informal partnership,
which was not even recorded with the Securities and Exchange Commission.
As such, it was understandable that Belo, who was after all petitioner
Tocao's good friend and confidante, would occasionally participate in the
affairs of the business, although never in a formal or official capacity. 3 Again,
respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's
presence in Geminesse Enterprise's meetings was merely as guarantor of
the company and to help petitioner Tocao. 4
Furthermore, no evidence was presented to show that petitioner Belo
participated in the profits of the business enterprise. Respondent herself
professed lack of knowledge that petitioner Belo received any share in the
net income of the partnership.5 On the other hand, petitioner Tocao declared

Page

26

that petitioner Belo was not entitled to any share in the profits of Geminesse
Enterprise.6 With no participation in the profits, petitioner Belo cannot be
deemed a partner since the essence of a partnership is that the partners
share in the profits and losses.7
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse
Enterprise, respondent had no cause of action against him and her
complaint against him should accordingly be dismissed.
As regards the award of damages, petitioners argue that respondent should
be deemed in bad faith for failing to account for stocks of Geminesse
Enterprise amounting to P208,250.00 and that, accordingly, her claim for
damages should be barred to that extent. We do not agree. Given the
circumstances surrounding private respondent's sudden ouster from the
partnership by petitioner Tocao, her act of withholding whatever stocks were
in her possession and control was justified, if only to serve as security for
her claims against the partnership. However, while we do not agree that the
same renders private respondent in bad faith and should bar her claim for
damages, we find that the said sum of P208,250.00 should be deducted
from whatever amount is finally adjudged in her favor on the basis of the
formal account of the partnership affairs to be submitted to the Regional
Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of
petitioners is PARTIALLY GRANTED. The Regional Trial Court of Makati is
hereby ordered to DISMISS the complaint, docketed as Civil Case No. 88509, as against petitioner William T. Belo only. The sum of P208,250.00 shall
be deducted from whatever amount petitioner Marjorie Tocao shall be held
liable to pay respondent after the normal accounting of the partnership
affairs.
SO ORDERED.
Davide,
Jr.,
Kapunan,
Puno, J., on official leave.
G.R.

No.

136729.

and

Pardo;

September

JJ.,

concur.

23

,2003

ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioner, vs. PHILIPPINE

Page

27

EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent.

S

AUSTRIA-MARTINEZ,

N
J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of
Court is the decision of the Court of Appeals in CA-G.R. CV No. 41274,[1
affirming the decision of the Regional Trial Court (Branch 147) of Makati,
then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics
Corp. (Astro for brevity) were ordered to pay respondent Philippine Export
and Foreign Loan Guarantee Corporation (Philguarantee), jointly and
severally, the amount of P3,621,187.52 with interests and costs.
The

antecedent

facts

are

undisputed.

Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory
notes: PN NO. PFX-254 dated December 14, 1981 for P600,000.00, PN No.
PFX-258 also dated December 14, 1981 for P400,000.00 and PN No. 15477
dated August 27, 1981 for P2,000,000.00. In each of these promissory
notes, it appears that petitioner Roxas signed twice, as President of Astro
and in his personal capacity.[2 Roxas also signed a Continuing Surety ship
Agreement in favor of Philtrust Bank, as President of Astro and as surety.[3
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of
Philtrust the payment of 70% of Astros loan,[4 subject to the condition that
upon payment by Philguanrantee of said amount, it shall be proportionally
subrogated
to
the
rights
of
Philtrust
against
Astro.5
As a result of Astros failure to pay its loan obligations, despite demands,
Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money
with
the
RTC
of
Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging,
inter alia, that he merely signed the same in blank and the phrases in his

Page

28

personal capacity and in his official capacity were fraudulently inserted

without
his
knowledge.6
After trial, the RTC rendered its decision in favor of Philguarantee with the
following
dispositive
portion:
WHEREFORE, in view of all the foregoing, the Court hereby renders
judgment in favor or (sic) the plaintiff and against the defendants Astro
Electronics Corporation and Peter T. Roxas, ordering the then (sic) to pay,
jointly and severally, the plaintiff the sum of P3,621.187.52 representing the
total obligation of defendants in favor of plaintiff Philguarantee as of
December 31, 1984 with interest at the stipulated rate of 16% per annum
and stipulated penalty charges of 16% per annum computed from January 1,
1985
until
the
amount
is
fully
paid.
With
costs.
SO

ORDERED.[7

The trial court observed that if Roxas really intended to sign the instruments
merely in his capacity as President of Astro, then he should have signed only
once
in
the
promissory
note.[8
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the
trial court that Roxas failed to explain satisfactorily why he had to sign twice
in the contract and therefore the presumption that private transactions have
been
fair
and
regular
must
be
sustained.[9
In the present petition, the principal issue to be resolved is whether or not
Roxas should be jointly and severally liable (solidary) with Astro for the sum
awarded
by
the
RTC.
The

answer

is

in

the

affirmative.

Astros loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it
appears on the notes, Roxas signed twice: first, as president of Astro and
second, in his personal capacity. In signing his name aside from being the
President of Asro, Roxas became a co-maker of the promissory notes and

Page

29

cannot escape any liability arising from it. Under the Negotiable Instruments
Law, persons who write their names on the face of promissory notes are
makers,[10 promising that they will pay to the order of the payee or any
holder according to its tenor.11 Thus, even without the phrase personal
capacity, Roxas will still be primarily liable as a joint and several debtor
under the notes considering that his intention to be liable as such is
manifested by the fact that he affixed his signature on each of the
promissory notes twice which necessarily would imply that he is undertaking
the obligation in two different capacities, official and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer
examination of the signatures affixed by Roxas on the promissory notes,
Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that portions of his
signatures covered portions of the typewritten words personal capacity
indicating with certainty that the typewritten words were already existing at
the time Roxas affixed his signatures thus demolishing his claim that the
typewritten words were just inserted after he signed the promissory notes. If
what he claims is true, then portions of the typewritten words would have
covered
portions
of
his
signatures,
and
not
vice
versa.
As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is
not clear so that this Court could not discern the same observations on the
notes,
Exhibits
A-4
and
3-A
and
B-4
and
4-A.
Nevertheless, the following discussions equally apply to all three promissory
notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We
jointly, severally and solidarily, promise to pay to PHILTRUST BANK or
order...12 An instrument which begins with I, We, or Either of us promise to
pay, when signed by two or more persons, makes them solidarily liable.13
Also, the phrase joint and several binds the makers jointly and individually
to the payee so that all may be sued together for its enforcement, or the
creditor may select one or more as the object of the suit.14 Having signed
under such terms, Roxas assumed the solidary liability of a debtor and
Philtrust Bank may choose to enforce the notes against him alone or jointly
with
Astro.

30
Page

Roxas claim that the phrases in his personal capacity and in his official
capacity were inserted on the notes without his knowledge was correctly
disregarded by the RTC and the Court of Appeals. It is not disputed that
Roxas does not deny that he signed the notes twice. As aptly found by both
the trial and appellate court, Roxas did not offer any explanation why he did
so. It devolves upon him to overcome the presumptions that private
transactions are presumed to be fair and regular[15 and that a person takes
ordinary care of his concerns.16 Aside from his self-serving allegations,
Roxas failed to prove the truth of such allegations. Thus, said presumptions
prevail over his claims. Bare allegations, when unsubstantiated by evidence,
documentary or otherwise, are not equivalent to proof under our Rules of
Court.17
Roxas is the President of Astro and reasonably, a businessman who is
presumed to take ordinary care of his concerns. Absent any countervailing
evidence, it cannot be gainsaid that he will not sign document without first
informing himself of its contents and consequences. Clearly, he knew the
nature of the transactions and documents involved as he not only executed
these notes on two different dates but he also executed, and again, signed
twice, a continuing Surety ship Agreement notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of
P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even
re-enforced his solidary liability Philtrust because as a surety, he bound
himself jointly and severally with Astros obligation.18 Roxas cannot now
avoid liability by hiding under the convenient excuse that he merely signed
the notes in blank and the phrases in personal capacity and in his official
capacity
were
fraudulently
inserted
without
his
knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner, it is
subrogated to the rights of Philtrust to demand for and collect payment from
both Roxas and Astro since it already paid the value of 70% of roxas and
Astro Electronics Corp.s loan obligation. In compliance with its contract of
Guarantee
in
favor
of
Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights.19 It may either be legal or

Page

31

conventional. Legal subrogation is that which takes place without

agreement but by operation of law because of certain acts.[20 Instances of
legal subrogation are those provided in Article 1302 of the Civil Code.
Conventional subrogation, on the other hand, is that which takes place by
agreement
of
the
parties.21
Roxas acquiescence is not necessary for subrogation to take place because
the instant case is one of the legal subrogation that occurs by operation of
law, and without need of the debtors knowledge.22 Further, Philguarantee,
as guarantor, became the transferee of all the rights of Philtrust as against
Roxas and Astro because the guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor.23
WHEREFORE, finding no error with the decision of the Court of Appeals
dated December 10, 1998, the same is hereby AFFIRMED in toto.
SO
Bellosillo,

ORDERED.
(Chairman),

Quisumbing, J., in the result.

Callejo,

Sr.,

and

Tinga,

JJ.,

concur.

32
Page

G.R. No. 154183

August 7, 2003

SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,

vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION,
KENNETH NG LI and MA. VICTORIA NG LI, respondents.
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus
line" credit facility worth P10 million in favor of respondent First Business
Paper Corporation (FBPC). The terms and conditions of the agreement as
well as the checklist of documents necessary to open the credit line were
stipulated in a "letter-advise" of the Bank dated 16 May 1993 addressed to
FBPC and to its President, respondent Kenneth Ng Li. 1 The "letter-advise"2
was effective upon "compliance with the documentary requirements." 3
The documents essential for the credit facility and submitted for this
purpose were the (a) Board Resolution or excerpts of the Board of Directors
Meeting, duly ratified by a Notary Public, authorizing the loan and security
arrangement as well as designating the officers to negotiate and sign for
FBPC specifically stating authority to mortgage, pledge and/or assign the
properties of the corporation; (b) agreement to purchase Domestic Bills;
and, (c) Continuing Guaranty for any and all amounts signed by petitionerspouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and
Ma. Victoria Ng Li.4 The spouses Luis Toh and Vicky Tan Toh were then
Chairman of the Board and Vice-President, respectively, of FBPC, while

Page

33

respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li were President

and General Manager, respectively, of the same corporation. 5
It is not disputed that the credit facility as well as its terms and conditions
was not cancelled or terminated, and that there was no prior notice of such
fact as required in the "letter-advise," if any was done.
On 10 May 1993, more than thirty (30) days from date of the "letter-advise,"
petitioner-spouses Luis Toh and Vicky Tan Toh and respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li signed the required Continuing
Guaranty, which was embodied in a public document prepared solely by
respondent Bank.6 The terms of the instrument defined the contract arising
therefrom as a surety agreement and provided for the solidary liability of
the signatories thereto for and in consideration of "loans or advances" and
"credit in any other manner to, or at the request or for the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on the indebtedness
that respondent FBPC may incur and for which the sureties may be liable,
stating that the credit facility "covers any and all existing indebtedness of,
and such other loans and credit facilities which may hereafter be granted to
FIRST BUSINESS PAPER CORPORATION." The surety also contained a de
facto acceleration clause if "default be made in the payment of any of the
instruments, indebtedness, or other obligation" guaranteed by petitioners
and respondents. So as to strengthen this security, the Continuing Guaranty
waived rights of the sureties against delay or absence of notice or demand
on the part of respondent Bank, and gave future consent to the Bank's
action to "extend or change the time payment, and/or the manner, place or
terms of payment," including renewal, of the credit facility or any part
thereof in such manner and upon such terms as the Bank may deem proper
without notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any
event or cause other than the written revocation thereof with notice to the
Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility and
procure letters of credit.7 On 17 November 1993 FBPC opened thirteen (13)
letters of credit and obtained loans totaling P15,227,510.00. 8 As the letters
of credit were secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria

Page

34

Ng Li and Redentor Padilla as signatories executed a series of trust receipts

over the goods allegedly purchased from the proceeds of the loans. 9
On 13 January 1994 respondent Bank received information that respondentspouses Kenneth Ng Li and Ma. Victoria Ng Li had fraudulently departed
from their conjugal home.10 On 14 January 1994 the Bank served a demand
letter upon FBPC and petitioner Luis Toh invoking the acceleration clause 11
in the trust receipts of FBPC and claimed payment for P10,539,758.68 as
unpaid overdue accounts on the letters of credit plus interests and penalties
within twenty-four (24) hours from receipt thereof. 12 The Bank also invoked
the Continuing Guaranty executed by petitioner-spouses Luis Toh and Vicky
Tan Toh who were the only parties known to be within national jurisdiction to
answer as sureties for the credit facility of FBPC. 13
On 17 January 1994 respondent Bank filed a complaint for sum of money
with ex parte application for a writ of preliminary attachment against FBPC,
spouses Kenneth Ng Li and Ma. Victoria Ng Li, and spouses Luis Toh and
Vicky Tan Toh, docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig City. 14
Alias summonses were served upon FBPC and spouses Luis Toh and Vicky
Tan Toh but not upon Kenneth Ng Li and Ma. Victoria Ng Li who had
apparently absconded.15
Meanwhile, with the implementation of the writ of preliminary attachment
resulting in the impounding of purported properties of FBPC, the trial court
was deluged with third-party claims contesting the propriety of the
attachment.16 In the end, the Bank relinquished possession of all the
attached properties to the third-party claimants except for two (2)
insignificant items as it allegedly could barely cope with the yearly
premiums on the attachment bonds.17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the
complaint where they admitted being part of FBPC from its incorporation on
29 August 1991, which was then known as "MNL Paper, Inc.," until its
corporate name was changed to "First Business Paper Corporation." 18 They
also acknowledged that on 6 March 1992 Luis Toh was designated as one of
the authorized corporate signatories for transactions in relation to FBPC's
checking account with respondent Bank.19 Meanwhile, for failing to file an
answer, respondent FBPC was declared in default. 20

Page

35

Petitioner-spouses however could not be certain whether to deny or admit

the due execution and authenticity of the Continuing Guaranty. 21 They could
only allege that they were made to sign papers in blank and the Continuing
Guaranty could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for them to have
freely and consciously executed the surety on 10 May 1993, the date
appearing on its face22 since beginning March of that year they had already
divested their shares in FBPC and assigned them in favor of respondent
Kenneth Ng Li although the deeds of assignment were notarized only on 14
June 1993.23 Petitioners also contended that through FBPC Board Resolution
dated 12 May 1993 petitioner Luis Toh was removed as an authorized
signatory for FBPC and replaced by respondent-spouses Kenneth Ng Li and
Ma. Victoria Ng Li and Redentor Padilla for all the transactions of FBPC with
respondent Bank.24 They even resigned from their respective positions in
FBPC as reflected in the 12 June 1993 Secretary's Certificate submitted to
the Securities and Exchange Commission25 as petitioner Luis Toh was
succeeded as Chairman by respondent Ma. Victoria Ng Li, while one Mylene
C. Padilla took the place of petitioner Vicky Tan Toh as Vice-President. 26
Finally, petitioners averred that sometime in June 1993 they obtained from
respondent Kenneth Ng Li their exclusion from the several surety
agreements they had entered into with different banks, i.e., Hongkong and
Shanghai Bank, China Banking Corporation, Far East Bank and Trust
Company, and herein respondent Bank. 27 As a matter of record, these other
banks executed written surety agreements that showed respondent Kenneth
Ng Li as the only surety of FBPC's indebtedness. 28
On 16 May 1996 the trial court promulgated its Decision in Civil Case No.
64047 finding respondent FBPC liable to pay respondent Solid Bank
Corporation the principal of P10,539,758.68 plus twelve percent (12%)
interest per annum from finality of the Decision until fully paid, but
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to
respondent Bank.29 The court a quo found that petitioners "voluntarily
affixed their signature[s]" on the Continuing Guaranty and were thus "at
some given point in time willing to be liable under those forms," 30 although
it held that petitioners were not bound by the surety contract since the

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36

letters of credit it was supposed to secure were opened long after

petitioners had ceased to be part of FBPC. 31
The trial court described the Continuing Guaranty as effective only while
petitioner-spouses were stockholders and officers of FBPC since respondent
Bank compelled petitioners to underwrite FBPC's indebtedness as sureties
without the requisite investigation of their personal solvency and capability
to undertake such risk.32 The lower court also believed that the Bank knew
of petitioners' divestment of their shares in FBPC and their subsequent
resignation as officers thereof as these facts were obvious from the
numerous public documents that detailed the changes and substitutions in
the list of authorized signatories for transactions between FBPC and the
Bank, including the many trust receipts being signed by persons other than
petitioners,33 as well as the designation of new FBPC officers which came to
the notice of the Bank's Vice-President Jose Chan Jr. and other officers. 34
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration
of its Decision.35
On 9 October 1996 respondent Bank appealed the Decision to the Court of
Appeals, docketed as CA-G.R. CV No. 55957. 36 Petitioner-spouses did not
move for reconsideration nor appeal the finding of the trial court that they
voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held that by
signing the Continuing Guaranty, petitioner-spouses became solidarily liable
with FBPC to pay respondent Bank the amount of P10,539,758.68 as
principal with twelve percent (12%) interest per annum from finality of the
judgment until completely paid. 37 The Court of Appeals ratiocinated that the
provisions of the surety agreement did not "indicate that Spouses Luis and
Vicky Toh x x x signed the instrument in their capacities as Chairman of the
Board and Vice-President, respectively, of FBPC only." 38 Hence, the court a
quo deduced, "[a]bsent any such indication, it was error for the trial court to
have presumed that the appellees indeed signed the same not in their
personal capacities."39 The appellate court also ruled that as petitioners
failed to execute any written revocation of the Continuing Guaranty with
notice to respondent Bank, the instrument remained in full force and effect
when the letters of credit were availed of by respondent FBPC. 40

Page

37

Finally, the Court of Appeals rejected petitioners' argument that there were
"material alterations" in the provisions of the "letter-advise," i.e., that only
domestic letters of credit were opened when the credit facility was for
importation of papers and other materials, and that marginal deposits were
not paid, contrary to the requirements stated in the "letter-advise." 41 The
simple response of the appellate court to this challenge was, first, the
"letter-advise" itself authorized the issuance of domestic letters of credit,
and second, the several waivers extended by petitioners in the Continuing
Guaranty, which included changing the time and manner of payment of the
indebtedness, justified the action of respondent Bank not to charge
marginal deposits.42
Petitioner-spouses moved for reconsideration of the Decision, and after
respondent Bank's comment, filed a lengthy Reply with Motion for Oral
Argument.43 On 2 July 2002 reconsideration of the Decision was denied on
the ground that no new matter was raised to warrant the reversal or
modification thereof.44 Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of
Appeals denied them due process when it did not grant their motion for
reconsideration and without "bother[ing] to consider [their] Reply with
Motion for Oral Argument." They maintain that the Continuing Guaranty is
not legally valid and binding against them for having been executed long
after they had withdrawn from FBPC. Lastly, they claim that the surety
agreement has been extinguished by the material alterations thereof and of
the "letter-advise" which were allegedly brought about by (a) the provision
of an acceleration clause in the trust receipts; (b) the flight of their cosureties, respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li; (c) the
grant of credit facility despite the non-payment of marginal deposits in an
amount beyond the credit limit of P10 million pesos; (d) the inordinate delay
of the Bank in demanding the payment of the indebtedness; (e) the
presence of ghost deliveries and fictitious purchases using the Bank's letters
of credit and trust receipts; (f) the extension of the due dates of the letters
of credit without the required 25% partial payment per extension; (g) the
approval of another letter of credit, L/C 93-0042, even after respondentspouses Kenneth Ng Li and Ma. Victoria Ng Li had defaulted on their
previous obligations; and, (h) the unmistakable pattern of fraud.

Page

38

Respondent Solid Bank maintains on the other hand that the appellate court
is presumed to have passed upon all points raised by petitioners' Reply with
Motion for Oral Argument as this pleading formed part of the records of the
appellate court. It also debunks the claim of petitioners that they were
inexperienced and ignorant parties who were taken advantage of in the
Continuing Guaranty since petitioners are astute businessmen who are very
familiar with the "ins" and "outs" of banking practice. The Bank further
argues that the notarization of the Continuing Guaranty discredits the
uncorroborated assertions against the authenticity and due execution
thereof, and that the Decision of the trial court in the civil case finding the
surety agreement to be valid and binding is now res judicata for failure of
petitioners to appeal therefrom. As a final point, the Bank refers to the
various waivers made by petitioner-spouses in the Continuing Guaranty to
justify the extension of the due dates of the letters of credit.
To begin with, we find no merit in petitioners' claim that the Court of
Appeals deprived them of their right to due process when the court a quo
did not address specifically and explicitly their Reply with Motion for Oral
Argument. While the Resolution of the appellate court of 2 July 2002 made
no mention thereof in disposing of their arguments on reconsideration, it is
presumed that "all matters within an issue raised in a case were laid before
the court and passed upon it."45 In the absence of evidence to the contrary,
we must rule that the court a quo discharged its task properly. Moreover, a
reading of the assailed Resolution clearly makes reference to a "careful
review of the records," which undeniably includes the Reply with Motion for
Oral Argument, hence there is no reason for petitioners to asseverate
otherwise.
This Court holds that the Continuing Guaranty is a valid and binding
contract of petitioner-spouses as it is a public document that enjoys the
presumption of authenticity and due execution. Although petitioners as
appellees may raise issues that have not been assigned as errors by
respondent Bank as party-appellant, i.e., unenforceability of the surety
contract, we are bound by the consistent finding of the courts a quo that
petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed their
signature[s]" on the surety agreement and were thus "at some given point
in time willing to be liable under those forms." 46 In the absence of clear,

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39

convincing and more than preponderant evidence to the contrary, our ruling
cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon
so long as they were corporate officers and stockholders of FBPC. Nothing in
the Continuing Guaranty restricts their contractual undertaking to such
condition or eventuality. In fact the obligations assumed by them therein
subsist "upon the undersigned, the heirs, executors, administrators,
successors and assigns of the undersigned, and shall inure to the benefit of,
and be enforceable by you, your successors, transferees and assigns," and
that their commitment "shall remain in full force and effect until written
notice shall have been received by [the Bank] that it has been revoked by
the undersigned." Verily, if petitioners intended not to be charged as
sureties after their withdrawal from FBPC, they could have simply
terminated the agreement by serving the required notice of revocation upon
the Bank as expressly allowed therein. 47 In Garcia v. Court of Appeals[48] we
ruled
Regarding the petitioner's claim that he is liable only as a corporate officer
of WMC, the surety agreement shows that he signed the same not in
representation of WMC or as its president but in his personal capacity. He is
therefore personally bound. There is no law that prohibits a corporate officer
from binding himself personally to answer for a corporate debt. While the
limited liability doctrine is intended to protect the stockholder by
immunizing him from personal liability for the corporate debts, he may
nevertheless divest himself of this protection by voluntarily binding himself
to the payment of the corporate debts. The petitioner cannot therefore take
refuge in this doctrine that he has by his own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety
agreement they signed so must we also hold respondent Bank to its
representations in the "letter-advise" of 16 May 1993. Particularly, as to the
extension of the due dates of the letters of credit, we cannot exclude from
the Continuing Guaranty the preconditions of the Bank that were plainly
stipulated in the "letter-advise." Fairness and justice dictate our doing so, for
the Bank itself liberally applies the provisions of cognate agreements
whenever convenient to enforce its contractual rights, such as, when it
harnessed a provision in the trust receipts executed by respondent FBPC to

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40

declare its entire indebtedness as due and demandable and thereafter to

exact payment thereof from petitioners as sureties. 49 In the same manner,
we cannot disregard the provisions of the "letter-advise" in sizing up the
panoply of commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that respondent
Bank "may at any time, or from time to time, in [its] discretion x x x extend
or change the time payment," this provision even if understood as a waiver
is confined per se to the grant of an extension and does not surrender the
prerequisites therefor as mandated in the "letter-advise." In other words, the
authority of the Bank to defer collection contemplates only authorized
extensions, that is, those that meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its discretion pursuant
to the Continuing Guaranty, it should nonetheless comply with the
requirements that domestic letters of credit be supported by fifteen percent
(15%) marginal deposit extendible three (3) times for a period of thirty (30)
days for each extension, subject to twenty-five percent (25%) partial
payment per extension. This reading of the Continuing Guaranty is
consistent with Philippine National Bank v. Court of Appeals 50 that any doubt
on the terms and conditions of the surety agreement should be resolved in
favor of the surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty that
"[n]o act or omission of any kind on [the Bank's] part in the premises shall in
any event affect or impair this guaranty"51 must also be read "strictissimi
juris" for the reason that petitioners are only accommodation sureties, i.e.,
they received nothing out of the security contract they signed. 52 Thus said,
the acts or omissions of the Bank conceded by petitioners as not affecting
nor impairing the surety contract refer only to those occurring "in the
premises," or those that have been the subject of the waiver in the
Continuing Guaranty, and stretch to no other. Stated otherwise, an
extension of the period for enforcing the indebtedness does not by itself
bring about the discharge of the sureties unless the extra time is not
permitted within the terms of the waiver, i.e., where there is no payment or
there is deficient settlement of the marginal deposit and the twenty-five
percent (25%) consideration, in which case the illicit extension releases the
sureties. Under Art. 2055 of the Civil Code, the liability of a surety is

Page

41

measured by the terms of his contract, and while he is liable to the full
extent thereof, his accountability is strictly limited to that assumed by its
terms.
It is admitted in the Complaint of respondent Bank before the trial court that
several letters of credit were irrevocably extended for ninety (90) days with
alarmingly flawed and inadequate consideration - the indispensable
marginal deposit of fifteen percent (15%) and the twenty-five percent (25%)
prerequisite for each extension of thirty (30) days. It bears stressing that the
requisite marginal deposit and security for every thirty (30) - day extension
specified in the "letter-advise" were not set aside or abrogated nor was
there any prior notice of such fact, if any was done.
Moreover, these irregular extensions were candidly admitted by Victor
Ruben L. Tuazon, an account officer and manager of respondent Bank and
its lone witness in the civil case
Q:

You extended it even if there was no marginal deposit?

A:

Yes.

Q:

And even if partial payment is less than 25%?

A:

Yes x x x x

Q:
You have repeatedly extended despite the insufficiency partial
payment requirement?
A:

I would say yes.53

The foregoing extensions of the letters of credit made by respondent Bank

without observing the rigid restrictions for exercising the privilege are not
covered by the waiver stipulated in the Continuing Guaranty. Evidently, they
constitute illicit extensions prohibited under Art. 2079 of the Civil Code,
"[a]n extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty." This act of the Bank is not mere
failure or delay on its part to demand payment after the debt has become
due, as was the case in unpaid five (5) letters of credit which the Bank did
not extend, defer or put off,54 but comprises conscious, separate and

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42

binding agreements to extend the due date, as was admitted by the Bank
itself
Q:
How much was supposed to be paid on 14 September 1993, the
original LC of P1,655,675.13?
A:
Under LC 93-0017 first matured on 14 September 1993. We rolled it
over, extended it to December 13, 1993 but they made partial payment that
is why we extended it.
Q:
The question to you now is how much was paid? How much is
supposed to be paid on September 14, 1993 on the basis of the original
amount of P1,655,675.13?
A:
Whenever this obligation becomes due and demandable except
when you roll it over so there is novation there on the original obligations 55
(underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky
Tan Toh are relieved of their obligations as sureties of respondent FBPC
under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate against the
enforcement of the Continuing Guaranty against the accommodation
sureties. Firstly, the guaranty was executed more than thirty (30) days from
the original acceptance period as required in the "letter-advise." Thereafter,
barely two (2) days after the Continuing Guaranty was signed, corporate
agents of FBPC were replaced on 12 May 1993 and other adjustments in the
corporate structure of FBPC ensued in the month of June 1993, which the
Bank did not investigate although such were made known to it.
By the same token, there is no explanation on record for the utter
worthlessness of the trust receipts in favor of the Bank when these
documents ought to have added more security to the indebtedness of FBPC.
The Bank has in fact no information whether the trust receipts were indeed
used for the purpose for which they were obtained. 56 To be sure, the goods
subject of the trust receipts were not entirely lost since the security officer
of respondent Bank who conducted surveillance of FBPC even had the
chance to intercept the surreptitious transfer of the items under trust: "We

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43

saw two (2) delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out
of the compound x x x [which were] taking out the last supplies stored in
the compound."57 In addition, the attached properties of FBPC, except for
two (2) of them, were perfunctorily abandoned by respondent Bank
although the bonds therefor were considerably reduced by the trial court. 58
The consequence of these omissions is to discharge the surety, petitioners
herein, under Art. 2080 of the Civil Code,59 or at the very least, mitigate the
liability of the surety up to the value of the property or lien released
If the creditor x x x has acquired a lien upon the property of a principal, the
creditor at once becomes charged with the duty of retaining such security,
or maintaining such lien in the interest of the surety, and any release or
impairment of this security as a primary resource for the payment of a debt,
will discharge the surety to the extent of the value of the property or lien
released x x x x [for] there immediately arises a trust relation between the
parties, and the creditor as trustee is bound to account to the surety for the
value of the security in his hands.60
For the same reason, the grace period granted by respondent Bank
represents unceremonious abandonment and forfeiture of the fifteen
percent (15%) marginal deposit and the twenty-five percent (25%) partial
payment as fixed in the "letter-advise." These payments are unmistakably
additional securities intended to protect both respondent Bank and the
sureties in the event that the principal debtor FBPC becomes insolvent
during the extension period. Compliance with these requisites was not
waived by petitioners in the Continuing Guaranty. For this unwarranted
exercise of discretion, respondent Bank bears the loss; due to its
unauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh
and Vicky Tan Toh are discharged as sureties under the Continuing Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in failing to
safe-keep the security provided by the marginal deposit and the twenty-five
percent (25%) requirement results in the material alteration of the principal
contract, i.e., the "letter-advise," and consequently releases the surety. 61
This inference was admitted by the Bank through the testimony of its lone
witness that "[w]henever this obligation becomes due and demandable,
except when you roll it over, (so) there is novation there on the original

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44

obligations." As has been said, "if the suretyship contract was made upon
the condition that the principal shall furnish the creditor additional security,
and the security being furnished under these conditions is afterwards
released by the creditor, the surety is wholly discharged, without regard to
the value of the securities released, for such a transaction amounts to an
alteration of the main contract."62
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of
the Court of Appeals dated 12 December 2001 in CA-G.R. CV No. 55957,
Solid Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li,
Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding petitioner-spouses
Luis Toh and Vicky Tan Toh solidarily liable with First Business Paper
Corporation to pay Solid Bank Corporation the amount of P10,539,758.68 as
principal with twelve percent (12%) interest per annum until fully paid, and
its Resolution of 2 July 2002 denying reconsideration thereof are REVERSED
and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case
No. 64047, Solid Bank Corporation v. First Business Paper Corporation,
Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding First
Business Paper Corporation liable to pay respondent Solid Bank Corporation
the principal of P10,539,758.68 plus twelve percent (12%) interest per
annum until fully paid, but absolving petitioner-spouses Luis Toh and Vicky
Tan Toh of any liability to respondent Solid Bank Corporation is REINSTATED
and AFFIRMED. No costs.
SO ORDERED.
Quisumbing,
Austria-Martinez,
Callejo, Sr., J., on leave.

and

Tinga,

JJ.,

concur.

45
Page

G.R. No. 119800

November 12, 2003

FILIPINAS TEXTILE MILLS, INC. and BERNARDINO VILLANUEVA,

Petitioners,
vs.
COURT OF APPEALS and STATE INVESTMENT HOUSE, INC.
Respondents.
DECISION
Tinga, J.:
Before this Court is a Petition for Review on Certiorari assailing the Decision1
and Resolution2 of the Court of Appeals dated June 16, 1994 and April 19,

Page

46

1995, respectively, affirming the Decision3 of the Regional Trial Court dated
July 23, 1990 which found the petitioners Filipinas Textile Mills, Inc. ("Filtex")
and Bernardino Villanueva ("Villanueva") jointly and severally liable to
respondent State Investment House, Inc. ("SIHI") for the amount of
P7,868,881.11.
The antecedent facts are as follows:
On December 6, 1985, SIHI instituted a Complaint4 for the collection of the
sum of P3,118,949.75, with interest, penalties, exemplary damages,
attorneys fees and costs of suit against herein petitioners Filtex and
Villanueva.
In its Complaint, SIHI alleged that sometime in 1983, Filtex applied for
domestic letters of credit to finance the purchase of various raw materials
for its textile business. Finding the application to be in order, SIHI issued on
various dates domestic letters of credit 5 authorizing Indo-Philippine Textile
Mills, Inc. ("Indo-Phil"), Texfiber Corporation ("Texfiber"), and Philippine
Polyamide Industrial Corporation ("Polyamide") "to value" on SIHI such
drafts as may be drawn by said corporations against Filtex for an aggregate
amount not exceeding P3,737,988.05.
Filtex used these domestic letters of credit to cover its purchase of various
textile materials from Indo-Phil, Texfiber and Polyamide. Upon the sale and
delivery of the merchandise, Indo-Phil, Texfiber and Polyamide issued
several sight drafts6 on various dates with an aggregate value of
P3,736,276.71 payable to the order of SIHI, which were duly accepted by
Filtex. Subsequently, the sight drafts were negotiated to and acquired in due
course by SIHI which paid the value thereof to Indo-Phil, Texfiber and
Polyamide for the account of Filtex.
Allegedly by way of inducement upon SIHI to issue the aforesaid domestic
letters of credit and "to value" the sight drafts issued by Indo-Phil, Texfiber
and Polyamide, Villanueva executed a comprehensive surety agreement 7 on
November 9, 1982, whereby he guaranteed, jointly and severally with Filtex,
the full and punctual payment at maturity to SIHI of all the indebtedness of
Filtex. The essence of the comprehensive surety agreement was that it shall
be a continuing surety until such time that the total outstanding obligation
of Filtex to SIHI had been fully settled.

Page

47

In order to ensure the payment of the sight drafts aforementioned, Filtex

executed and issued to SIHI several trust receipts 8 of various dates, which
were later extended with the issuance of replacement trust receipts all
dated June 22, 1984, covering the merchandise sold. Under the trust
receipts, Filtex agreed to hold the merchandise in trust for SIHI, with liberty
to sell the same for SIHI's account but without authority to make any other
disposition of the said goods. Filtex likewise agreed to hand the proceeds, as
soon as received, to SIHI "to apply" against any indebtedness of the former
to the latter. Filtex also agreed to pay SIHI interest at the rate of 25% per
annum from the time of release of the amount to Indo-Phil, Texfiber and
Polyamide until the same is fully paid, subject to SIHI's option to reduce the
interest rate. Furthermore, in case of delay in the payment at maturity of
the aggregate amount of the sight drafts negotiated to SIHI, said amount
shall be subject to two percent (2%) per month penalty charge payable from
the date of default until the amount is fully paid.
Because of Filtex's failure to pay its outstanding obligation despite demand,
SIHI filed a Complaint on December 6, 1985 praying that the petitioners be
ordered to pay, jointly and severally, the principal amount of P3,118,949.75,
plus interest and penalties, attorney's fees, exemplary damages, costs of
suit and other litigation expenses.
In its Answer with Counterclaim,9 Filtex interposed special and affirmative
defenses, i.e., the provisions of the trust receipts, as well as the
comprehensive surety agreement, do not reflect the true will and intention
of the parties, full payment of the obligation, and lack of cause of action. For
his part, Villanueva interposed the same special and affirmative defenses
and added that the comprehensive surety agreement is null and void and
damages and attorney's fees are not legally demandable. 10 The petitioners,
however, failed to specifically deny under oath the genuineness and due
execution of the actionable documents upon which the Complaint was
based.
On July 23, 1990, the Regional Trial Court of Manila rendered judgment 11
holding Filtex and Villanueva jointly and severally liable to SIHI. Dissatisfied,
Filtex and Villanueva filed an Appeal,12 primarily contending that they have
fully paid their indebtedness to SIHI and asserting that the letters of credit,
sight drafts, trust receipts and comprehensive surety agreement upon which

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48

the Complaint is based are inadmissible in evidence supposedly because of

non-payment of documentary stamp taxes as required by the Internal
Revenue Code.13
In its assailed Decision, the Court of Appeals debunked the petitioners'
contention that the letters of credit, sight drafts, trust receipts and
comprehensive surety agreement are inadmissible in evidence ruling that
the petitioners had "in effect, admitted the genuineness and due execution
of said documents because of their failure to have their answers placed
under oath, the complaint being based on actionable documents in line with
Section 7, Rule 8 of the Rules of Court." 14 The appellate court also ruled that
there remained an unpaid balance as of January 31, 1989 of P868,881.11 for
which Filtex and Villanueva are solidarily liable. 15
The appellate court denied the petitioners' Motion for Reconsideration16 in
its Resolution,17 ruling that the petitioners failed to raise new and
substantial matters that would warrant the reversal of its Decision.
However, due to certain typographical oversights, the Court of Appeals
modified its Decision and stated that the correct unpaid balance as of
January 31, 1989 was actually P7,868,881.11, excluding litigation and other
miscellaneous expenses and filing fees.18
In asking this Court to reverse and set aside the aforementioned Decision
and Resolution of the Court of Appeals, the petitioners argued that the
appellate court should not have admitted in evidence the letters of credit,
sight drafts, trust receipts and comprehensive surety agreement for lack of
the requisite documentary stamps thereon. They hypothesized that their
implied admission of the genuineness and due execution of these
documents for failure to specifically deny the same under oath should not
be equated with an admission in evidence of the documents and an
admission of their obligation. They also maintained that they have fully paid
the obligation and, in fact, have made an excess payment in the amount of
P415,722.53. In addition, Villanueva asserted that the comprehensive surety
agreement which he executed is null and void, inadmissible in evidence and
contains material alterations. Thus, he claimed that he should not be held
solidarily liable with Filtex.

Page

49

Traversing the allegations in the instant petition, SIHI stated in its

Comment19 that in their respective answers to the complaint, the petitioners
expressly admitted the due execution of the letters of credit, sight drafts
and trust receipts and their obligation arising from these documents. Having
done so, they could no longer question the admissibility of these
documents. Moreover, their allegation of inadmissibility of these documents
is inconsistent with their defense of full payment. SIHI also reasoned that
the documentary stamps, assuming they are required, are for the sole
account of Filtex not only because the letters of credit were issued at its
instance and application but also because it was the issuer and acceptor of
the trust receipts and sight drafts, respectively. As regards the petitioners'
allegation of full payment, SIHI stressed that the appellate court had already
resolved this issue in its favor by ruling that there remained an unpaid
balance of P7,868,881.11 as of January 31, 1989 for which the petitioners
were held solidarily liable. Besides, by quoting substantial portions of their
appellants' Brief in the instant petition, the petitioners merely repeated the
issues that have already been passed upon by the appellate court. Finally,
SIHI asserted the validity and admissibility of the comprehensive surety
agreement.
The threshold issue in this case is whether or not the letters of credit, sight
drafts, trust receipts and comprehensive surety agreement are admissible in
evidence despite the absence of documentary stamps thereon as required
by the Internal Revenue Code.20
We rule in the affirmative. As correctly noted by the respondent, the Answer
with Counterclaim21 and Answer,22 of Filtex and Villanueva, respectively, did
not contain any specific denial under oath of the letters of credit, sight
drafts, trust receipts and comprehensive surety agreement upon which
SIHI's Complaint23 was based, thus giving rise to the implied admission of
the genuineness and due execution of these documents. Under Sec. 8, Rule
8 of the Rules of Court, when an action or defense is founded upon a written
instrument, copied in or attached to the corresponding pleading as provided
in the preceding section, the genuineness and due execution of the
instrument shall be deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to be the facts.

Page

50

In Benguet Exploration, Inc. vs. Court of Appeals,24 this Court ruled that the
admission of the genuineness and due execution of a document means that
the party whose signature it bears admits that he voluntarily signed the
document or it was signed by another for him and with his authority; that at
the time it was signed it was in words and figures exactly as set out in the
pleading of the party relying upon it; that the document was delivered; and
that any formalities required by law, such as a seal, an acknowledgment, or
revenue stamp, which it lacks, are waived by him.
Moreover, under Section 173 of the Internal Revenue Code the liability for
payment of the stamp taxes is imposed on "the person making, signing,
issuing, accepting, or transferring" the document. As correctly pointed out
by SIHI, Filtex was the issuer and acceptor of the trust receipts and sight
drafts, respectively, while the letters of credit were issued upon its
application. On the other hand, Villanueva signed the comprehensive surety
agreement. Thus, being among the parties obliged to pay the documentary
stamp taxes, the petitioners are estopped from claiming that the documents
are inadmissible in evidence for non-payment thereof.
Interestingly, the petitioners questioned the admissibility of these
documents rather belatedly, at the appeal stage even. Their respective
answers25 to SIHI's Complaint were silent on this point. The rule is wellsettled that points of law, theories, issues and arguments not adequately
brought to the attention of the trial court need not, and ordinarily will not,
be considered by a reviewing court as they cannot be raised for the first
time on appeal because this would be offensive to the basic rules of fair
play, justice and due process.26
Hence, the petitioners can no longer dispute the admissibility of the letters
of credit, sight drafts, trust receipts and comprehensive surety agreement.
However, this does not preclude the petitioners from impugning these
documents by evidence of fraud, mistake, compromise, payment, statute of
limitations, estoppel and want of consideration. 27
This brings us to the petitioners' contention that they have already fully paid
their obligation to SIHI and have, in fact, overpaid by P415,722.53. This
matter is purely a factual issue. In Fortune Motors (Phils.) Corporation vs.
Court of Appeals,28 it was held that "the jurisdiction of this Court in cases

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51

brought before it from the Court of Appeals under Rule 45 of the Rules of
Court is limited to reviewing or revising errors of law. It is not the function of
this Court to analyze or weigh evidence all over again unless there is a
showing that the findings of the lower court are totally devoid of support or
are glaringly erroneous as to constitute serious abuse of discretion. Factual
findings of the Court of Appeals are conclusive on the parties and carry even
more weight when said court affirms the factual findings of the trial court." 29
It should be noted that the issue of overpayment as well as the proof
presented by the petitioners on this point merely rehash those submitted
before the Court of Appeals. The appellate court affirmed the trial court and
passed upon this issue by exhaustively detailing the amounts paid as
guaranty deposit, the payments made and the balance due for every trust
receipt. This Court shall not depart from the findings of the trial court and
the appellate court, supported by the preponderance of evidence and
unsatisfactorily refuted by the petitioners, as they are.
As a final issue, Villanueva contended that the comprehensive surety
agreement is null and void for lack of consent of Filtex and SIHI. He also
alleged that SIHI materially altered the terms and conditions of the
comprehensive surety agreement by granting Filtex an extension of the
period for payment thereby releasing him from his obligation as surety. We
find these contentions specious.
In the first place, the consent of Filtex to the surety may be assumed from
the fact that Villanueva was the signatory to the sight drafts and trust
receipts on behalf of Filtex.30 Moreover, in its Answer with Counterclaim, 31
Filtex admitted the execution of the comprehensive surety agreement with
the only qualification that it was not a means to induce SIHI to issue the
domestic letters of credit. Clearly, had Filtex not consented to the
comprehensive surety agreement, it could have easily objected to its
validity and specifically denied the same. SIHI's consent to the surety is also
understood from the fact that it demanded payment from both Filtex and
Villanueva.
As regards the purported material alteration of the terms and conditions of
the comprehensive surety agreement, we rule that the extension of time

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52

granted to Filtex to pay its obligation did not release Villanueva from his
liability. As this Court held in Palmares vs. Court of Appeals:32
"The neglect of the creditor to sue the principal at the time the debt falls
due does not discharge the surety, even if such delay continues until the
principal becomes insolvent
The raison d'etre for the rule is that there is nothing to prevent the creditor
from proceeding against the principal at any time. At any rate, if the surety
is dissatisfied with the degree of activity displayed by the creditor in the
pursuit of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor.
It may not be amiss to add that leniency shown to a debtor in default, by
delay permitted by the creditor without change in the time when the debt
might be demanded, does not constitute an extension of the time of
payment, which would release the surety. In order to constitute an extension
discharging the surety, it should appear that the extension was for a definite
period, pursuant to an enforceable agreement between the principal and
the creditor, and that it was made without the consent of the surety or with
a reservation of rights with respect to him. The contract must be one which
precludes the creditor from, or at least hinders him in, enforcing the
principal contract within the period during which he could otherwise have
enforced it, and precludes the surety from paying the debt." 33
Lastly, with regard to Villanueva's assertion that the 25% annual interest to
be paid by Filtex in case it failed to pay the amount released to suppliers
was inserted by SIHI without his consent, suffice it to say that the trust
receipts bearing the alleged insertion of the 25% annual fee are
countersigned by him. His pretension of lack of knowledge and consent
thereto is obviously contrived.
In view of the foregoing, we find the instant petition bereft of merit.1wphi1
WHEREFORE, premises considered, the petition is DENIED and the assailed
Decision and Resolution of the Court of Appeals concurring with the decision
of the trial court are hereby AFFIRMED. Costs against the petitioners.
SO ORDERED.

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53

Bellosillo, (Chairman), Quisumbing, Austria-Martinez and Callejo, Sr., JJ.,

concur.

54
Page

G.R. No. 34642

September 24, 1931

Page

55

FABIOLA SEVERINO, accompanied by her husband RICARDO

VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.
Jacinto E. Evidente for appellees.
STREET, J.:
This action was instituted in the Court of First Instance of the Province of
Iloilo by Fabiola Severino, with whom is joined her husband Ricardo Vergara,
for the purpose of recovering the sum of P20,000 from Guillermo Severino
and Enrique Echaus, the latter in the character of guarantor for the former.
Upon hearing he cause the trial court gave judgment in favor of the
plaintiffs to recover the sum of P20,000 with lawful from November 15,
1929, the date of the filing of the complaint, with costs. But it was declared
that execution of this judgment should issue first against the property of
Guillermo Severino, and if no property should be found belonging to said
defendant sufficient to satisfy the judgment in whole or in part, execution
for the remainder should be issued against the property of Enrique Echaus
as guarantor. From this judgment the defendant Echaus appealed, but his
principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio
Severino, deceased, former resident of Occidental Negros. Upon the death
of Melecio Severino a number of years ago, he left considerable property
and litigation ensued between his widow, Felicitas Villanueva, and Fabiola
Severino, on the one part, and other heirs of the deceased on the other
part. In order to make an end of this litigation a compromise was effected by
which Guillermo Severino, a son of Melecio Severino, took over the property
pertaining to the estate of his father at the same time agreeing to pay
P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of money
was made payable, first, P40,000 in cash upon the execution of the
document of compromise, and the balance in three several payments of
P20,000 at the end of one year; two years, and three years respectively. To
this contract the appellant Enrique Echaus affixed his name as guarantor.

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56

The first payment of P40,000 was made on July 11, 1924, the date when the
contract of compromise was executed; and of this amount the plaintiff
Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all
as yet unpaid, Fabiola Severino is entitled to the sum of P20,000.
It appears that at the time of the compromise agreement above-mentioned
was executed Fabiola Severino had not yet been judicially recognized as the
natural daughter of Melecio Severino, and it was stipulated that the last
P20,000 corresponding to Fabiola and the last P5,000 corresponding to
Felicitas Villanueva should retained on deposit until the definite status of
Fabiola Severino as natural daughter of Melecio Severino should be
established. The judicial decree to this effect was entered in the Court of
First Instance of Occidental Negros on June 16, 1925, and as the money
which was contemplated to be held in suspense has never in fact been paid
to the parties entitled thereto, it results that the point respecting the
deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never been paid
and is still owing to the plaintiff; and the only defense worth noting in this
decision is the assertion on the part of Enrique Echaus that he received
nothing for affixing his signature as guarantor to the contract which is the
subject of suit and that in effect the contract was lacking in consideration as
to him.
The point is not well taken. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal
parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and
dismissal of a lawsuit is recognized in law as a valuable consideration; and
the dismissal of the action which Felicitas Villanueva and Fabiola Severino
had instituted against Guillermo Severino was an adequate consideration to
support the promise on the part of Guillermo Severino to pay the sum of
money stipulated in the contract which is the subject of this action. The
promise of the appellant Echaus as guarantor therefore binding. It is never
necessary that the guarantor or surety should receive any part of the
benefit, if such there be, accruing to his principal. But the true consideration
of this contract was the detriment suffered by the plaintiffs in the former
action in dismissing that proceeding, and it is immaterial that no benefit
may have accrued either to the principal or his guarantor.

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57

The judgment appealed from is in all respects correct, and the same will be
affirmed, with costs against the appellant. So ordered.
Avancea, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real
and Imperial, JJ., concur.

G.R. No. 103066 April 25, 1996

WILLEX
PLASTIC
INDUSTRIES,
CORPORATION,
petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK,
respondents.

MENDOZA, J.:p
This is a petition for review on certiorari of the decision 1 of the Court of
Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the Regional
Trial Court of the National Capital Judicial Region, Branch XLV, Manila, which
ordered petitioner Willex Plastic Industries Corporation and the Inter-Resin
Industrial Corporation, jointly and severally, to pay private respondent
International Corporate Bank certain sums of money, and the appellate
court's resolution of October 17, 1989 denying petitioner's motion for
reconsideration.

58
Page

The facts are as follows:

Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of

credit with the Manila Banking Corporation. To secure payment of the credit
accomodation, Inter-Resin Industrial and the Investment and Underwriting
Corporation of the Philippines (IUCP) executed two documents, both entitled
"Continuing Surety Agreement" and dated December 1, 1978, whereby they
bound themselves solidarily to pay Manilabank "obligations of every kind,
on which the [Inter-Resin Industrial] may now be indebted or hereafter
become indebted to the [Manilabank]." The two agreements (Exhs. J and K)
are the same in all respects, except as to the limit of liability of the surety,
the first surety agreement being limited to US$333,830.00, while the second
one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic
Industries Corp., executed a "Continuing Guaranty" in favor of IUCP whereby
"For and in consideration of the sum or sums obtained and/or to be obtained
by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and
Willex Plastic jointly and severally guaranteed "the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the
extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00) Philippine Currency and such interests, charges and
penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the
sum of P4,334,280.61 representing Inter-Resin Industrial's outstanding
obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp.,
which in the meantime had succeeded IUCP, demanded from Inter-Resin
Industrial and Willex Plastic the payment of what it (IUCP) had paid to
Manilabank. As neither one of the sureties paid, Atrium filed this case in the
court below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,600.00 representing the proceeds of its
fire insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty"
was intended to secure payment to Atrium of the amount of P4,334,280.61

Page

59

which the latter had paid to Manilabank. It claimed, however, that it had
already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the
complaint and interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the
former's liability is extinguished due to the accidental fire that destroyed its
premises, which liability is covered by sufficient insurance assigned to
plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to
plaintiff, its account is now very much lesser than those stated in the
complaint because of some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability
is only secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim
against the principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The
case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have
waived the right to present evidence for its failure to appear at the hearing
despite due notice. On the other hand, Willex Plastic rested its case without
presenting any evidence. Thereafter Interbank and Willex Plastic submitted
their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin
Industrial and Willex Plastic jointly and severally to pay to Interbank the
following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with
interest of 17% per annum from August 11, 1982, when Inter-Resin

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60

Industrial paid P687,500.00 to the plaintiff, until full payment of the said
amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of the total
amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals.
Willex Plastic filed its brief, while Inter-Resin Industrial presented a "Motion
to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and
to Defer Filing of the Appellant's Brief." After its motion was denied, InterResin Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming
the ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to
present evidence to show that Inter-Resin Industrial had already paid its
obligation to Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant InterResin Industrial's motion for reception of evidence because the situation or
situations in which we could exercise the power under BP 129 did not exist.
Movant here has not presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of
February 22, 1991 and the resolution of December 6, 1991 of the Court of
Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty"
signed on April 2, 1979 petitioner Willex Plastic may be held jointly and
severally liable with Inter-Resin Industrial for the amount paid by Interbank
to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-ininterest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety
Agreements" made on December 1, 1978. In denying liability to Interbank

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61

for the amount, Willex Plastic argues that under the "Continuing Guaranty,"
its liability is for sums obtained by Inter-Resin Industrial from Interbank, not
for sums paid by the latter to Manilabank for the account of Inter-Resin
Industrial. In support of this contention Willex Plastic cites the following
portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained by
INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the
DEBTOR/S, from you and/or your principal/s as may be evidenced by
promissory note/s, checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly
and severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the DEBTOR/S in your and/or your
principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency,
and such interests, charges and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact
that evidence aliunde was introduced in the trial court to explain that it was
actually to secure payment to Interbank (formerly IUCP) of amounts paid by
the latter to Manilabank that the "Continuing Guaranty" was executed. In its
complaint below, Interbank's predecessor-in-interest, Atrium Capital,
alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff
required defendant IRIC [Inter-Resin Industrial] to execute a chattel
mortgage in its favor and a Continuing Guaranty which was signed by the
other defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it
claimed that it had already paid its obligation in its entirety. On the other
hand, Willex Plastic, while denying the allegation in question, merely did so
"for lack of knowledge or information of the same." But, at the hearing of
the case on September 16, 1986, when asked by the trial judge whether
Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex
Plastic's counsel replied in the negative and manifested that "the plaintiff in

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62

this case [Interbank] is the guarantor and my client [Willex Plastic] only
signed as a guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the "Continuing
Guaranty" had been made to guarantee payment of amounts made by it to
Manilabank and not of any sums given by it as loan to Inter-Resin Industrial.
Interbank's witness testified under cross examination by counsel for Willex
Plastic that Willex "guaranteed the exposure/of whatever exposure of ACP
[Atrium Capital] will later be made because of the guarantee to Manila
Banking Corporation." 3
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it
relates. 4 At all events, Willex Plastic cannot now claim that its liability is
limited to any amount which Interbank, as creditor, might give directly to
Inter-Resin Industrial as debtor because, by failing to object to the parol
evidence presented, Willex Plastic waived the protection of the parol
evidence rule. 5
Accordingly, the trial court found that it was "to secure the guarantee made
by plaintiff of the credit accommodation granted to defendant IRIC [InterResin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC
to execute a chattel mortgage in its favor and a Continuing Guaranty which
was signed by the defendant Willex Plastic Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to
secure the guarantee undertaken by plaintiff-appellee [Interbank] of the
credit accommodation granted to Inter-Resin Industrial by Manilabank,
plaintiff-appellee required defendant-appellants to sign a Continuing
Guaranty." These factual findings of the trial court and of the Court of
Appeals are binding on us not only because of the rule that on appeal to the
Supreme Court such findings are entitled to great weight and respect but
also because our own examination of the record of the trial court confirms
these findings of the two courts. 7
Nor does the record show any other transaction under which Inter-Resin
Industrial may have obtained sums of money from Interbank. It can
reasonably be assumed that Inter-Resin Industrial and Willex Plastic

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63

intended to indemnify Interbank for amounts which it may have paid

Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it
was "to secure the aforesaid guarantee, that INTERBANK required principal
debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor,
and so a "Continuing Guaranty" was executed on April 2, 1979 by WILLEX
PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin
Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory
contract, cannot legally exist because of the absence of a valid principal
obligation. 8 Its contention is based on the fact that it is not a party either to
the "Continuing Surety Agreement" or to the loan agreement between
Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to
the principal alone being sufficient. For a "guarantor or surety is bound by
the same consideration that makes the contract effective between the
principal parties thereto. It is never necessary that a guarantor or surety
should receive any part or benefit, if such there be, accruing to his
principal." 9 In an analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor,
for the purpose of having an additional capital for buying and selling cocoshell charcoal and importation of activated carbon, the comprehensive
surety agreement was admittedly in full force and effect. The loan was,
therefore, covered by the said agreement, and private respondent, even if
he did not sign the promissory note, is liable by virtue of the surety
agreement. The only condition that would make him liable thereunder is
that the Borrower "is or may become liable as maker, endorser, acceptor or
otherwise." There is no doubt that Daicor is liable on the promissory note
evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a

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64

principal one which, in this case is the loan obtained by Daicor as evidenced
by a promissory note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be
retroactivelt applied so as to secure payments made by Interbank under the
two "Continuing Surety Agreements." Willex Plastic invokes the ruling in El
Vencedor v. Canlas 11 and Di o v. Court of Appeals 12 in support of its
contention that a contract of suretyship or guaranty should be applied
prospectively.
The cases cited are, however, distinguishable from the present case. In El
Vencedor v. Canlas we held that a contract of suretyship "is not
retrospective and no liability attaches for defaults occurring before it is
entered into unless an intent to be so liable is indicated." There we found
nothing in the contract to show that the paries intended the surety bonds to
answer for the debts contracted previous to the execution of the bonds. In
contrast, in this case, the parties to the "Continuing Guaranty" clearly
provided that the guaranty would cover "sums obtained and/or to be
obtained" by Inter-Resin Industrial from Interbank.
On the other hand, in Di o v. Court of Appeals the issue was whether the
sureties could be held liable for an obligation contracted after the execution
of the continuing surety agreement. It was held that by its very nature a
continuing suretyship contemplates a future course of dealing. "It is
prospective in its operation and is generally intended to provide security
with respect to future transactions." By no means, however, was it meant in
that case that in all instances a contrast of guaranty or suretyship should be
prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13
although a contract of suretyship is ordinarily not to be construed as
retrospective, in the end the intention of the parties as revealed by the
evidence is controlling. What was said there 14 applies mutatis mutandis to
the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that
bonds or other contracts of suretyship are ordinarily not to be construed as
retrospective, but that rule must yield to the intention of the contracting
parties as revealed by the evidence, and does not interfere with the use of

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65

the ordinary tests and canons of interpretation which apply in regard to

other contracts.
In the present case the circumstances so clearly indicate that the bond
given by Echevarria was intended to cover all of the indebtedness of the
Arrocera upon its current account with the plaintiff Bank that we cannot
possibly adopt the view of the court below in regard to the effect of the
bond.
[4] Willex Plastic says that in any event it cannot be proceeded against
without first exhausting all property of Inter-Resin Industrial. Willex Plastic
thus claims the benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex
Plastic and Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you
and/or your principal/s may directly proceed against Me/Us without first
proceeding against and exhausting DEBTOR/s properties in the same
manner as if all such liabilities constituted My/Our direct and primary
obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion.
In addition, Willex Plastic bound itself solidarily liable with Inter-Resin
Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be obtained by
INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the
DEBTOR/S, from you and/or your principal/s as may be evidenced by
promissory note/s, checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly
and severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the DEBTOR/S in your and/or your

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66

principal/s, successor/s and assigns favor to the extent of the aggregate

principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency,
and such interests, charges and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its
indebtedness to Interbank and that Willex Plastic should have been allowed
by the Court of Appeals to adduce evidence to prove this. Suffice it to say
that Inter-Resin Industrial had been given generous opportunity to present
its evidence but it failed to make use of the same. On the otherhand, Willex
Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29,
1987, but because of its failure to appear on that date, the hearing was
reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion
of Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and
"reset for the last time" on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly
the trial court issued the following order:
Considering that, as shown by the records, the Court had exerted every
earnest effort to cause the service of notice or subpoena on the defendant
Inter-Resin Industrial but to no avail, even with the assistance of the
defendant Willex the defendant Inter-Resin Industrial is hereby deemed to
have waived the right to present its evidence.
On the other hand, Willex Plastic announced it was resting its case without
presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered
its order and set the hearing anew on July 23, 1987. But Inter-Resin
Industrial again moved for the postponement of the hearing be postponed
to August 11, 1987. The hearing was, therefore, reset on September 8 and
22, 1987 but the hearings were reset on October 13, 1987, this time upon
motion of Interbank. To give Interbank time to comment on a motion filed by
Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was
again reset on November 17, 26 and December 11, 1987. However, Inter-

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Resin Industrial again moved for the postponement of the hearing.

Accordingly the hearing was reset on November 26 and December 11, 1987,
with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on
January 22, 1988 and February 5, 1988 upon motion of its counsel. As InterResin Industrial still failed to present its evidence, it was declared to have
waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence,
however, the hearing was postponed to March 4, 1988. Again Inter-Resin
Industrial's counsel did not appear. The trial court, therefore, finally declared
Inter-Resin Industrial to have waived the right to present its evidence. On
the other hand, Willex Plastic, as before, manifested that it was not
presenting evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be
given the opportunity of showing that Inter-Resin Industrial has already paid
its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs
against the petitioner.
SO ORDERED.
Regalado, Romero, Puno and Torres, Jr., JJ., concur.

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68

G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners,

vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this
present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No.
17724 1 which reversed the 2 December 1987 Decision of Branch 45 of the
Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan
Bank and Trust Company vs. Uy Tiam, doing business under the name of
"UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto
Uy" and docketed as Civil Case No. 82-9303. They likewise challenge public
respondent's Resolution of 21 August 1989 2 denying their motion for the
reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as
follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services
(hereinafter referred to as UTEFS), thru its representative Uy Tiam, applied
for and obtained credit accommodations (letter of credit and trust receipt
accommodations) from the Metropolitan Bank and Trust Company
(hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original
Records, p. 333). To secure the aforementioned credit accommodations
Norberto Uy and Jacinto Uy Dio executed separate Continuing Suretyships
(Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the
latter. Under the aforesaid agreements, Norberto Uy agreed to pay
METROBANK any indebtedness of UTEFS up to the aggregate sum of
P300,000.00 while Jacinto Uy Dio agreed to be bound up to the aggregate
sum of P800,000.00.

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Having paid the obligation under the above letter of credit in 1977, UTEFS,
through Uy Tiam, obtained another credit accommodation from METROBANK
in 1978, which credit accommodation was fully settled before an irrevocable
letter of credit was applied for and obtained by the abovementioned
business entity in 1979 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in
the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters
Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by
UTEFS without the participation of Norberto Uy and Jacinto Uy Dio as they
did not sign the document denominated as "Commercial Letter of Credit and
Application." Also, they were not asked to execute any suretyship to
guarantee its payment. Neither did METROBANK nor UTEFS inform them
that the 1979 Letter of Credit has been opened and the Continuing
Suretyships separately executed in February, 1977 shall guarantee its
payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid
Planters Products the amount of P815,600.00 which payment was covered
by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original
Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and
delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979,
whereby the former acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which amounted to P815,
600.00. Being the entrusted, the former agreed to deliver to METROBANK
the entrusted goods in the event of non-sale or, if sold, the proceeds of the
sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust
receipt. As a consequence, METROBANK sent letters to the said principal
obligor and its sureties, Norberto Uy and Jacinto Uy Dio, demanding
payment of the amount due. Informed of the amount due, UTEFS made
partial payments to the Bank which were accepted by the latter.
Answering one of the demand letters, Dio, thru counsel, denied his liability
for the amount demanded and requested METROBANK to send him copies of
documents showing the source of his liability. In its reply, the bank informed

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him that the source of his liability is the Continuing Suretyship which he
executed on February 25, 1977.
As a rejoinder, Dio maintained that he cannot be held liable for the 1979
credit accommodation because it is a new obligation contracted without his
participation. Besides, the 1977 credit accommodation which he guaranteed
has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort
to extrajudicial remedies to be futile, METROBANK filed a complaint for
collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive
of interest, commission penalty and bank charges) with a prayer for the
issuance of a writ of preliminary attachment, against Uy Tiam,
representative of UTEFS and impleaded Dio and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ,
which writ was returned unserved and unsatisfied as defendant Uy Tiam was
nowhere to be found at his given address and his commercial enterprise
was already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant
herein) filed a motion to dismiss the complaint on the ground of lack of
cause of action. They maintained that the obligation which they guaranteed
in 1977 has been extinguished since it has already been paid in the same
year. Accordingly, the Continuing Suretyships executed in 1977 cannot be
availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a
guaranty cannot exist without a valid obligation. It was further argued that
they can not be held liable for the obligation contracted in 1979 because
they are not privies thereto as it was contracted without their participation
(Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss.
Invoking the terms and conditions embodied in the comprehensive
suretyships separately executed by sureties-defendants, the bank argued
that sureties-movants bound themselves as solidary obligors of defendant
Uy Tiam to both existing obligations and future ones. It relied on Article
2053 of the new Civil Code which provides: "A guaranty may also be given
as security for future debts, the amount of which is not yet known; . . . ." It
was further asserted that the agreement was in full force and effect at the

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71

time the letter of credit was obtained in 1979 as sureties-defendants did not
exercise their right to revoke it by giving notice to the bank. (Ibid., pp. 5154).
Meanwhile, the resolution of the aforecited motion to dismiss was held in
abeyance pending the introduction of evidence by the parties as per order
dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order
dated March 7, 1986 within which to file the answer, sureties-defendants
filed their responsive pleading which merely rehashed the arguments in
their motion to dismiss and maintained that they are entitled to the benefit
of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint
against defendant Uy Tiam on the ground that it has no information as to
the heirs or legal representatives of the latter who died sometime in
December, 1986, which motion was granted on the following day (Ibid., pp.
180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment,
a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation
contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March
30, 1987 by virtue of the Continuing Suretyships they executed on February
25, 1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Dio executed the continuing suretyships, exhibits E and F,
on February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount
of P700,000.00 and this was the obligation which both obligation which
both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation
and such payment extinguished the obligation they assumed as
guarantors/sureties.

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b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of
Credit which covered the 1977 account of Uy Tiam. Thus, the obligation
under either is apart and distinct from the obligation created in the other
as evidenced by the fact that Uy Tiam had to apply anew for the 1979
transaction (Exh. A). And Dio and Uy, being strangers thereto, cannot be
answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio and Uy when it
extended to Credit at least to inform them that the continuing suretyships
they executed on February 25, 1977 will be considered by the plaintiff to
secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio and Uy were fully
informed of the import of the Continuing Suretyships when they affixed their
signatures thereon that they are thereby securing all future obligations
which Uy Tiam may contract the plaintiff. On the contrary, Dio and Uy
categorically testified that they signed the blank forms in the office of Uy
Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the
instruction of Uy Tiam, their former employer. They denied having gone to
the office of the plaintiff to subscribe to the documents (October 1, 1987,
tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as
attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual
basis.
SO ORDERED. (Records, p. 336)

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From the said Decision, the private respondent appealed to the Court of
Appeals. The case was docketed as CA-G.R. CV No. 17724. In support
thereof, it made the following assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING
THAT DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY ARE
SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30,
1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS
ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIO AND
NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the
dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby
REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay,
jointly and severally, to appellant METROBANK the amount of P2,397,883.68
which represents the amount due as of July 17, 1987 inclusive of principal,
interest and charges;
2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay,
jointly and severally, appellant METROBANK the accruing interest, fees and
charges thereon from July 18, 1987 until the whole monetary obligation is
paid; and
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay,
jointly and severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED.

In ruling for the herein private respondent (hereinafter METROBANK), public

respondent held that the Continuing Suretyship Agreements separately

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74

executed by the petitioners in 1977 were intended to guarantee payment of

Uy Tiam's outstanding as well as future obligations; each suretyship
arrangement was intended to remain in full force and effect until
METROBANK would have been notified of its revocation. Since no such
notice was given by the petitioners, the suretyships are deemed
outstanding and hence, cover even the 1979 letter of credit issued by
METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They
questioned the public respondent's construction of the suretyship
agreements and its ruling with respect to the extent of their liability
thereunder. They argued the even if the agreements were in full force and
effect when METROBANK granted Uy Tiam's application for a letter of credit
in 1979, the public respondent nonetheless seriously erred in holding them
liable for an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds
utilized by the lower court in rendering judgment for defendants-appellees
which We upon appeal found and resolved to be untenable, thereby
reversing and setting aside said judgment and rendering another in favor of
plaintiff, and no new or fresh issues have been posited to justify reversal of
Our decision herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether or not the
petitioners may be held liable as sureties for the obligation contracted by Uy
Tiam with METROBANK on 30 May 1979 under and by virtue of the
Continuing Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing
Suretyship Agreements were automatically extinguished upon payment of
the principal obligation secured thereby, i.e., the letter of credit obtained by
Uy Tiam in 1977. They further claim that they were not advised by either
METROBANK or Uy Tiam that the Continuing Suretyship Agreements would
stand as security for the 1979 obligation. Moreover, it is posited that to
extend the application of such agreements to the 1979 obligation would
amount to a violation of Article 2052 of the Civil Code which expressly
provides that a guaranty cannot exist without a valid obligation. Petitioners

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further argue that even granting, for the sake of argument, that the
Continuing Suretyship Agreements still subsisted and thereby also secured
the 1979 obligations incurred by Uy Tiam, they cannot be held liable for
more than what they guaranteed to pay because it s axiomatic that the
obligations of a surety cannot extend beyond what is stipulated in the
agreement.
On 12 February 1990, this Court resolved to give due course to the petition
after considering the allegations, issues and arguments adduced therein,
the Comment thereon by the private respondent and the Reply thereto by
the petitioners; the parties were required to submit their respective
Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy
Tiam to METROBANK by virtue of the Continuing Suretyship Agreements
they separately signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for
said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even future debts,
the amount of which may not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not limited to
a single transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally intended to
provide security with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the
guarantor becomes liable. 9 Otherwise stated, a continuing guaranty is one
which covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract, of guaranty, until
the expiration or termination thereof. 10 A guaranty shall be construed as
continuing when by the terms thereof it is evident that the object is to give
a standing credit to the principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract of guaranty

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states that the same is to secure advances to be made "from time to time"
the guaranty will be construed to be a continuing one. 11
In other jurisdictions, it has been held that the use of particular words and
expressions such as payment of "any debt," "any indebtedness," "any
deficiency," or "any sum," or the guaranty of "any transaction" or money to
be furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a continuing
guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship
agreement executed by petitioner Uy provides thus:
I. For and in consideration of any existing indebtedness to the BANK of UY
TIAM (hereinafter called the "Borrower"), for the payment of which the
SURETY is now obligated to the BANK, either as guarantor or otherwise,
and/or in order to induce the BANK, in its discretion, at any time or from
time to time hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request, or for the account of the Borrower, either
with or without security, and/or to purchase or discount, or to make any
loans or advances evidence or secured by any notes, bills, receivables,
drafts, acceptances, checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon which the Borrower
is or may become liable as maker, endorser, acceptor, or otherwise, the
SURETY agrees to guarantee, and does hereby guarantee, the punctual
payment at maturity to the loans, advances credits and/or other obligations
hereinbefore referred to, and also any and all other indebtedness of every
kind which is now or may hereafter become due or owing to the BANK by
the Borrower, together with any and all expenses which may be incurred by
the BANK in collecting all or any such instruments or other indebtedness or
obligations herein before referred to, and/or in enforcing any rights
hereunder, and the SURETY also agrees that the BANK may make or cause
any and all such payments to be made strictly in accordance with the terms
and provisions of any agreement(s) express or implied, which has (have)
been or may hereafter be made or entered into by the Borrow in reference
thereto, regardless of any law, regulation or decree, unless the same is
mandatory and non-waivable in character, nor or hereafter in effect, which
might in any manner affect any of the terms or provisions of any such

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agreement(s) or the Bank's rights with respect thereto as against the

Borrower, or cause or permit to be invoked any alteration in the time,
amount or manner of payment by the Borrower of any such instruments,
obligations or indebtedness; provided, however, that the liability of the
SURETY hereunder shall not exceed at any one time the aggregate principal
sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00)
(irrespective of the currenc(ies) in which the obligations hereby guaranteed
are payable), and such interest as may accrue thereon either before or after
any maturity(ies) thereof and such expenses as may be incurred by the
BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner
Dio contains identical provisions except with respect to the guaranteed
aggregate principal amount which is EIGHT THOUSAND PESOS
(P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect
until written notice shall have been received by the BANK that it has been
revoked by the SURETY, but any such notice shall not release the SURETY,
from any liability as to any instruments, loans, advances or other obligations
hereby guaranteed, which may be held by the BANK, or in which the BANK
may have any interest at the time of the receipt (sic) of such notice. No act
or omission of any kind on the BANK'S part in the premises shall in any
event affect or impair this guaranty, nor shall same (sic) be affected by any
change which may arise by reason of the death of the SURETY, or of any
partner(s) of the SURETY, or of the Borrower, or of the accession to any such
partnership of any one or more new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship
agreement in the case at bar are continuing in nature. Petitioners do not
deny this; in fact, they candidly admitted it. Neither have they denied the
fact that they had not revoked the suretyship agreements. Accordingly, as
correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships
was to induce appellant to grant any application for credit accommodation
(letter of credit/trust receipt) UTEFS may desire to obtain from appellant

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bank. By its terms, each suretyship is a continuing one which shall remain in
full force and effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from
appellant bank, for the purpose of obtaining goods (covered by a trust
receipt) from Planters Products, the continuing suretyships were in full force
and effect. Hence, even if sureties-appellees did not sign the "Commercial
Letter of Credit and Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was covered by the said
suretyships. What makes them liable thereunder is the condition which
provides that the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS which (sic) was liable as principal
obligor for having failed to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements
cannot be made applicable to the 1979 obligation because the latter was
not yet in existence when the agreements were executed in 1977; under
Article 2052 of the Civil Code, a guaranty "cannot exist without a valid
obligation." We cannot agree. First of all, the succeeding article provides
that "[a] guaranty may also be given as security for future debts, the
amount of which is not yet known." Secondly, Article 2052 speaks about a
valid obligation, as distinguished from a void obligation, and not an existing
or current obligation. This distinction is made clearer in the second
paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance
of a voidable or an unenforceable contract. It may also guarantee a natural
obligation.
As to the amount of their liability under the Continuing Suretyship
Agreements, petitioners contend that the public respondent gravely erred in
finding them liable for more than the amount specified in their respective
agreements, to wit: (a) P800,000.00 for petitioner Dio and (b) P300,000.00
for petitioner Uy.

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The limit of the petitioners respective liabilities must be determined from

the suretyship agreement each had signed. It is undoubtedly true that the
law looks upon the contract of suretyship with a jealous eye, and the rule is
settled that the obligation of the surety cannot be extended by implication
beyond its specified limits. To the extent, and in the manner, and under the
circumstances pointed out in his obligation, he is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by petitioner Dio
and petitioner Uy fix the aggregate amount of their liability, at any given
time, at P800,000.00 and P300,000.00, respectively. The law is clear that a
guarantor may bond himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the
conditions. 18 In the case at bar, both agreements provide for liability for
interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any
maturity(ies) thereof and such expenses as may be incurred by the BANK
referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the
SURETY to enforce any of the terms and conditions of this undertaking, the
SURETY further agrees to pay the BANK a reasonable compensation for and
as attorney's fees and costs of collection, which shall not in any event be
less than ten per cent (10%) of the amount due (the same to be due and
payable irrespective of whether the case is settled judicially or
extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which
they had signed, petitioners separately bound themselves to pay interest,
expenses, attorney's fees and costs. The last two items are pegged at not
less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable
for the interest and judicial costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein.

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If it be simple or indefinite, it shall comprise not only the principal

obligation, but also all its accessories, including the judicial costs, provided
with respect to the latter, that the guarantor shall only be liable for those
costs incurred after he has been judicially required to pay.
Interest and damages are included in the term accessories. However, such
interest should run only from the date when the complaint was filed in court.
Even attorney's fees may be imposed whenever appropriate, pursuant to
Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc.
vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because:
(1) they were not mentioned in the bond; and (2) the surety would become
liable for more than the amount stated in the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year 1922 this
Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a
suretyship bond may recover from the surety as part of their damages,
interest at the legal rate even if the surety would thereby become liable to
pay more than the total amount stipulated in the bond. The theory is that
interest is allowed only by way of damages for delay upon the part of the
sureties in making payment after they should have done so. In some states,
the interest has been charged from the date of the interest has been
charged from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice, which is to order
that interest begin to run from the date when the complaint was filed in
court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, section 6) and with
Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the
contract, but by reason of its failure to pay when demanded and for having
compelled the plaintiff to resort to the courts to obtain payment. It should
be observed that interest does not run from the time the obligation became
due, but from the filing of the complaint.

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As to attorney's fees. Before the enactment of the New Civil Code,

successful litigants could not recover attorney's fees as part of the damages
they suffered by reason of the litigation. Even if the party paid thousands of
pesos to his lawyers, he could not charge the amount to his opponent (Tan
Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven
cases enumerated in Article 2208, among them, "where the court deems it
just and equitable that attorney's (sic) fees and expenses of litigation should
be recovered" or "when the defendant acted in gross and evident bad faith
in refusing to satisfy the plaintiff's plainly valid, just and demandable claim."
This gives the courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the
principal obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of
Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last demand
letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the
public respondent mentions the amount of "P613,339.32, as of January 31,
1982, inclusive of interest commission penalty and bank charges." 23 This is
the same amount stated by METROBANK in its Memorandum. 24 However, in
summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public
respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of
UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17,
1987) P651,092.82 representing the principal amount, P825,133.54, for
past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges
at 12% per annum (5-31-82 to 7-17-87) as shown in the Statement of
Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that
date, the outstanding principal obligation of Uy Tiam, secured by the
petitioners' Continuing Suretyship Agreements, was less than P613,339.32.
Such amount may be fully covered by the Continuing Suretyship Agreement
executed by petitioner Dio which stipulates an aggregate principal sum of
not exceeding P800,000.00, and partly covered by that of petitioner Uy
which pegs his maximum liability at P300,000.00.

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Consequently, the judgment of the public respondent shall have to be

modified to conform to the foregoing exposition, to which extent the instant
petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the
challenged decision has to be modified with respect to the extend of
petitioners' liability. As modified, petitioners JACINTO UY DIO and
NORBERTO UY are hereby declared liable for and are ordered to pay, up to
the maximum limit only of their respective Continuing Suretyship
Agreement, the remaining unpaid balance of the principal obligation of UY
TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable
Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the
interest due thereon at the legal rate commencing from the date of the
filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the
Regional Trial Court of Manila, as well as the adjudged attorney's fees and
costs.
All other dispositions in the dispositive portion of the challenged decision
not inconsistent with the above are affirmed.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

83
Page

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E.
ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO
HALILI, respondents.
Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us to review and set aside
the Decision of the Court of Appeals which reversed a decision of the trial

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court ordering private respondents to pay jointly and severally to petitioner

Atok Finance certain sums of money.
On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu
Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading")
along with individual private stockholders of Sanyu Chemical, namely,
private respondent spouses Danilo E. Halili and Pablico Bermundo as
sureties, executed in the continuing Suretyship Agreement in favor of Atok
Finance as creditor. Under this Agreement, Sanyu Trading and the individual
private respondents who were officers and stockholders of Sanyu Chemical
did:
(1) For valuable and/or other consideration . . ., jointly and severally
unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter
called Creditor), the full, faithful and prompt payment and discharge of any
and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal)
to the Creditor. The word "indebtedness" is used herein in its most
comprehensive sense and includes any and all advances, debts, obligations
and liabilities of Principal or any one or more of them, here[to]fore, now or
hereafter made, incurred or created, whether voluntary or involuntary and
however arising, whether direct or acquired by the Creditor by assignment
or succession, whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined and whether the Principal may
be may be liable individually of jointly with others, or whether recovery
upon such indebtedness may be or hereafter become barred by any statute
of limitations, or whether such indebtedness may be or otherwise become
unenforceable. 1 (Emphasis supplied)
Other relevant provisions of the Continuing Suretyship Agreement follow:
(2) This is a continuing suretyship relating to any indebtedness, including
that arising under successive transactions which shall either continue the
indebtedness from time to time or renew it after it has been satisfied. This
suretyship is binding upon the heirs, successors, executors, administrators
and assigns of the surety, and the benefits hereof shall extend to and
include the successors and assigns of the Creditor.
(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be prosecuted

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against the Principal and whether or not the Principal be joined in any such
action or actions.
xxx xxx xxx.
(6) In addition to liens upon, and rights of set-off against the moneys,
securities or other property of the Surety given to the Creditor by law, the
Creditor shall have the lien upon and a right of self-off against all moneys,
securities, and other property of the Surety now and hereafter in the
possession of the Creditor; and every such lien or right of self-off may be
exercised without need of demands upon or notice to the Surety. No lien or
right of set-off shall be deemed to have been waived by any act, omission or
conduct on the part of the Creditor, or by any neglect to exercise such right
of set-off or to enforce such lien, or by any delay in so doing, and every right
of set-off or lien shall continue in full force and effect until such right of setoff of lien is specifically waived or released by an instrument in writing
executed by the Creditor.
(7) Any indebtedness of the Principal now or hereafter held by the Surety is
hereby subordinated to the indebtedness of the Principal to the Creditor;
and if the Creditor so requests, such indebtedness of the Principal of the
Surety shall be collected, enforced and shall be paid over to the Creditor
and shall be paid over to the Creditor and shall be paid over to the Creditor
on account of the indebtedness of the Principal to the Creditor but without
reducing or affecting in any manner the liability of the Surety under the
provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade receivables
outstanding as of 27 November 1981 with a total face value of P125,871.00,
to Atok Finance in consideration of receipt from Atok Finance of the amount
of P105,000.00. The assigned receivables carried a standard term of thirty
(30) days; it appeared, however, that the standard commercial practice was
to grant an extension up to one hundred twenty (120) days without
penalties. The relevant portions of this Deed of Assignment read as follows:

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86

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and
ASSIGN all his/its rights, title and interest in the contracts, receivables,
accounts, notes, leases, deeds of sale with reservation of title, invoices,
mortgages, checks, negotiable instruments and evidences of indebtedness
listed in the schedule forming part hereinafter called "Contract" or
"Contracts."
2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR
does hereby certify, warrant and represent that :
(a). He/It is the sole owner of the assigned Contracts free and clear of claims
of any other party except the herein ASSIGNEE and has the right to transfer
absolute title thereto the ASSIGNEE;
(b). Each assigned Contract is bonafide and the amount owing and to
become due on each contract is correctly stated upon the schedule or other
evidences of the Contract delivered pursuant thereto;
(c). Each assigned Contract arises out of the sale of merchandise/s which
had been delivered and/or services which have been rendered and none of
the Contract is now, nor will at any time become, contingent upon the
fulfillment of any contract or condition whatsoever, or subject to any
defense, offset or counterclaim;
(d). No assigned Contract is represented by any note or other evidence of
indebtness or other security document except such as may have been
endorsed, assigned and delivered by the ASSIGNOR to the ASSIGNEE
simultaneously with the assignment of such Contract;
(e). No agreement has been made, or will be made, with any debtor for any
deduction discount or return of merchandise, except as may be specifically
noted at the time of the assignment of the Contract;
(f). None of the terms or provisions of the assigned Contracts have been
amended, modified or waived;
(g). The debtor/s under the assigned Contract/s are solvent and his/its/their
failure to pay the assigned Contracts and/or any installment thereon upon

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maturity thereof shall be conclusively considered as a violation of this

warranty; and
(h). Each assigned Contract is a valid obligation of the buyer of the
merchandise and/or service rendered under the Contract And that no
Contract is overdue.
The foregoing warranties and representations are in addition to those
provided for in the Negotiable Instruments Law and other applicable laws.
Any violation thereof shall render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE jointly and severally with the
debtors under the assigned contracts, the amounts due thereon.
xxx xxx xxx
4. The ASSIGNOR shall without compensation or cost, collect and receive in
trust for the ASSIGNEE all payments made upon the assigned contracts and
shall remit to the ASSIGNEE all collections on the said Contracts as follows :
P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until
November 1, 1982.
P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to Atok
Finance with a total face value of P100,378.45.
On 13 January 1984, Atok Finance commenced action against Sanyu
Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before
the Regional Trial Court of Manila to collect the sum of P120,240.00 plus
penalty charges amounting to P0.03 for every peso due and payable for
each month starting from 1 September 1983. Atok Finance alleged that
Sanyu Chemical had failed to collect and remit the amount due under the
trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of
Atok's claim upon the ground that such claim had prescribed under Article
1629 of the Civil Code and for lack of cause of action. The private
respondents contended that the Continuing Suretyship Agreement, being an

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accessory contract, was null and void since, at the time of its execution,
Sanyu Chemical had no pre-existing obligation due to Atok Finance.
At the trial, Sanyu Chemical and the individual private respondents failed to
present any evidence on their behalf, although the individual private
respondents submitted a memorandum in support of their argument. After
trial, on 1 April 1985, the trial court rendered a decision in favor of Atok
Finance. The dispositive portion of this decision reads as follows:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK
FINANCE CORPORATION; and against the defendants SANYU CHEMICAL
CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO
BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and
severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from September 1,
1983 until the whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED. 4
Private respondents went on appeal before the then Intermediate Appellate
Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV.
The case was raffled to the Third Civil Cases Division of the IAC. In a
resolution dated 21 March 1986, that Division dismissed the appeal upon
the ground of abandonment, since the private respondents had failed to file
their appeal brief notwithstanding receipt of the notice to do so. On 4 June
1986, entry of judgment was made by the Clerk of Court of the IAC.
Accordingly, Atok Finance went before the trial court and sought a writ of
execution to enforce the decision of the trial court of 1 April 1985. The trial
court issued a writ of execution on 23 July 1986. 5 Petitioner alleged that the
writ of execution was served on private respondents. 6
However, on 27 August 1986, private respondents filed a Petition for Relief
from Judgment before the Court of Appeals. This Petition was raffled off to
the 15th Division of the Court of Appeals. In that Petition, private

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respondents claimed that their failure to file their appeal brief was due to
excusable negligence, that is, that their previous counsel had entrusted the
preparation and filing of the brief to one of his associates, which associate,
however, had unexpectedly resigned from the law firm without returning the
records of cases he had been handling, including the appeal of private
respondents. Atok Finance opposed the Petition for Relief arguing that no
valid ground existed for setting aside the resolution of the Third Division of
the then IAC.
The 15th Division of the Court of Appeals nonetheless granted the Petition
for Relief from Judgment "in the paramount interest of justice," 7 set aside
the resolution of the Third Civil Cases Division of the then IAC, and gave
private respondents a non-extendible period of fifteen (15) days within
which to file their appeal brief. Private respondents did file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of
the appeal, and reversed and set aside the decision of the trial court and
entered a new judgment dismissing the complaint of Atok Finance, ordering
it to pay private respondents P3,000.00 as attorney's fees and to pay the
costs.
Atok Finance moved to set aside the decision of the 15th Division of the
Court of Appeals, inviting attention to the resolution of the IAC's Third Civil
Cases Division of 21 March 1986 originally dismissing private respondent's
appeal for abandonment thereof. In a resolution dated 18 August 1987, the
15th Division denied Atok Finance's motion stating that it had granted the
Petition for Relief from Judgment and given private respondents herein
fifteen (15) days within which to file an appeal brief, while Atok Finance did
not file an appellee's brief, and that its decision was arrived at "on the basis
of appellant's brief and the original records of the appeal case."
In the present Petition for Review, Atok Finance assigns the following as
errors on the part of the Court of Appeals in rendering its decision of 18
August 1987:
(1) that it had erred in ruling that a continuing suretyship agreement cannot
be effected to secure future debts;

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(2) that it had erred in ruling that the continuing suretyship agreement was
null and void for lack of consideration without any evidence whatsoever
[being] adduced by private respondents;
(3) that it had erred in granting the Petition for Relief from Judgment while
execution proceedings [were] on-going on the trial court. 8 (Emphasis in the
original)
As a preliminary matter, we note that a Division of the Court of Appeals is
co-equal with any other Division of the same court. Accordingly, a Division
of the Court of Appeals has no authority to consider and grant a petition for
relief from a judgment rendered by another Division of the same court. In
the case at bar, however, we must note that an intervening event had
occurred between the resolution of 21 March 1986 of the Third Civil Cases
Division of the IAC dismissing private respondents' appeal and the 30
September 1986 order of the 15th Division of the Court of Appeals granting
the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate
Appellate Court went out of existence and a new court, the Court of
Appeals, came into being, was organized and commenced functioning. 9 This
event, and the probability that some confusion may have accompanied the
period of transition from the IAC to the Court of Appeals, lead us to believe
that the defect here involved should be disregarded as being of secondary
importance. At the same time, nothing in this decision should be read as
impliedly holding that a petition from relief judgment is available in respect
of a decision rendered by the Court of Appeals; this issue is best reserved
for determination in some future cases where it shall have been adequately
argued by the parties.
We turn, therefore, to a consideration of the first substantive issue
addressed by the Court of Appeals in rendering its Decision on the merits of
the appeal: whether the individual private respondents may be held
solidarily liable with Sanyu Chemical under the provisions of the Continuing
Suretyship Agreement, or whether that Agreement must be held null and
void as having been executed without consideration and without a preexisting principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:

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It is the contention of private appellants that the suretyship agreement is

null and void because it is not in consonance with the laws on guaranty and
security. The said agreement was entered into by the parties two years
before the Deed of Assignment was executed. Thus, allegedly, it ran counter
to the provision that guaranty cannot exist independently because by
nature it is merely an accessory contract. The law on guaranty is applicable
to surety to some extent Manila Surety and Fidelity Co. v. Baxter
Construction & Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co.,
53 O.G. 7247.
We find merit in this contention.
Although obligations arising from contracts have the force of law between
the contracting parties, (Article 1159 of the Civil Code) this does not mean
that the law is inferior to it; the terms of the contract could not be enforces
if not valid. So, even if, as in this case, the agreement was for a continuing
suretyship to include obligations enumerated in paragraph 2 of the
agreement, the same could not be enforced. First, because this contract,
just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil
Code); and, second, although it may be given as security for future debt
(Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be
considered "future debt" as envisioned by this law.
There is no proof that when the suretyship agreement was entered into,
there was a pre-existing obligation which served the principal obligation
between the parties. Furthermore, the "future debts" alluded to in Article
2053 refer to debts already existing at the time of the constitution of the
agreement but the amount thereof is unknown, unlike in the case at bar
where the obligation was acquired two years after the agreement. 10
(Emphasis supplied).
We consider that the Court of Appeals here was in serious error. It is true
that a serious guaranty or a suretyship agreement is an accessory contract
in the sense that it is entered into for the purpose of securing the
performance of another obligation which is denominated as the principal
obligation. It is also true that Article 2052 of the Civil Code states that "a
guarantee cannot exist without a valid obligation." This legal proposition is
not, however, like most legal principles, to be read in an absolute and literal

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manner and carried to the limit of its logic. This is clear from Article 2052 of
the Civil Code itself:
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance
of a voidable or an unenforceable contract. It may also guaranty a natural
obligation." (Emphasis supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured. (Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw interpreting
Articles 2052 and 2053 of the Civil Code. In National Rice and Corn
Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., 11 the private
respondents assailed the decision of the trial court holding them liable
under certain surety bonds filed by private respondent Fojas and issued by
private respondent Alto Surety Co. in favor of petitioner NARIC, upon the
ground that those surety bonds were null and void "there being no principal
obligation to be secured by said bonds." In affirming the decision of the trial
court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift
of the private respondents' doctrinaire argument:
Under his third assignment of error, appellant Fojas questions the validity of
the additional bonds (Exhs. D and D-1) on the theory that when they were
executed, the principal obligation referred to in said bonds had not yet been
entered into, as no copy thereof was attached to the deeds of suretyship.
This defense is untenable, because in its complaint the NARIC averred, and
the appellant did not deny that these bonds were posted to secure the
additional credit that Fojas has applied for, and the credit increase over his
original contract was sufficient consideration for the bonds. That the latter
were signed and filed before the additional credit was extended by the
NARIC is no ground for complaint. Article 1825 of the Civil Code of 1889, in
force in 1948, expressly recognized that "a guaranty may also be given as

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security for future debts the amount of which is not yet known." (Emphasis
supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court was
confronted again with the same issue, that is, whether private respondent
was liable to pay a promissory note dated 29 April 1977 executed by the
principal debtor in the light of the provisions of a comprehensive surety
agreement which petitioner bank and the private respondent had earlier
entered into on 19 October 1976. Under the comprehensive surety
agreement, the private respondents had bound themselves as solidary
debtors of the Diacor Corporation not only in respect of existing obligations
but also in respect of future ones. In holding private respondent surety
(Residoro Chua) liable under the comprehensive surety agreement, the
Court said:
The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a
principal one, which, in this case is the loan obtained by Daicor as
evidenced by a promissory note. What obviously induced petitioner bank to
grant the loan was the surety agreement whereby Go and Chua bound
themselves solidarily to guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can be clearly seen that the
surety agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil Code. Thus

Article 2053. A guarantee may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured. 13 (Emphasis supplied)
It is clear to us that the Rizal Commercial Banking Corporation and the
NARIC cases rejected the distinction which the Court of Appeals in the case
at bar sought to make with respect to Article 2053, that is, that the "future
debts" referred to in that Article relate to "debts already existing at the time
of the constitution of the agreement but the amount [of which] is unknown,"
and not to debts not yet incurred and existing at that time. Of course, a
surety is not bound under any particular principal obligation until that

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principal obligation is born. But there is no theoretical or doctrinal difficulty

inherent in saying that the suretyship agreement itself is valid and binding
even before the principal obligation intended to be secured thereby is born,
any more that there would be in saying that obligations which are subject to
a condition precedent are valid and binding before the occurrence of the
condition precedent. 14
Comprehensive or continuing surety agreements are in fact quite commonm
place in present day financial and commercial practice. A bank or a
financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor;
with such surety agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation
extended to the principal debtor. As we understand it, this is precisely what
happened in the case at bar.
We turn to the second substantive issue, that is, whether private
respondents are liable under the Deed of Assignment which they, along with
the principal debtor Sanyu Chemical, executed in favor of petitioner, on the
receivables thereby assigned.
The contention of Sanyu Chemical was that Atok Finance had no cause of
action under the Deed of Assignment for the reason that Sanyu Chemical's
warranty of the debtors' solvency had ceased. In submitting this contention,
Sanyu Chemical relied on Article 1629 of the Civil Code which reads as
follows:
Art. 1629. In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties
should not have agreed upon the duration of the liability, it shall last for one
year only, from the time of the assignment if the period had already
expired.
If the credit should be payable within a term or period which has not yet
expired, the liability shall cease one year after maturity.

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Once more, the Court of Appeals upheld the contention of private

respondents and held that Sanyu Chemical was free from liability under the
Deed of Assignment. The Court of Appeals said:
. . . Article 1629 provides for the duration of assignor's warranty of debtor's
solvency depending on whether there was a period agreed upon for the
existence of such warranty, analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then for such period;
(2) if no period (or length of time) was agreed upon, then:
(a) one year from assignment if debt was due at the time of the
assignment
(b) one year from maturity if debt was not yet due at the time of the
assignment..
The debt referred to in this law is the debt under the assigned contract or
the original debts in favor of the assignor which were later assigned to the
assignee. The debt alluded to in the law, is not the debt incurred by the
assignor to the assignee as contended by the appellant.
Applying the said law to the case at bar, the records disclose that none of
the assigned receivables had matured on November 27, 1981 when the
Deed of Assignment was executed. The oldest debt then existing was that
contracted on November 3, 1981 and the latest was contracted on
December 4, 1981.
Each of the invoices assigned to the assignee contained a term of 30 days
(Exhibits B-3-A to 5 and extended by the notation which appeared in the
"Schedule of Assigned Receivables" which states that the ". . . the terms
stated on our invoices were normally extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary
practice of the company, thus, the assigned debts matured between April 3,
1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in this
case, would then be from the maturity period up to April 3, 1983 or May 4,
1983 to cover all of the receivables in the invoices.

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The letter of demand executed by appellee was dated August 29, 1983
(Exhibit D) and the complaint was filed on January 13, 1984. Both dates
were beyond the warranty period.
In effect, therefore, company-appellant was right when it claimed that
appellee had no cause of action against it or had lost its cause of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court of Appeals was in
reversible error in so concluding. The relevant provision of the Deed of
Assignment may be quoted again in this connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts,
the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent
that . . .
(g) the debtor/s under the assigned contract/s are solvent and his/its/their
failure to pay the assigned contract/s and/or any installment thereon upon
maturity thereof shall be conclusively considered as a violation of this
warranty; and . . .
The foregoing warranties and representations are in addition to those
provided for in the Negotiable Instruments Law and other applicable laws.
Any violation thereof shall render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE jointly and severally with the
debtors under the assigned contracts, the amounts due thereon.
xxx xxx xxx
(Emphasis supplied)
It may be stressed as a preliminary matter that the Deed of Assignment was
valid and binding upon Sanyu Chemical. Assignment of receivables is a
commonplace commercial transaction today. It is an activity or operation
that permits the assignee to monetize or realize the value of the receivables
before the maturity thereof. In other words, Sanyu Chemical received from
Atok Finance the value of its trade receivables it had assigned; Sanyu
Chemical obviously benefitted from the assignment. The payments due in
the first instance from the trade debtors of Sanyu Chemical would represent

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the return of the investment which Atok Finance had made when it paid
Sanyu Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private respondents and accepted
by the Court of Appeals is not, in the case at bar, material. The liability of
Sanyu Chemical to Atok Finance rests not on the breach of the warranty of
solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629)
but rather ex contractu. Under the Deed of Assignment, the effect of nonpayment by the original trade debtors was breach of warranty of solvency
by Sanyu Chemical, resulting in turn in the assumption of solidary liability
by the assignor under the receivables assigned. In other words, the assignor
Sanyu Chemical becomes a solidary debtor under the terms of the
receivables covered and transferred by virtue of the Deed of Assignment.
And because assignor Sanyu Chemical became, under the terms of the
Deed of Assignment, solidary obligor under each of the assigned
receivables, the other private respondents (the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili), became solidarily liable for that obligation of
Sanyu Chemical, by virtue of the operation of the Continuing Suretyship
Agreement. Put a little differently, the obligations of individual private
respondent officers and stockholders of Sanyu Chemical under the
Continuing Suretyship Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor under each of the
assigned receivables by virtue of the operation of the Deed of Assignment.
That solidary liability of Sanyu Chemical is not subject to the limiting period
set out in Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok Finance in
the trial court, it had a valid and enforceable cause of action against Sanyu
Chemical and the other private respondents. We also agree with the Court
of Appeals that the original obligors under the receivables assigned to Atok
Finance remain liable under the terms of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby
GRANTED DUE COURSE, and the Decision of the Court of Appeals dated 18
August 1987 and its Resolution dated 30 September 1987 are hereby
REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING
the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985,
except only that, in the exercise of this Court's discretionary authority

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equitably to mitigate the penalty clause attached to the Deed of

Assignment, that penalty is hereby reduced to eighteen percent (18%) per
annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so
modified, the Decision of the trial court is hereby AFFIRMED. Costs against
private respondents.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
"SO ORDERED."6

99
Page

G.R. No. 136603

January 18, 2002

EMILIO Y. TAEDO, petitioner,

vs.
ALLIED BANKING CORPORATION, respondent.
PARDO, J.:
Appeal via certiorari from the decision of the Court of Appeals 1 reversing the
ruling of the trial court and holding petitioner liable solidarily with defendant
Cheng Ban Yek Co., Inc. for all items of the money judgment and costs of
suit.
The Facts
The facts, as found by the Court of Appeals, are as follows:
"Appeal by both the plaintiff Allied Banking Corporation and the defendant
Cheng Ban Yek & Co., Inc. from the Order, as summary judgment, of the
Regional Trial Court (Branch XLIV, Manila), the decretal part whereof reads:

"1. On the first cause of action:

Page

100

"WHEREFORE, and in view of the foregoing considerations, summary

judgment is hereby rendered in favor of the plaintiff, Allied Banking
Corporation, and against defendant Cheng Ban Yek and Co., Inc. as follows:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P2,000,000.00, plus interest thereon at 14% per annum, 2% per annum as
service charge, and penalty charge of 1% per month from February 11,
1981 until fully paid;
"2. On the second cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P2,500,000.00, plus interest thereon at 14% per annum, service charge of
2% per annum, and penalty charge of 1 % per month, from February 3,
1981 until fully paid;
"3. On the third cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of
2% per annum, and penalty charge of 1 % per month, from February 12,
1981 until fully paid;
"4. On the fourth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of
2% per annum, and penalty charge of 1 % per month, from February 12,
1981 until fully paid;
"5. On the fifth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of
2% per annum, and penalty charge of 1% per month, from February 12,
1981 until fully paid;
"6. On the sixth cause of action:

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101

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of
2% per annum, and penalty charge of 1% per month, from February 12,
1981 until fully paid;
"7. On the seventh cause of action:
" Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,500,000.00 plus interest thereon at 14% per annum, service charge of
2% per annum, and penalty charge of 1% per month, from February 12,
1981 until fully paid;
"8. On all the causes of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum
equivalent to 25% of the amount due and demandable as and for attorneys
fees;
"9. Declaring the "Continuing Guaranty" as having been extinguished after
plaintiff branded it as a "worthless security" and preferred to avail, as it did
avail, of the provisional remedy of attachment; and declaring defendants
Alfredo Ching and Emilio Taedo relieved of their obligation under the said
continuing Guaranty; and
"10. Ordering the defendant Cheng Ban Yek Co., Inc. to pay the costs of suit.
"SO ORDERED."2
"The foregoing summary judgment has its roots in a complaint with
preliminary attachment filed by plaintiff bank to recover sums of money
from defendant corporation on its seven past due promissory notes with
principal amounts totaling P10,000,000.00, from defendants Alfredo Ching
and Emilio Taedo under a Continuing Guaranty providing for joint and
several liability relative to the said promissory notes. The preliminary
attachment sought was granted upon the required bond and was thereafter
maintained despite defendant corporations efforts to have it discharged.
"The appeal of plaintiff bank is limited to paragraph 9 of the summary
judgment (supra, p. 3) which declared defendants Aldredo Ching and Emilio
Taedo as free from any liability under the Continuing Guaranty since their

Page

102

respective liabilities thereunder became extinguished when plaintiff bank in

its pleading branded the Continuing Guaranty as "worthless security".
"On the other hand, defendant corporations appeal is an attack on the
summary nature of the proceeding adopted by the lower court since,
according to defendant corporation, there was a petition for suspension of
payment filed by it with the Securities and Exchange Commission which,
although dismissed, was duly appealed to the Court of Appeals.
"xxx
"Defendant corporations petition for suspension of payment was dismissed
by the Securities and Exchange Commission for lack of quorum. At the
creditors meeting called and accordingly held to approve the corporations
petition for suspension of payment, out of outstanding liabilities of
P237,718,426.00, only the creditors representing P110,355,607.37 thereof
attended. This was far short of the three-fifths quorum unqualifiedly
required by law which should have been P142,631,055.60 (Act No. 1956,
Sec. 8) x x x ."3
On October 16, 1984, the trial court rendered a summary judgment, as
quoted above.4
Both plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek
& Co., Inc. appealed from the summary judgment to the Court of Appeals. 5
On March 27, 1990, the Court of Appeals promulgated a decision, the
dispositive portion of which reads:
"WHEREFORE, the Order appealed from is in part REVERSED and MODIFIED
by deleting paragraph 9 from the dispositive portion thereof, and declaring
the defendants Alfredo Ching and Emilio Taedo solidarily liable with
defendant Cheng Ban Yek Co., Inc. for all items of the money judgment set
forth in paragraphs one 91) to eight (8) inclusive, and paragraph ten (10), of
said dispositive portion. The Order is AFFIRMED in its other aspects. No
costs in this instance.
"SO ORDERED."6

Page

103

On April 11, 1990, petitioner Emilio Y. Taedo filed a motion for

reconsideration of the decision, contending that while the case was pending
before the Court of Appeals the Allied Bank and Cheng Ban Yek & Co., Inc.
agreed to extend the time of payment of the indebtedness, without the
consent of petitioner, thereby relieving him of his obligation as guarantor or
surety of such obligation.7
On November 27, 1998, the Court of Appeals denied the motion for lack of
merit.8
Hence, this appeal.9
The Issues
The basic issues raised are (a) whether the execution by the respondent
Bank of the Fourth Amendatory Agreement extinguished petitioners
obligations as surety, and (b) whether the "continuing guarantee" executed
by the petitioner is a contract of (surety) adhesion. 10
The Courts Ruling
We find the petition without merit.
Resolving the first issue, we note that the amendatory agreement between
the respondent Allied Banking Corporation and Cheng Ban Yek & Co., Inc.
extended the maturity of the promissory notes without notice or consent of
the petitioner as surety of the obligations. However, the "continuing
guarantee" executed by the petitioner provided that he consents and agrees
that the bank may, at any time or from time to time extend or change the
time of payments and/or the manner, place or terms of payment of all such
instruments, loans, advances, credits or other obligations guaranteed by the
surety. Hence, the extensions of the loans did not release the surety. 11
As to the second issue, even if the "continuing guarantee" were considered
as one of adhesion, we find the contract of "surety" valid because petitioner
was "free to reject it entirely". 12 Petitioner was a stockholder and officer of
Cheng Ban Yek and Co., Inc. and it was common business and banking
practice to require "sureties" to guarantee corporate obligations.
The Fallo

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104

IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision
of the Court of Appeals.13
No costs in this instance.
SO ORDERED.
Davide,
Jr.,
C.J.,
Kapunan, J., no part.

Puno,

and

Ynares-Santiago,

JJ.,

concur.

[G.R. No. L-9306. May 25, 1956.]

SOUTHERN MOTORS, INC., Plaintif-Appellee, vs. ELISEO BARBOSA,
Defendant-Appellant.
DECISION
CONCEPCION, J.:
This is an appeal from a decision of the Court of First Instance of Iloilo:
(a) Ordering the Defendant Eliseo Barbosa to pay to the Court, for the
benefit of the Plaintiff within a period of ninety (90) days from receipt by the
Defendant hereof, the sum of P2,889.53, with interest at the rate of 12% per
annum computed on the basis of the amounts of the installments
mentioned in the mortgage and of the dates they respectively fell due, until
fully paid; the sum of P200 by way of attorneys fees, plus costs; and (b)
Upon failure of the Defendant to pay as aforesaid, ordering the land
described in the complaint and subject of the mortgage to be sold at public
auction in accordance with law in order to realize the amount of the
judgment debt and costs.
Although originally forwarded to the Court of Appeals, the same has
certified the record to this Court in view of the fact that the issues raised in
the appeal involve merely questions of law.
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to
foreclose a real estate mortgage, constituted by the latter in favor of the
former, as security for the payment of the sum of P2,889.53 due to said
Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in
accordance with the terms and conditions of the corresponding deed of
mortgage. Defendant Eliseo Barbosa filed an answer admitting the

105

allegations of the complaint and alleging, by way of special and

affirmative defense:
Page

That the Defendant herein has executed the deed of mortgage Annex A for
the only purpose of guaranteeing as surety and/or guarantor the
payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of
the Plaintiff.
That the Plaintiff until now has no right action against the herein
Defendant on the ground that said Plaintiff, without motive whatsoever, did
not intent or intent to exhaust all recourses to collect from the true debtor
Mr. Alfredo Brillantes the debt contracted by the latter in favor of said
Plaintiff, and did not resort nor intends to resort all the legal remedies
against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that
said Mr. Alfredo Brillantes is solvent and has many properties within the
Province of Iloilo.
Thereupon, Plaintiff moved for summary judgment which a branch of the
Court of First Instance of Iloilo, presided over by Hon. Roman Ibaez, Judge,
denied upon the ground that it is premature. Plaintiff moved for a
reconsideration of the order to this effect. Soon later, he filed, also, another
motion praying that the case be transferred to another branch of said court,
because that of Judge Ibaez would be busy trying cadastral cases, and had
adopted the policy of refraining from entertaining any other civil cases and
all incidents related thereto, until after said cadastral cases shall have been
finally disposed of. With the express authority of Judge Ibaez, the case
was referred to the branch of said court, presided over by Hon. Querube C.
Makalintal, Judge, for action, upon said motion for reconsideration.
Thereafter, Judge Makalintal rendered the aforementioned decision, from
which the Defendant has appealed. He maintains, in his brief, that:
1. The trial court erred in hearing Plaintiff-Appellees motion for
reconsideration dated June 9, 1951, notwithstanding the fact that
Defendant-Appellant was not served with a copy thereof nor served with
notice of the hearing thereof.
2. The trial court erred in rendering a judgment on the pleadings in
Appellees favor when no issue was at all submitted to it for resolution, to
the prejudice of the substantial rights of Appellant.
3. The court a quo erred in depriving Defendant-Appellant of his property
rights without due process of law.
The first assignment of error is based upon an erroneous predicate, for,
contrary to Defendants assertion, his counsel in the lower court, Atty.
Manuel F. Zamora, through an employee of his office, by the name of
Agripino Aguilar, was actually served on June 9, 1951, with copy of Plaintiffs

Page

106

motion for reconsideration, with notice to the effect that said motion would
be submitted for the consideration and approval of the lower court, on
Saturday, June 16, 1951, at 8: 00 a.m., or soon thereafter as counsel may
be heard.
The second assignment of error is, likewise, untenable. It is not true that
there was no issue submitted for determination by the lower court when it
rendered the decision appealed from.
It will be recalled that each one of the allegations made in Plaintiffs
complaint were expressly admitted in Defendants answer, in which he
merely alleged, as special and affirmative defense, that Plaintiff is not
entitled to foreclose the mortgage constituted in its favor by the Defendant,
because the property of Alfredo Brillantes, the principal debtors, had not
been exhausted as yet, and were not sought to be exhausted, for the
satisfaction of Plaintiffs credit. Thus, there was no question of fact left for
determination. The only issue set up by the pleadings was the sufficiency of
said affirmative defense. And such was the only point discussed by the
Defendant in his opposition to Plaintiffs motion for a summary judgment,
referring, evidently, to a judgment on the pleadings.
Plaintiffs motion for reconsideration of the order of Judge Roman Ibaez
refusing to render said judgment, upon the ground that it was premature,
revived said issue of sufficiency of the aforementioned affirmative defense,
apart from calling for a reexamination of the question posed by said order of
Judge Ibaez, namely, whether it was proper, under the circumstances, to
render a judgment on the pleadings. In other words, said motion for
reconsideration had the effect of placing before then Judge Makalintal, for
resolution, the following issues, to wit: (1) whether a summary judgment or
a judgment on the pleadings was in order, considering the allegations of
Plaintiffs
complaint
and
those
of
Defendants
answer;
chan
roblesvirtualawlibraryand (2) whether the mortgage in question could be
foreclosed although Plaintiff had not exhausted, and did not intend to
exhaust, the properties of his principal debtor, Alfredo Brillantes.
The third assignment of error is predicated upon the alleged lack of notice of
the hearing of Plaintiffs motion for reconsideration. As stated in our
discussion of the first assignment of error, this pretense is refuted by the
record. Moreover, it is obvious that Defendants affirmative defense is
devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors,
administrators and assigns shall well and truly perform the full obligations
above-stated according to the terms thereof, then this mortgage shall be
null and void, otherwise it shall remain in full force and effect, in which

107

event herein mortgagor authorizes and empowers herein mortgageecompany to take any of the following actions to enforce said payment;.
Page

(a) Foreclose, judicially or extrajudicially, the chattel mortgage above

referred to and/or also this mortgage, applying the proceeds of the purchase
price at public sale of the real property herein mortgaged to any deficiency
or difference between the purchase price of said chattel at public auction
and the amount of P2,889.53, together with its interest hereby secured;
chan roblesvirtualawlibraryor
(b) Simply foreclose this mortgage judicially in accordance with the
provisions of section 2, Rule 70, Rules of Court, or extra- judicially under the
provisions of Act No. 3135 and Act No. 4118, to satisfy the full amount of
P2,889.53, together with its interest of 12 per cent per annum.
2. The right of guarantors, under Article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal debtor,
exists only when a pledge or a mortgage has not been given as special
security for the payment of the principal obligation. Guarantees, without
any such pledge or mortgage, are governed by Title XV of said Code,
whereas pledges and mortgages fall under Title XVI of the same Code, in
which the following provisions, among others, are found:
ART. 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor.
ART. 2126. The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the fulfillment
of the obligation for whose security it was constituted.
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a
mortgagor is not entitled to the exhaustion of the property of the principal
debtor.
4. Although an ordinary personal guarantor not a mortgagor or pledgor
may demand the aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment against him until
after the properties of the principal debtor shall have been exhausted to
satisfy the obligation involved in the case.
Wherefore, the decision appealed from is hereby affirmed, with costs
against the Defendant-Appellant. It is SO ORDERED.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Bautista
Angelo, Labrador, Reyes, J.B.L., and Endencia, JJ., concur.

Page

108

August 17, 1999

109

G.R. No. 109941

Page

PACIONARIA
C.
BAYLON,
petitioner,
vs.
THE HONORABLE COURT OF APPEALS (Former Ninth Division) and
LEONILA TOMACRUZ, respondents.
GONZAGA-REYES, J.:
This is a petition for review by way of certiorari under Rule 45 of the Revised
Rules of Court of the decision of the Court of Appeals 1 dated November 29,
1991 in CA-G.R. CV No. 27779 affirming the decision 2 of the Regional Trial
Court of Quezon City, Branch 88, dated June 14, 1990 in Civil Case No. Q-892483 and the Resolution of the Court of Appeals dated April 27, 1993
denying petitioner's Motion for Reconsideration.1wphi1.nt
The pertinent facts, as found by the trial court and affirmed by respondent
court, are briefly narrated as follows:
Sometime in 1986, petitioner Pacionaria C. Baylon introduced private
respondent Leonila Tomacruz, the co-manager of her husband at PLDT, to
Rosita B. Luanzon.3 Petitioner told private respondent that Luanzon has been
engaged in business as a contractor for twenty years and she invited
private respondent to lend Luanzon money at a monthly interest rate of five
percent (5%), to be used as capital for the latter's business. Private
respondent, persuaded by the assurances of petitioner that Luanzon's
business was stable and by the high interest rate, agreed to lend Luanzon
money in the amount of P150,000. On June 22, 1987, Luanzon issued and
signed a promissory note acknowledging receipt of the P150,000 from
private respondent and obliging herself to pay the former the said amount
on or before August 22, 1987.4 Petitioner signed the promissory note,
affixing her signature under the word "guarantor." Luanzon also issued a
postdated Solidbank check no. CA418437 dated August 22, 1987 payable to
Leonila Tomacruz in the amount of P150,000.00. 5 Subsequently, Luanzon
replaced this check with another postdated Solidbank check no. 432945
dated December 22, 1987, in favor of the same payee and covering the
same amount.6 Several check in the amount of P7,500 each were also
issued by Luanzon and made payable to private respondent. 7

Page

110

Private respondent made a written demand upon petitioner for payment,

which petitioner did not heed. Thus, on May 8, 1989, private respondent
filed a case for the collection of a sum of money with the Regional Trial
Court (RTC) of Quezon City, Branch 88, against Luanzon and petitioner
herein, impleading Mariano Baylon, husband of petitioner, as an additional
defendant. However, summons was never served upon Luanzon.
In her answer, petitioner denied having guaranteed the payment of the
promissory note issued by Luanzon. She claimed that private respondent
gave Luanzon the money, not as loan, but rather as an investment in Art
Enterprises and Construction, Inc. the construction business of Luanzon.
Furthermore, petitioner avers that, granting arguendo that there was a loan
and petitioner guaranteed the same, private respondent has not exhausted
the property of the principal debtor nor has she resorted to all the legal
remedies against the principal debtor as required by law. Finally, petitioner
claims that there was an extension of the maturity date of the loan without
her consent, thus releasing from her obligation. 8
After trial on the merits, the lower court ruled in favor of private respondent.
In its Decision dated June 14, 1990, it stated that
The evidence and the testimonies on record clearly established a (sic) fact
that the transaction between the plaintiff and defendants was a loan with
five percent (5%) monthly interest and not an investment. In fact they all
admitted in their testimonies that they are not given any stock certificate
but only promissory notes similar to Exhibit "B" wherein it was clearly stated
that defendant Luanzon would pay the amount of indebtedness on the date
due. Postdated checks were issued simultaneously with the promissory
notes to enable the plaintiff and others to withdraw their money on a certain
fixed time. This shows that they were never participants in the business
transaction of defendant Luanzon but were creditors.
The evidences presented likewise show that plaintiff and others loan their
money to defendant Luanzon because of the assurance of the monthly
income of five percent (5%) of their money and that they could withdraw it
anytime after the due date add to it the fact that their friend, Pacionaria
Baylon, expresses her unequivocal gurarantee to the payment of the
amount loaned.

xxx

111

xxx

xxx

Page

WHEREFORE, premises considered, judgment is hereby rendered against the

defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the
sum of P150,000.00, with interest at the legal rate from the filing of this
complaint until full payment thereof, to pay the total sum of P21,000.00 as
attorney's fees and costs of suit.9
On appeal, the trial court's decision was affirmed by the Court of Appeals.
Hence, this present case wherein petitioner makes the following assignment
of errors
I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT
TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN
INVESTOR IN THE CONSTRUCTION BUSINESS OF ART ENTERPRISES &
CONSTRUCTION, INC.
II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON
WAS A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE
RESPONDENT COURT ERRED IN RULING THAT PETITIONER-APPELLANT
BAYLON IS LIABLE TO THE PRIVATE RESPONDENT BECAUSE THE LATTER HAS
NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF THE PRINCIPAL DEBTOR
AND HAS NOT RESORTED TO ALL THE LEGAL REMEDIES PROVIDED BY LAW
AGAINST THE DEBTOR, DEFENDANT LUANZON.
III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON
WAS A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987,
THE LOWER COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED
FROM HER GUARANTY BY THE SUBSEQUENT TRANSACTIONS BETWEEN THE
RESPONDENT-APPELLANT AND DEFENDANT LUANZON.
At the outset, we note that petitioner's claim that the factual findings of the
lower court, which were affirmed by the Court of Appeals, were based on a
misapprehension of facts and contradicted by the evidence on records 10 is a
bare allegation and devoid of merit. As a rule, the conclusions of fact of the
trial court, especially when affirmed by the Court of Appeals, are final and
conclusive and cannot be reviewed on appeal by the Supreme Court. 11
Although this rule admits of several exceptions, 12 none of the exceptions are

Page

112

in point in the present case. The factual findings of the respondent court are
borne out by the record and are based on substantial evidence.
Petitioner claims that there is no loan to begin with; that private respondent
gave Luanzon the amount of P150,000, not as a loan, but rather as an
investment in the construction project of the latter. 13 In support of her claim,
petitioner cites the use by private respondent of the words "investment,"
"dividends," and "commission" in her testimony before the lower court; the
fact that private respondent received monthly checks from Luanzon in the
amount of P7,500 from July to December, 1987, representing dividends on
her investment; and the fact that other employees of the Development
Bank of the Philippines made similar investments in Luanzon's construction
business.14
However, all the circumstances mentioned by petitioner cannot override the
clear and unequivocal terms of the June 22, 1987 promissory note whereby
Luanzon promised to pay private respondent the amount of P150,000 on or
before August 22, 1987. The promissory note states as follows:
June 22, 1987
To Whom It May Concern:
For value received, I hereby promise to pay Mrs. LEONILA
TOMACRUZ the amount of ONE HUNDRED FIFTY THOUSAND
PESOS ONLY (P150,000.00) on or before August 22, 1987.
The above amount is covered by __________ Check No. _______
dated August 22, 1987.
(signed)
ROSITA B. LUANZON
GURARANTOR:
(signed)
PACIONARIA O. BAYLON
Tel. No. 801-28-00
18 P. Mapa St., DBP Village
Almanza, Las Pinas, M.M.15

Page

113

If the terms of a contract are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulation shall control. 16
Resort to extrinsic aids and other extraneous sources are not necessary in
order to ascertain the parties' intent when there is no ambiguity in the
terms of the agreement.17 Both petitioner and private respondent do not
deny the due execution and authenticity of the June 22, 1987 promissory
note. All of petitioner's arguments are directed at uncovering the real
intention of the parties in executing the promissory note, but no amount of
argumentation will change the plain import of the terms thereof, and
accordingly, no attempt to read into it any alleged intention of the parties
thereto may be justified.18 The clear terms of the promissory note establish
a creditor-debtor relationship between Luanzon and private respondent. The
transaction at bench is therefore a loan, not an investment.
It is petitioner's contention that, even though she is held to be a guarantor
under the terms of the promissory note, she is not liable because private
respondent did not exhaust the property of the principal debtor and has not
resorted to all the legal remedies provided by the law against the debtor. 19
Petitioner is invoking the benefit of excussion pursuant to article 2058 of the
Civil Code, which provides that
The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor.
It is axiomatic that the liability of the guarantor is only subsidiary. 20 All the
properties of the principal debtor must first be exhausted before his own is
levied upon. Thus, the creditor may hold the guarantor liable only after
judgment has been obtained against the principal debtor and the latter is
unable to pay, "for obviously the 'exhaustion of the principal's property'
the benefit of which the guarantor claims cannot even begin to take place
before judgment has been obtained." 21 This rule is embodied in article 2062
of the Civil Code which provides that the action brought by the creditor must
be filed against the principal debtor alone, except in some instances when
the action may be brought against both the debtor and the principal
debtor.22

Page

114

Under the circumstances availing in the present case, we hold that it is

premature for this Court to even determine whether or not petitioner is
liable as a guarantor and whether she is entitled to the concomitant rights
as such, like the benefit of excussion, since the most basic prerequisite is
wanting that is, no judgment was first obtained against the principal
debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no
debtor has been held liable for the obligation which is allegedly secured by
such guarantee. Although the principal debtor Luanzon was impleaded as
defendant, there is nothing in the records to show that summons was
served upon her. Thus, the trial court never even acquired jurisdiction over
the principal debtor. We hold that private respondent must first obtain a
judgment against the principal debtor before assuming to run after the
alleged guarantor.
IN VIEW OF THE FOREGOING, the petition is granted and the questioned
Decision of the Court of Appeals dated November 29, 1991 and Resolution
dated April 27, 1993 are SET ASIDE. No pronouncement as to
costs.1wphi1.nt
SO ORDERED.
Melo, Vitug, Panganiban and Purisima, JJ., concur.

Page

115

116
Page

G.R. No. L-42518

August 29, 1936

WISE & CO., INC., plaintiff-appellee,

vs.
DIONISIO P. TANGLAO, defendant-appellant.
The appellant in his own behalf.
Franco and Reinoso for appellee.
AVANCEA, C. J.:
In the Court of First Instance of Manila, Wise & Co. instituted civil case No.
41129 against Cornelio C. David for the recovery of a certain sum of money
David was an agent of Wise & Co. and the amount claimed from him was
the result of a liquidation of accounts showing that he was indebted in said
amount. In said case Wise & Co. asked and obtained a preliminary
attachment of David's property. To avoid the execution of said attachment,
David succeeded in having his Attorney Tanglao execute on January 16,
1932, a power of attorney (Exhibit A) in his favor, with the following clause:
To sign for me as guarantor for himself in his indebtedness to Wise &
Company of Manila, which indebtedness appears in civil case No. 41129, of
the Court of First Instance of Manila, and to mortgage my lot (No. 517-F of

Page

117

the subdivision plan Psd-20, being a portion of lot No. 517 of the cadastral
survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee the said
obligations to the Wise & Company, Inc., of Manila.
On the 18th of said month David subscribed and on the 23d thereof, filed in
court, the following document (Exhibit B):
COMPROMISE
Come now the parties, plaintiff by the undersigned attorneys and
defendants in his own behalf and respectfully state:
I. That the defendant confesses judgment for the sum of six hundred forty
pesos (P640), payable at the rate of eighty pesos (P80) per month, the first
payment to be made on February 15, 1932 and successively thereafter until
the full amount is paid; the plaintiff accepts this stipulation.
II. That as security for the payment of said sum of P640, defendant binds in
favor of, and pledges to the plaintiff, the following real properties:
1. House of light materials described under tax declaration No. 9650 of the
municipality of Angeles, Province of Pampanga, assessed at P320.
2. Accesoria apartments with a ground floor of 180 sq. m. with the first story
of cement and galvanized of iron roofing located on the lot belonging to
Mariano Tablante Geronimo, said accesoria is described under tax
declaration No. 11164 of the municipality of Angeles, Province of Pampanga,
assessed at P800.
3. Parcel of land described under Transfer Certificate of Title No. 2307 of the
Province of Pampanga recorded in the name of Dionisio Tanglao of which
defendant herein holds a special power of attorney to pledge the same in
favor of Wise & Co., Inc., as a guarantee for the payment of the claim
against him in the above entitled cause. The said parcel of land is bounded
as follows: NE. lot No. 517 "Part" de Narciso Garcia; SE. Calle Rizal; SW. lot
No. 517 "Part" de Bernardino Tiongco; NW. lot No. 508 de Clemente Dayrit;
containing 431 sq. m. and described in tax declaration No. 11977 of the
municipality of Angeles, Pampanga, assessed at P423.

Page

118

That this guaranty is attached to the properties above mentioned as first

lien and for this reason the parties agree to register this compromise with
the Register of Deeds of Pampanga, said lien to be cancelled only on the
payment of the full amount of the judgment in this case.
Wherefore, the parties pray that the above compromise be admitted and
that an order issue requiring the register of Deeds of Pampanga to register
this compromise previous to the filing of the legal fees.
David paid the sum of P343.47 to Wise & Co., on account of the P640 which
he bound himself to pay under Exhibit B, leaving an unpaid balance of
P296.53.
Wise & Co. now institutes this case against Tanglao for the recovery of said
balance of P296.53.
There is no doubt that under Exhibit, A, Tanglao empowered David, in his
name, to enter into a contract of suretyship and a contract of mortgage of
the property described in the document, with Wise & Co. However, David
used said power of attorney only to mortgage the property and did not enter
into contract of suretyship. Nothing is stated in Exhibit B to the effect that
Tanglao became David's surety for the payment of the sum in question.
Neither is this inferable from any of the clauses thereof, and even if this
inference might be made, it would be insufficient to create an obligation of
suretyship which, under the law, must be express and cannot be presumed.
It appears from the foregoing that defendant, Tanglao could not have
contracted any personal responsibility for the payment of the sum of P640.
The only obligation which Exhibit B, in connection with Exhibit A, has
created on the part of Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said P640. However, a
foreclosure suit is not instituted in this case against Tanglao, but a purely
personal action for the recovery of the amount still owed by David.
At any rate, even granting that defendant Tanglao may be considered as a
surety under Exhibit B, the action does not yet lie against him on the ground
that all the legal remedies against the debtor have not previously been
exhausted (art. 1830 of the Civil Code, and decision of the Supreme Court of
Spain of March 2, 1891). The plaintiff has in its favor a judgment against

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debtor David for the payment of debt. It does not appear that the execution
of this judgment has been asked for and Exhibit B, on the other hand, shows
that David has two pieces of property the value of which is in excess of the
balance of the debt the payment of which is sought of Tanglao in his alleged
capacity as surety.
For the foregoing considerations, the appealed judgment is reversed and the
defendant is absolved from the complaint, with the costs to the plaintiff. So
ordered.
Villa-Real, Abad Santos, Imperial, Diaz, Recto, and Laurel, JJ., concur.

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121

November 9, 1934
Page

G.R. No. L-41320

CONCEPCION J. VIUDA DE SYQUIA, in her capacity as administratrix

of the state of the deceased Gregorio Syquia, plaintiff-appellee,
vs.
PERFECTO JACINTO, ET AL., defendants.
RAFAEL PALMA, appellants.
Francisco Dominguez for appellant.
Cardenas and Casal for appellee.

BUTTE, J.:
On December 15, 1924, the Bank of the Philippine Islands obtained a
judgment against Perfecto and Felipe Jacinto and Rafael Palma on a
promissory note in its favor executed by the defendants on May 27, 1922,
for the sum of P22,000 with interest at the rate of 9 per cent per annum
plus 10 per cent of the principal as costs and attorney's fees. The dispositive
part of this judgment is as follows:
Se condena a los Sres. P. y F. Jacinto y Rafael Palma a que paguen a la parte
demandante, los primeros como obligados principales y el ultimo como
fiador, la suma de veinticuatro mil pesos (P24,000) al interes de 9 por ciento
al ao desde el 27 de mayo de 1923, mas el uno por ciento sobre el
principal en concepto de honorarios de abogado y costas.
No debe expedirse ejecucion contra el demandado Sr. Rafael Palma, sino
despues de haberse hecho excusion de los bienes de los senores P. y F.
Jacinto.
On August 16, 1928, the Bank of the Philippine Islands "in consideration of
the sum of P1 and other valuable considerations" assigned and transferred
said judgment to Gregorio Syquia.
On July 12, 1932, the widow of Gregorio Syquia, as administratrix of his
estate, filed suit in the Court of First Instance of Manila against Perfecto and

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Felipe Jacinto and Rafael Palma reciting the aforementioned judgment and
assignment and alleging that since the date of said judgment none of the
defendants had paid anything thereon and there remains still due the sum
of P24,000 with interest at 9 per cent since May 27, 1923. The plaintiff
prayed that the judgment be revived and that defendants Perfecto and
Felipe Jacinto as principal and Rafael Palma as guarantor be adjudged to pay
the sum of P24,000 with interest since May 27, 1923, and costs. To this
petition were attached a copy of the judgment of December 15, 1924,
Exhibit A, and a copy of the assignment thereof to the plaintiff, Exhibit B.
The defendants filed a joint amended answer in which they admitted the
judgment, Exhibit A, and that said judgment had lapsed and it was
necessary to revive the same; but they denied the assignment to Syquia
and the allegation that nothing had been paid on said judgment and that
the full amount thereof was still due. They set up as a special defense that
the judgment which the plaintiff was attempting to revive has been fully
paid; that at the time of making the assignment to Gregorio Syquia, the
bank had no right or interest under said judgment, the same having been
fully paid, and that the partition does not state facts sufficient to constitute
a cause of action.
In the same answer they set up a counter-demand to the following effect:
that in the month of April, 925, the Bank of the Philippine Islands caused an
execution to be issued under said judgment and the sheriff on the request of
the bank sold at public sale three properties belonging to the defendants
Jacinto which had been previously attached; that at said public sale three
properties belonging to the defendants Jacinto which had been previously
attached; that at said public sale the bank was the highest bidder crediting
the amount of its bid on the said judgment; that said parcels of land with
their improvements consisting of four houses yielded a monthly revenue of
P880 or P10,560 a year; that during the year allowed the judgment debtors
for redemption the said bank took control and possession of the said parcels
of land and collected and retained the revenues thereof as aforesaid and
that Gregorio Syquia has been receiving the same since that time, though
without any right whatever; that the said revenues during the year of
redemption in the sum of P10,560 were never applied by the bank as a
credit on said judgment. The defendants prayed that they be absolved from
the demand of the petitioner and that the estate of Gregorio Syquia be

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condemned to pay the sum of P10,560 with costs. The answer concludes
with a prayer for general relief.
On the trial of this cause it was shown that at the execution sale held on
April 18, 1925, the bank bought two of the properties of the defendants
Jacinto for the sum of P15,045. The third property was sold to Rufino Reyes
for P1,000 which was not credited on the judgment debt pending the
determination of Reyes' claim of priority. The trial court stated the judgment
debt as of April 18, 1925, as follows:
Loan ...................................................... P24,0
........................................
00.00
Interest from May 27, 1923 to April 1,
1925 at 9 per cent ...

4,083
.29

Cost including sheriff's

sale .....................................................

657.9
5

Total
obligation .........................................

P28,7
41.24

from which is to be deducted P15,045 the value of the two parcels sold to
the bank on April 18, 1925, leaving a balance due of P13,696.24. On
September 2, 1925, the defendant Palma paid the bank P100 leaving thus a
net balance due of P13,596.24. The trial court entered the following
judgment:
Dictese sentencia condenando a los demandados, Perfecto Jacinto y Felipe
Jacinto, como obligados principales, y Rafael Palma como fiador, a pagar a
la demandante la cantidad de trece mil quinientos noventa y seis pesos con
veinte y cuatro centimos (P13,596.24), mas las costas del juicio.
Se sobresee la reconvencion de los demandados.
Asi se ordena.

124

Manila, I.F., 25 de septiembre de 1933.

Page

From this judgment only defendant Palma appeals. He submits the following
assignments of error:
1. El Juzgado erro al no apreciar que la cuenta de los deudores P. y F. Jacinto
quedo liquidada con el banco al efectuarse la venta de las fincas
embargadas por este a favor de Gregorio Syquia por la suma de P45,000 y
que, por consiguiente, la sentencia firme de diciembre 14, 1924, quedo ipso
facto saldada y con creces, en virtud de aquella venta.
2. El Juzgado erro al no apreciar que el banco no transmitio ningun derecho,
interes o participacion en la sentencia referida al tiempo de hacerse el
traspaso de los mismos a Gregorio Syquia.
3. Aun suponiendo que la sentencia firme era subsistente contra los
deudores y su fiador al tiempo de hacerse el traspaso por el banco de
cualquier titulo, derecho, interes o participacion en dicha sentencia, el
Juzgado erro al no apreciar que se ha constituido una novacion de la
obligacion del fiador sin su conocimiento ni consentimiento, y, por tanto, sin
eficacia juridica contra el.
4. El Juzgado erro al no apreciar que el demandado Rafael Palma, como
fiador, ha quedado eximido de su obligacion no solo por efecto de la
novacion hecha sin su conocimiento ni consentimiento, sino tambien por
efecto de la aceptacion por el banco de los bienes inmuebles de los
deudores P. y F. Jacinto, en pago de deuda.
It is to be noted that Palma filed no separate answer nor special defenses
available to him as guarantor but merely joined in the answer of his
codefendants pleading that the bank had been fully paid. It should be noted
too that the execution which was issued under the judgment of December
15, 1924, and under which said parcels of land were sold on April 18, 1925,
was directed solely against the principal debtors, Perfecto and Felipe Jacinto,
Palma not being mentioned therein.
Under his first and second assignments of error, the appellant argues that
when the bank acquired said properties at the sheriff's sale on April 18,
1925, for the sum of P15,045, it paid much less than they were worth, in

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view of the fact that they yielded an annual revenue of P10,560; and this is
further established by the fact that the bank on August 16, 1928, sold and
conveyed said parcels to Gregorio Syquia for the sum of P45,000. Exhibits 2A and 2-Bare copies of pages of the "libro de diversas cuentas" of the bank,
upon which appears the account of Perfecto and Felipe Jacinto and Rafael
Palma. From these it appears that after the sale by the bank to Syquia, said
account was marked as balanced and closed. From these facts the appellant
contends that the principal debtors, and therefore the guarantor, were
discharged from further liability on the judgment; and that being true,
Syquia acquired nothing by the assignment of the judgment to him by the
bank. In strict law, it is obvious that the plea that the defendants has paid
their debt cannot be sustained. Indeed the appellant himself in arguing his
first and second assignments of error invokes the equitable principle that no
person should enrich himself unjustly at the expense of another. Clearly this
equitable principle has no application to a legally conducted sheriff's sale.
The appellant does not question the regularity of the sale. A purchaser at a
sheriff's sale, when his title has once become vested, may dispose of the
property for such consideration as he sees fit or as he can obtain. The rule
which the appellant asks us to introduce into our jurisprudence with regard
to sheriff's sales would cast such a doubt upon such sales that bidders
would abstain therefrom and even judgment creditors would offer less, all to
the prejudice of judgment debtors. The Code of Civil Procedure goes far in
protecting the judgment debtor. He may prevent the sale of the property on
execution (sec. 456); or he may redeem it from the purchaser at any time
within twelve months after the sale(sec. 465). In the instant case, although
it was alleged the property was sold for greatly below its value, the
defendants did not exercise any right of redemption. We hold, therefore,
that the judgment debt in its entirety was not discharged before the action
for the revival of the judgment was brought.
However, the majority of the court are of the opinion that there should be
credited upon the judgment for the benefit of the guarantor alone the sum
of P10,560, being the revenues collected and retained during the year of
redemption by Gregorio Syquia from said properties, according to the
testimony of Perfecto Jacinto (t.s.n., 19, 20,22). This conclusion is based on
the interpretation given to the provisions of the Code of Civil Procedure by
this court in the cases of Pabico vs. Ong Pauco (43 Phil., 572); Flores vs. Lim

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(50 Phil. 738); Powell vs. National Bank (54 Phil., 54). It is view of the writer
that this defense so far as the guarantor is concerned is premature.
In his brief and upon the oral argument the appellant has pressed upon our
attention several defenses available to guarantors under our law which, he
claims, entitle him to a reversal of the judgment. With reference to all these
defences, it suffices to say that it is conceded that Palma as guarantor is still
entitled to the benefits of articles 1830,1832 and 1852 of the Civil Code. Up
to the present, the judgment creditor has made no demand on Palma.
Joining him in the suit against the principal debtor is not the demand
intended articles 1832 of the Civil Code. That demand can be made only
after judgment on the debt, for obviously the "exhaustion of the principal's
property" the benefit of which the guarantor claims cannot even begin
to take place before judgment has been obtained. Only then can the
creditor "levy upon the property of the principal" only then can the
liability of the creditor begin under article 1833 of the Civil Code. It would be
absurd and futile to point out "saleable property of the debtor" at the
inception of the suit, when it cannot be seized or sold, and require the
creditor to make a "levy" upon it.
There is no competent evidence that the principal debtors, Perfecto and
Felipe Jacinto, are insolvent even if they were now, there can be no
certainty that they may not be in funds when an exemption on the revived
judgment is issued. So far as this record shows, the judgment creditor has
not exhausted his remedies against the principal debtors and he is still
looking to them for payment. It is not for the guarantor to anticipate that
there will be a return of nulla bona on the execution, when and if issued. Nor
is it for him to anticipate a demand on him under article 1832 and to offer
defences thereto which have not matured. The occasion for these defences
may never arise. The present revived judgment could not therefore be res
judicata as to such future defences. The revived judgment does not
foreclose any defence which the guarantor may raise when "demand for
payment" is made on him. Indeed, he cannot claim the benefits of articles
1830, 1832, 1834 and 1852 of the Civil Code before demand is made on
him; they are all available to him only after "demand for payment" (art.
1832).

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The appellant's defences may be all be considered when they are property
presented at the proper time. The case which he now presents, in
anticipation of a demand which has not yet been made, is purely
hypothetical. The courts do not undertake to decide hypothetical cases.
It results that the judgment appealed from must be modified in the sense
that Rafael Palma as guarantor maybe held contingently liable only in the
sum of P3,034.24 under said judgment, which is in all other respects
affirmed, without special pronouncement as to costs in this instance.
Street, J., concurs.
Separate Opinions

AVANCEA, C.J., concurring:

I concur in this decision. Although I dissented in the decision in the case of
Powell vs. National Bank (54 Phil., 54), I have agree with it as long as it is
not revoked by the majority.
IMPERIAL, J., concurring:
On December 15, 1924, judgment was rendered in civil cause No. 26942 of
the Court of First Instance of Manila in favor of the Bank of the Philippine
Islands and againts Perfecto Jacinto, as principals, and Rafael Palma, as
guarantor, for the amount of P24,000 together with interest at the rate of 9
per cent per annum from May 27, 1923, plus 1 per cent on the said amount,
as attorney's fees, and cots of the proceedings. It was ordered in the said
judgment that no execution shall be issued against the guarantor until after
salable properties of the principal debtors shall have been exhausted. The
judgment became final and the law between the parties. On February 20,
1925, execution of the judgment was issued against the Jacintos and the
sheriff levied upon real properties belonging to them which were purchased
at public auction by the Bank of the Philippine Islands for P15,045. During
the year of redemption the properties so sold earned rental amounting to
P10,560 which were collected and actually received by Gregorio Syquia,
with the knowledge and consent of the judgment creditor. On August 16,

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1928, the judgment creditor sold the same date but in separate instrument
it also sold to Gregorio Syquia for the nominal value of P1 and for other
valuable considerations all its rights, participation and interest on the
aforesaid judgment. This purchaser died without taking any further step and
his administratrix on July 12, 1932, after the lapse of about eight years from
the date of the judgment, instituted another action against the same
debtors and guarantor for the revival of the judgment.
The guarantor appealed from the judgment rendered by the lower court
whereby he was condemned to pay, as guarantor, to the administratrix the
sum of P13,596.24 plus costs of the suit. His counterclaim for the rental was
dismissed.
The appellant, being a mere guarantor, no execution could be issued
against him without first exhausting the salable properties of his principal,
as provided by article 1830 of the Civil Code. Same provisions was made in
the original judgment rendered against him. Pursuant to article 1832 the
benefit of exhaustion is not vailable to the guarantor until demand for
payment is made upon him by the creditor. In view of the change in our
procedural system in civil litigations the proper and only time for a formal
demand for payment could only be made at the time the execution of the
judgment is issued; but it happened that the execution actually issued has
never been directed against the guarantor.
This being the case and because both the Bank of the Philippine Islands and
its assignee remained inactive for many years and due to this attitude the
principal debtors became insolvent the guarantor cannot now be
subrogated to the rights and privileges of said creditors as againts the
principal debtors and for this reason his obligation on the surety has been
released in accordance with the provisions of article 1852 of the said Code.
It is argued that the insolvency of the principal debtors has not been proven,
but such fact is virtually admitted by both parties and the circumstance that
neither the Bank of the Philippine Islands nor its assignee has taken any
step to secure an alias writ of execution against the principal debtors is a
clear indication of the latter's insolvency.
It is also estimated that inasmuch as there is no positive evidence of the
principal debtors' insolvency and that the guarantor failed to allege it in his

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answer as a special defense it is now premature to pass upon the obligation

contracted by the guarantor. On this point it might be said that if guarantor
has really been released by positive acts performed by the Bank of the
Philippine Islands and its assignee, as shown above, the right of the
guarantor to be exonerated has accrued and he is entitled right now to a
complete discharge. Further proceedings are useless and will only promote
multiplicity of actions.
The matter presents another feature which calls for solution under the
principles of justice and equity. The judgment of the bank was only for
P24,000, plus interest and costs. It bought the real properties of the
principal debtors for P15,045 but afterwards it sold them to Gregorio Syquia
for the sum of P45,000.00, thus realizing a profit which amounted to
P29,955. As to the assignee, it is true that he paid P45,000, but the
properties so bought are worth more than P68,000 and in addition to this
bargain he collected the rentals during the year of redemption which
amounted to the substantial sum of P10,560. Under these circumstances
and applying the principles of justice and equity it should have been held
that the judgment, which is sought to be revived, has fully been satisfied.
Any other determination on this particular point will encourage enrichment
of a person to the prejudice of an innocent one.
There can be no question that the late Gregorio Syquia has collected the
rents of the properties assigned to him during the year allowed by the law
for redemption. The testimony of Perfecto Jacinto on this point is positive,
clear and convincing and it was not contradicted by nay evidence of the
appellee. Said rentals amounted to P10,560 and it should have been
credited to the judgment debtors. (Pabico vs. Ong Pauco, 43 Phil., 572;
Flores vs. Lim, 50 Phil., 738; and Angeles and De Angeles vs. Lozada and
Saguisag, 54 Phil., 184.)
Other members of this court further maintain the opinion that the
defendant-appellant Rafael Palma has been relieved from further
responsibility as surety through the failure of the Bank of the Philippine
Islands, the predecessor in interest of the herein plaintiff-appellee, to secure
a writ of execution after it was ascertained, through the levy of the writ of
execution issued against the principals Perfecto Jacinto et al. that the latter
had not sufficient property to satisfy the judgment, thus depriving the

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defendant-appellant of the opportunity to point out other properties of the

judgment debtor upon which a levy could be made. To this I am also
agreeable.
The foregoing reasons, as can readily be seen, call for a dissenting opinion,
but in order to expedite the matter with a sufficient number of votes and
inasmuch as defendant-appellant is given credit for the yearly rentals
earned by the properties sold and his right of exhaustion is upheld and
reserved, I concur in the result of the majority decision.
Malcolm, Villa-Real and Abad Santos, JJ., concur.
GODDARD, J., dissenting:
I dissent.
Upon a sale of real property, under a writ of execution, the purchaser is
substituted to and acquires all the right, interest, title and claim of the
judgment debtor thereto, subject only to the right of redemption. The officer
making the sale must give the purchaser a certificate of sale containing a
particular description of the property sold; the price paid for each distinct lot
or parcel; the whole price paid and the date when the right of redemption
expires. (Sec. 463, Code of Civil Procedure.)
The judgment debtor, or the redemptioners mentioned in section 464 of the
Code of Civil Procedure, may redeem the property from the purchaser at
any time within twelve months after the sale, on paying the purchaser the
amount of his purchase, with one per cent per month interest thereon in
addition, up to the time of redemption, together with the amount of any
assessments or taxes which the purchaser may have paid thereon after
purchase, and interest on such last-named amount at the same rate.
(Section 465, Code of Civil Procedure.)
The purchaser, from the time of the sale until a redemption, is entitled to
receive from the tenant in possession the rents of the property sold or the
value of the use and occupation thereof. But when any rents have been
received by the judgment creditor or purchaser from property thus sold
preceding such redemption, the amounts of such rents and profits shall be a

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credit upon the redemption money to be paid. (See. 469, Code of Civil
Procedure.)
Is there any provision in our Code of Civil Procedure aside from that
contained in section 469 of that Code, quoted above, that authorizes this
court to allow a judgment debtor a credit for the amount of the rents and
profits of land sold under execution? No. Was there any "redemption money"
paid the purchaser by the judgment debtor in this case? No. Have the above
quoted sections of the Code of Civil Procedure been repealed or modified?
Not by the Legislature. "However, the majority of the court are of the
opinion that there should be credited upon the judgment for the benefit of
the guarantor alone the sum of P10,560, being the revenues collected and
retained during the year of redemption by Gregorio Syquia from said
properties, according to the testimony of Perfecto Jacinto (t.s.n., 19, 20,
22)." Majority opinion.
In short the "majority are of the opinion" that the defendant-appellant,
Rafael Palma, is entitled to the rents and profits on the property during the
year of redemption, although the law clearly provides that the purchaser,
from the time of the sale until a redemption, is entitled to receive such rents
and profits and, pursuant to that opinion, Palma is allowed a credit of
P10,560 upon the judgment against him, not upon "redemption money"
which he might have profitably paid the purchaser. I say might have
profitably paid, because this appellant, in his brief, puts the value of the
property sold under execution at P88,000. The purchaser only paid P15,045.
Let us suppose the appellant had redeemed the property on the last day of
the year or redemption, he would have had to pay the purchaser the sum of
P15,045 plus 12 per cent, a total of P16,850.40 less a credit of P10,560, the
alleged value of the rents and profits for the year of redemption, or a total
of only P6,290 for property worth P88,000, a clear profit of P81,710.
The sections of our Code of Civil Procedure, cited above, are taken from the
California Code of Civil Procedure. The courts of that state, interpreting the
phrase "upon a sale of real property, the purchaser shall be substituted and
acquire all the right, title, interest and claim of the judgment debtor
thereto", have held that it is by the sale that the title passes, or, in other
words, that at the sale the purchaser acquires the legal title to the land
subject to defeasance by the happening of the condition subsequent

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(redemption). (McNutt vs. Nuevo Land Co., 167 Cal., 459; 140 Pac., 6; Leet
vs. Armbruster, 143 Cal., 663; 77 Pac., 653; Pollard vs. Harlow, 138 Cal.,
390; 71 Pac., 454, 648; Reynolds vs. London & Lancashire F. Ins. Co., 128
Cal., 16; 79 Am. St. Rep., 17; 60 Pac., 467; Breedlove vs. Norwich etc. Ins.
Society, 124 Cal., 164; 58 Pac., 770 ["It is by the sale that the title passes"];
Leaver vs. Smith, 47 Cal., App., 474; 190 Pac., 1050; Wangenheim vs.
Garner, 42 Cal. App., 332; 183 Pac., 670; Youd vs. German Savings & Loan
Society, 3 Cal. App., 706; 86 Pac., 991. In McQueeney vs. Toomey, 36 Mont.,
282; 122 Am. St. Rep., 358; 13 Ann. Cas., 316; 92 Pac., 561, the courts
holds that the title passes to the purchaser on the sale and notes that in
Simpson vs. Castle, 52 Cal., 664, the statute so providing was overlooked.)
It is also held that the various qualifications to the purchaser's title are not
inconsistent with the vesting of the legal title in him and that even the
continued possession of the land by the judgment debtor is no more
incompatible with the existence of a legal title in another than in the
ordinary case of a tenant and his landlord. (Pollard vs. Harlow, 138 Cal., 390,
393; 71 Pac., 454, 648.)
It is undoubtedly true that independent of some express statutory provision
to that effect a purchaser at an execution sale would not be entitled to rents
and profits during the time allowed for redemption. In California, however,
the courts have held that this right has been expressly conferred upon
purchasers at sales on civil judgments obtained in the ordinary
administration of justice, it being provided, in the Code of Civil Procedure of
that State, as it is in our Code, that "The purchaser from the time of the sale
until a redemption . . . is entitled to receive, from the tenant in possession,
the rents of the property sold, or the value of the use and occupation
thereof. . . ." (Mayo vs. Woods, 31 Cal., 269; California Code of Civil
Procedure, section 707; Yndart vs. Den, 125 Cal., 85; Robinson vs. Thornton,
102 Cal., 675.)
The courts of California have also held that the "tenant in possession" is
liable to the purchaser at sheriff's sale for the rents and profits of the land
sold. The phrase "tenant in possession" has been held to be a generic term
designed to apply to all cases of tenancy. In a broad sense, a "tenant" is
held to be "one that holds or possesses lands or tenements, by any kind of
title, either in fee, for life, years, or at will." Under this definition the owner

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in fee in possession is no less, in legal contemplation, a tenant, than the one

who occupies under him. (Harris vs. Reynolds, 13 Cal., 514; 73 Am. Dec.,
600.)1awphil.net
The phrase "tenant in possession" also includes a mortgagee of the
judgment debtor (Knight vs. Truett, 18 Cal., 113), the trustee and his
successor in interest under a trust deed from the judgment debtor (Shores
vs. Scott River Co., 21 Cal., 135) and the administrator of the estate of the
judgment debtor (Walls vs. Walker, 37 Cal., 424; 99 Am. Dec., 290), when
they are in possession after a sheriff's sale.
In California, prior to 1869, the purchaser at an execution sale was given the
rents and profits of the property without any liability to account for them in
case of a redemption. (Page vs. Rogers, 31 Cal., 293; Kline vs. Chase, 17
Cal., 596, holding that a debtor who received rent from his tenants between
the sale and a redemption is liable to the purchaser for the amount
received.) In that year the rule was changed by the adoption of an
amendment to section 707 of the Code of Civil Procedure of that state under
which the amount of any rents or profits received by the judgment creditor
or purchaser will be a credit upon the redemption money to be paid. This
section thus liberalized in favor of the judgment debtor is section 496 of our
Code of Civil Procedure.
It is, however, evident that the majority of this court is of the opinion that
the Legislature of the State of California and the Philippine Legislature did
not do enough for the judgment debtor, who, for some reason or other, fails
to redeem his property within a year after it is sold under a writ of
execution. Well, Mr. Judgment Debtor, cheer up! If you fail to redeem your
land within the year provided by law, your cruel judgment creditor, if he be
the purchaser of your property sold under execution, will now be obliged to
allow you a credit on his judgment against you equal to the amount of the
rents and profits that he may have received from your property during the
year of redemption.
Suppose the
the property
receive the
judgment. In

judgment creditor is not the purchaser and a third party buys

of the judgment debtor at the execution sale, the former will
purchase price to be credited against the amount of the
case the judgment debtor fails to redeem from the third party

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purchaser, who has received the rents and profits during the redemption
period, would the majority of this court hold that the judgment debtor then
had a right to a credit against the judgment equal to the value of the rents
and profits received by the purchaser during the period of redemption? In
other words would the judgment creditor have to repay his judgment debtor
the value of such rents and profits? If it be legal and logical to allow such a
credit in the case under consideration, the answer to these questions must
be in the affirmative. However, it would also be just as legal and logical to
compel the third party purchaser to return the rents and profits to the
judgment debtor even though the latter failed to redeem his property within
the period fixed by law.
In view of the provisions of our Code of Civil Procedure and the decisions of
the courts of California, cited above, it is clear that in the case of a sale of
real property, under a writ of execution, the purchaser, whether he be the
judgment creditor or a third party, is regarded as the owner of such property
during the period elapsing between the sale and the time for redemption;
that he is entitled to the rents and profits, or the value of the use and
occupation thereof during said period and that when such rents, etc. have
been received by the purchaser and the judgment debtor redeems the
property within the period provided by law, then and then only, is the latter
entitled to a credit of the amount of such rents, etc., upon the redemption
money to be paid by him to the purchaser.
The judgment of the trial court should be affirmed with costs in both
instances against the defendant-appellant.
Hull, Vickers and Diaz, JJ., concur.

135

July 22, 1916

Page

G.R. No. L-10168

JOSE M. A. ARROYO, guardian of Tito Jocsing, an imbecile, plaintiffappellee,

vs.
FLORENTINO HILARIO JUNGSAY, ET AL., defendants-appellants.
Perfecto J. Salas Rodriguez for appellants.
TRENT, J.:
The plaintiff in this case is the guardian of one Tito Jocsing, an imbecile,
appointed by the court to succeed Jungsay, the former guardian, who
absconded with the funds of his ward. The defendants are the absconding
guardian and his bondsmen. From a judgment in favor of the plaintiff and
against the defendants for the sum of P6,000, together with interest and
costs, the bondsmen appealed.
The principal question presented for our consideration is whether the
appellants should be credited with P4,400, the alleged value of certain
property attached as that of the absconding guardian, all of which is in the
exclusive possession of third parties under claim of ownership.
The appellants in contending for the credit, rely upon article 1834 of the
Civil Code, which gives to the surety the benefit of a levy (excusion), even
when a judgment is rendered against both the surety and the principal. But,
according t article 1832, before the surety is entitled to this benefit, he must
point out to the creditor property of the principal debtor which can be sold
and which is sufficient to cover the amount of the debt. Upon this point
Manresa, in vol. 12, pp. 263-265, says:
As explicitly stated in the article under consideration, it is not sufficient that
the surety claim the benefit of discussion in time, nor that is so doing he
designate property of the debtor wherein to satisfy the debt. It is also
necessary that another condition be fulfilled, to wit, that such property be
realizable and that it be situated in Spanish territory. This is not only logical,
but just, because the attachment of property situated a great distance away

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136

would be a lengthy and extremely difficult proceeding and one that, if

actually not opposed to, yet does not very well accord with the purpose of
the bond, that is, to insure the fulfillment of the obligation and at the same
time furnish the creditor with the means of obtaining its fulfillment without
hindrance or delays. The same may be said of property that is not readily
realizable, and as the surety is the sole person who benefits by the
discussion and the one most interested in avoiding difficulties in its
execution, it is he, therefore, who should designate the property out of
which the recovery is to be made, it being unquestionably convenient for
him that the property he designates unite the conditions indicated in order
to facilitate the payment of the debt, whereby he will be freed from the
subsidiary obligation inherent in the bond.
In Hill & Co. vs. Bourcier and Pond (29 La. Ann., 841), where provisions
similar to our Civil Code were under consideration, the court said:
The surety has the right, under certain circumstances, to demand the
discussion of the property of the principal debtor. Where suit is brought
against the surety alone, he may interpose the plea, and compel the
creditor to discuss the principal debtor. The effect of this is to stay
proceedings against the surety until judgment has been obtained against
the principal debtor, and execution against his property has proved
insufficient. When the suit is brought against the surety and the principal
debtor the plea of discussion does not require or authorize any suspension
of the proceedings; but the judgment will be so modified as to require the
creditor to proceed by execution against the property of the principal, and
to exhaust it before resorting to the property of the surety. (Bernard vs.
Custis, 4 Martin, 215; Banks vs. Brander, 13 La., 276.)
In either case, the surety who desires to avail himself of this right must
demand it in limine, `on the institution of proceedings against him.' He
must, moreover, point out to the creditor property of the principal debtor,
not incumbered, subject to seizure; and must furnish a sufficient sum to
have the discussion carried into effect. (R. C. C., 3045, 3046, 3047.) A plea
which does not meet these requirements must be disregarded. (Robechot
vs. Folse, 11 La., 136; Banks vs. Brander, 13 La., 276.)

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137

The property pointed out by the sureties is not sufficient to pay the
indebtedness; it is not salable; it is so incumbered that third parties have, as
we have indicated, full possession under claim of ownership without leaving
to the absconding guardian a fractional or reversionary interest without
determining first whether the claim of one or more of the occupants is well
founded. In all these respects the sureties have failed to meet the
requirements of article 1832 of the Civil Code.
Where a guardian absconds or is beyond the jurisdiction of the court, the
proper method, under article 1834 of the Civil Code and section 577 of the
Code of Civil Procedure, in order to ascertain whether such guardian is liable
and to what extent, in order to bind the sureties on his official bond, is by a
proceeding in the nature of a civil action wherein the sureties are made
parties and given an opportunity to be heard. All this was done in the
instant case.
The judgment appealed from, being in accordance with the law, the same is
hereby affirmed, with costs against the appellants. So ordered.
Torres, Johnson, Moreland, and Araullo, JJ., concur.

G.R. No. L-26449

May 15, 1969

LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU,

plaintiff-appellant, vs.
JOSE O. SIA, defendant,
TIMES SURETY & INSURANCE CO. INC., surety-appellee.
REYES, J.B.L., J.:

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138

Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the
Court of First Instance of Manila (Judge Francisco Arca presiding), in its Civil
Case No. 54913, entitled Luzon Steel Corporation, plaintiff vs. Metal
Manufacturing of the Philippines, Inc., and Jose O. Sia, defendants, whereby
the court aforesaid quashed a writ of execution issued against the Times
Surety & Insurance Co., Inc., and cancelled the undertaking of said surety
company.
The essential and uncontroverted facts of the case may be summarized as
follows:
Luzon Steel Corporation has sued Metal Manufacturing of the Philippines
and Jose O. Sia, the former's manager, for breach of contract and damages.
It obtained a writ of preliminary attachment of the properties of the
defendants, but the attachment was lifted upon a P25,000.00 counterbond
executed by the defendant Sia, as principal, and the Times Surety &
Insurance Co., Inc. (hereinafter designated as the surety), as solidary
guarantor, in the following terms:
WHEREFORE, we JOSE O. SIA, as principal and the TIMES SURETY &
INSURANCE CO., INC., as Surety, in consideration of the dissolution of
attachment, hereby jointly and severally bind ourselves in the sum of
Twenty Five Thousand Pesos (P25,000.00), Philippine Currency, to answer for
the payment to the plaintiff of any judgment it may recover in the action in
accordance with Section 12, Rule 59, of the Rules of Court. (pp. 32, 45, Rec.
on Appeal.)
Issues having been joined, plaintiff and defendant (without intervention of
the surety) entered into a compromise whereby defendant Sia agreed to
settle the plaintiff's claim in the following manner:
1. That the defendant shall settle with the Plaintiff the amount of TWENTY
FIVE THOUSAND (P25,000.00) PESOS, in the following manner: FIVE
HUNDRED (P500.00) PESOS, monthly for the first six (6) months to be paid
at the end of every month and to commence in January, 1965, and within
one month after paying the last installment of P500.00, the balance of
P22,000.00 shall be paid in lump sum, without interest. It is understood that
failure of the Defendant to pay one or any installment will make the whole

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139

obligation immediately due and demandable and that a writ of execution

will be issued immediately against Defendants bond.lawphi1.et
The compromise was submitted to the court and the latter approved it,
rendered judgment in conformity therewith, and directed the parties to
comply with the same (Record on Appeal, page 22).
Defendant having failed to comply, plaintiff moved for and obtained a writ of
execution against defendant and the joint and several counterbond. The
surety, however, moved to quash the writ of execution against it, averring
that it was not a party to the compromise, and that the writ was issued
without giving the surety notice and hearing. The court, overruling the
plaintiff's opposition, set aside the writ of execution, and later cancelled the
counterbond, and denied the motion for reconsideration. Hence this appeal.
Main issues posed are (1) whether the judgment upon the compromise
discharged the surety from its obligation under its attachment counterbond
and (2) whether the writ of execution could be issued against the surety
without previous exhaustion of the debtor's properties.
Both questions can be solved by bearing in mind that we are dealing with a
counterbond filed to discharge a levy on attachment. Rule 57, section 12,
specifies that an attachment may be discharged upon the making of a cash
deposit or filing a counterbond "in an amount equal to the value of the
property attached as determined by the judge"; that upon the filing of the
counterbond "the property attached ... shall be delivered to the party
making the deposit or giving the counterbond, or the person appearing on
his behalf, the deposit or counterbond aforesaid standing in place of the
property so released".
The italicized expressions constitute the key to the entire problem. Whether
the judgment be rendered after trial on the merits or upon compromise,
such judgment undoubtedly may be made effective upon the property
released; and since the counterbond merely stands in the place of such
property, there is no reason why the judgment should not be made effective
against the counterbond regardless of the manner how the judgment was
obtained.

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140

Squarely on the point, and rebutting the appellee's apprehension that the
compromise could be the result of a collusion between the parties to injure
the surety, is our decision in Anzures vs. Alto Surety & Insurance Co., Inc.,
et al., 92 Phil. 742, where this Court, through former Chief Justice Paras,
ruled as follows:
Under section 12, Rule 59, of the Rules of Court, the bond filed, as in this
case, for the discharge of an attachment is "to secure the payment to the
plaintiff of any judgment he may recover in the action," and stands "in place
of the property so released". It follows that the order of cancellation issued
by the respondent judge is erroneous. Indeed, judgment had already been
rendered by the Court of First Instance of Manila in civil case No. 11748,
sentencing Benjamin Aguilar to pay the sum of P3,500.00 to the petitioner;
and it is not pretended that said judgment is a nullity. There is no point in
the contention of the respondent Surety Company that the compromise was
entered into without its knowledge and consent, thus becoming as to it
essentially fraudulent. The Surety is not a party to civil case No. 11748 and,
therefore, need not be served with notice of the petition for judgment. As
against the conjecture of said respondent that the parties may easily
connive by means of a compromise to prejudice it, there is also the
likelihood that the same end may be attained by parties acting in bad faith
through a simulated trial. At any rate, it is within the power of the Surety
Company to protect itself against a risk of the kind.
Wherefore, the order of the respondent Judge cancelling the bond in
question is set aside. So ordered with costs against the respondent Alto
Surety & Insurance Co., Inc.
The lower court and the appellee herein appear to have relied on doctrines
of this Court concerning the liability of sureties in bonds filed by a plaintiff
for the issuance of writs of attachment, without discriminating between
such bonds and those filed by a defendant for the lifting of writs of
attachment already issued and levied. This confusion is hardly excusable
considering that this Court has already called attention to the difference
between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et al., L15709, 19 October 1960, this Court pointed out that

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141

The diverse rule in section 17 of Rule 59 for counterbonds posted to obtain

the lifting of a writ of attachment is due to these bonds being security for
the payment of any judgment that the attaching party may obtain; they are
thus mere replacements of the property formerly attached, and just as the
latter may be levied upon after final judgment in the case in order to realize
the amount adjudged, so is the liability of the countersureties ascertainable
after the judgment has become final. This situation does not obtain in the
case of injunction counterbonds, since the sureties in the latter case merely
undertake "to pay all damages that the plaintiff may suffer by reason of the
continuance ... of the acts complained of" (Rule 60, section 6) and not to
secure payment of the judgment recovered.1
It was, therefore, error on the part of the court below to have ordered the
surety bond cancelled, on the theory that the parties' compromise
discharged the obligation of the surety.
As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405-406, in
passing upon the liability of counter sureties in replevin who bound
themselves to answer solidarily for the obligations of the defendants to the
plaintiffs in a fixed amount of P912.04, to secure payment of the amount
that said plaintiff be adjudged to recover from the defendants, 2
the liability of the sureties was fixed and conditioned on the finality of the
judgment rendered regardless of whether the decision was based on the
consent of the parties or on the merits. A judgment entered on a stipulation
is nonetheless a judgment of the court because consented to by the parties.
But the surety in the present case insists (and the court below so ruled) that
the execution issued against it was invalid because the writ issued against
its principal, Jose O. Sia, et al., defendants below, had not been returned
unsatisfied; and the surety invoked in its favor Section 17 of Rule 57 of the
Revised Rules of Court (old Rule 59), couched in the following terms:
SEC. 17. When execution returned unsatisfied, recovery had upon bond.
If the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbond given pursuant to the provisions of this rule to
secure the payment of the judgment shall become charged on such counterbond, and bound to pay to the judgment creditor upon demand, the amount

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142

due under the judgment, which amount may be recovered from such surety
or sureties after notice and summary hearing in the same action.
The surety's contention is untenable. The counterbond contemplated in the
rule is evidently an ordinary guaranty where the sureties assume a
subsidiary liability. This is not the case here, because the surety in the
present case bound itself "jointly and severally" (in solidum) with the
defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil
Code of the Philippines that excusion (previous exhaustion of the property of
the debtor) shall not take place "if he (the guarantor) has bound himself
solidarily with the debtor". The rule heretofore quoted cannot be construed
as requiring that an execution against the debtor be first returned
unsatisfied even if the bond were a solidary one; for a procedural rule may
not amend the substantive law expressed in the Civil Code, and further
would nullify the express stipulation of the parties that the surety's
obligation should be solidary with that of the defendant.
A second reason against the stand of the surety and of the court below is
that even if the surety's undertaking were not solidary with that of the
principal debtor, still he may not demand exhaustion of the property of the
latter, unless he can point out sufficient leviable property of the debtor
within Philippine territory. There is no record that the appellee surety has
done so. Says Article 2060 of the Civil Code of the Philippines:
ART. 2060. In order that the guarantor may make use of the benefit of
excussion, he must set it up against the creditor upon the latter's demand
for payment from him, and point out to the creditor available property of the
debtor within Philippine territory, sufficient to cover the amount of the debt.
A third reason against the thesis of appellee is that, under the rule and its
own terms, the counter-bond is only conditioned upon the rendition of the
judgment. Payment under the bond is not made to depend upon the
delivery or availability of the property previously attached, as it was under
Section 440 of the old Code of Civil Procedure. Where under the rule and the
bond the undertaking is to pay the judgment, the liability of the surety or
sureties attaches upon the rendition of the judgment, and the issue of an
execution and its return nulla bona is not, and should not be, a condition to
the right to resort to the bond. 3

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143

It is true that under Section 17 recovery from the

be "after notice and summary hearing in the
requirement has been substantially complied with
was allowed to move for the quashal of the writ
cancellation of their obligation.

surety or sureties should

same action". But this
from the time the surety
of execution and for the

WHEREFORE, the orders appealed from are reversed, and the court of origin
is ordered to proceed with the execution against the surety appellee, Times
Surety & Insurance Co., Inc. Costs against said appellee.
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and
JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of First
Instance of Misamis Oriental, Branch I, respondents.
Benjamin Tabique & Zosimo T. Vasalla for petitioner.
Rodrigo F. Lim, Jr. for private respondent.
AQUINO, J.:
This case is about the liability of a surety in a counterbond for the lifting of a
writ of preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in
Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong in
the Court of First Instance of Misamis Oriental for the collection of the sum
of P 58,400 plus litigation expenses and attorney's fees (Civil Case No.
4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976, the
lower court issued an order of attachment. The deputy sheriff attached the
properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro
City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a
counterbond in 'the amount of P 58,400 with Towers Assurance Corporation

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144

as surety. In that undertaking, the Ong spouses and Towers Assurance

Corporation bound themselves to pay solidarity to See Hong the sum of P
58,400.
On March 24, 1976 the Ong spouses filed an answer with a counterclaim.
For non-appearance at the pre- trial, the Ong spouses were declared in
default.
On October 25, 1976, the lower court rendered a decision, ordering not only
the Ong spouses but also their surety, Towers Assurance Corporation, to pay
solidarily to See Hong the sum of P 58,400. The court also ordered the Ong
spouses to pay P 10,000 as litigation expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. On March 8, 1977,
Ororama Supermart filed a motion for execution. The lower court granted
that motion. The writ of execution was issued on March 14 against the
judgment debtors and their surety. On March 29, 1977, Towers Assurance
Corporation filed the instant petition for certiorari where it assails the
decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in issuing
a writ of execution against the surety without first giving it an opportunity to
be heard as required in Rule 57 of tie Rules of Court which provides:
SEC. 17. When execution returned unsatisfied, recovery had upon bound.
If the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbound given pursuant to the provisions of this rule to
secure the payment of the judgment shall become charged on such
counterbound, and bound to pay to the judgment creditor upon demand,
the amount due under the judgment, which amount may be recovered from
such surety or sureties after notice and summary hearing in the same
action.
Under section 17, in order that the judgment creditor might recover from
the surety on the counterbond, it is necessary (1) that execution be first
issued against the principal debtor and that such execution was returned
unsatisfied in whole or in part; (2) that the creditor made a demand upon
the surety for the satisfaction of the judgment, and (3) that the surety be

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145

given notice and a summary hearing in the same action as to his liability for
the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because
Towers Assurance Corporation assumed a solidary liability for the
satisfaction of the judgment. A surety is not entitled to the exhaustion of the
properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel
Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution can be
issued against him since he is not a party in the case involving his principal.
Notice and hearing constitute the essence of procedural due process.
(Martinez vs. Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon.
Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-26865-66,
January 30. 1970. 31 SCRA 313).
WHEREFORE, the order and writ of execution, insofar as they concern
Towers Corporation, are set aside. The lower court is directed to conduct a
summary hearing on the surety's liability on its counterbound. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ.,
concur.

G.R. No. L-47369

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

146

FELICIANO, J.:

Page

This case was certified to us by the Court of Appeals in its resolution dated
11 November 1977 as one involving only questions of law and, therefore,
falling within the exclusive appellate jurisdiction of this Court under Section
17, Republic Act 296, as amended.
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for
and was granted an increase in its line of credit from P400,000.00 to
P800,000.00 (the "Principal Obligation"), with the Philippine National Bank
(PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient
bond in the amount of P400,000.00, representing the increment in its line of
credit, to secure its faithful compliance with the terms and conditions under
which its line of credit was increased. In compliance with this requirement,
PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B
Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in
favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B
Surety bound themselves jointly and severally to comply with the "terms
and conditions of the advance line [of credit] established by the [PNB]." PNB
had the right under the Surety Bond to proceed directly against R & B
Surety "without the necessity of first exhausting the assets" of the principal
obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability
was not to be limited to the principal sum of P400,000.00, but would also
include "accrued interest" on the said amount "plus all expenses, charges or
other legal costs incident to collection of the obligation [of R & B Surety]"
under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical
indemnity agreements were entered into with R & B Surety: (a) one
agreement dated 23 December 1963 was executed by the Catholic Church
Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not
only as President of CCM but also in his personal and individual capacity;
and (b) another agreement dated 24 December 1963 was executed by
PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua
Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal
and individual capacity; Mr. Liu signed both as President of PACOCO and in
his individual and personal capacity.

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147

Under both indemnity agreements, the indemnitors bound themselves

jointly and severally to R & B Surety to pay an annual premium of P5,103.05
and "for the faithful compliance of the terms and conditions set forth in said
SURETY BOND for a period beginning ... until the same is CANCELLED and/or
DISCHARGED." The Indemnity Agreements further provided:
(b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage,
prejudice, loss, costs, payments, advances and expenses of whatever kind
and nature, including [of] attorney's fees, which the CORPORATION may, at
any time, become liable for, sustain or incur as consequence of having
executed the above mentioned Bond, its renewals, extensions or
substitutions and said attorney's fees [shall] not be less than twenty [20%]
per cent of the total amount claimed by the CORPORATION in each action,
the same to be due, demandable and payable, irrespective of whether the
case is settled judicially or extrajudicially and whether the amount has been
actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The
said indemnities will be paid to the CORPORATION as soon as demand is
received from the Creditor or upon receipt of Court order or as soon as it
becomes liable to make payment of any sum under the terms of the abovementioned Bond, its renewals, extensions, modifications or substitutions,
whether the said sum or sums or part thereof, have been actually paid or
not.
We authorize the SURETY COMPANY, to accept in any case and at its entire
discretion, from any of us, payments on account of the pending obligations,
and to grant extension to any of us, to liquidate said obligations, without
necessity of previous knowledge of [or] consent from the other obligors.
xxx

xxx

xxx

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any

payment or disbursement made by the SURETY COMPANY on account of the
above-mentioned Bonds, its renewals, extensions or substitutions, either in
the belief that the SURETY COMPANY was obligate[d] to make such payment
or in the belief that said payment was necessary in order to avoid greater
losses or obligations for which the SURETY COMPANY might be liable by
virtue of the terms of the above-mentioned Bond, its renewals, extensions

xxx

Page

148

or substitutions, shall be final and will not be disputed by the undersigned,

who jointly and severally bind themselves to indemnify the SURETY
COMPANY of any and all such payments as stated in the preceding clauses.
xxx

xxx

When PAGRICO failed to comply with its Principal Obligation to the PNB, the
PNB demanded payment from R & B Surety of the sum of P400,000.00, the
full amount of the Principal Obligation. R & B Surety made a series of
payments to PNB by virtue of that demand totalling P70,000.00 evidenced
by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph
Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments
made by it to the PNB and for a discharge of its liability to the PNB under
the Surety Bond. When petitioners failed to heed its demands, R & B Surety
brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua
Ben in the Court of First Instance of Manila, praying principally that
judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the plaintiff, the
sum of P20,412.20 representing the unpaid premiums for Surety Bond No.
4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly
until the Surety Bond No. 4765 is discharged, with interest thereon at the
rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the
sum of P400,000.00 representing the total amount of the Surety Bond No.
4765 with interest thereon at the rate of 12% per annum on the amount of
P70,000.00 which had been paid to the Phil. National Bank already, the
interest to begin from the month of September, 1966;
xxx

xxx

xxx

Petitioner Joseph Cochingyan, Jr. in his answer maintained that the

Indemnity Agreement he executed in favor of R & B Surety: (i) did not
express the true intent of the parties thereto in that he had been asked by R
& B Surety to execute the Indemnity Agreement merely in order to make it
appear that R & B Surety had complied with the requirements of the PNB

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149

that credit lines be secured; (ii) was executed so that R & B Surety could
show that it was complying with the regulations of the Insurance
Commission concerning bonding companies; (iii) that R & B Surety had
assured him that the execution of the agreement was a mere formality and
that he was to be considered a stranger to the transaction between the PNB
and R & B Surety; and (iv) that R & B Surety was estopped from enforcing
the Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed
the Indemnity Agreement in favor of R & B Surety only "for accommodation
purposes" and that it did not express their true intention; (ii) that the
Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had
already been assumed by CCM by virtue of a Trust Agreement entered into
with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook
to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation
under the Indemnity Agreement was thereby extinguished by novation
arising from the change of debtor under the Principal Obligation; and (iv)
that the filing of the complaint was premature, considering that R & B
Surety filed the case against him as indemnitor although the PNB had not
yet proceeded against R & B Surety to enforce the latter's liability under the
Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to
support his asserted defenses. Petitioner Villanueva did not submit any
evidence either on his "accommodation" defense. The trial court was
therefore constrained to decide the case on the basis alone of the terms of
the Trust Agreement and other documents submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a
decision in favor of R & B Surety, the dispositive portion of which reads as
follows;
Premises considered, judgment is hereby rendered: (a) ordering the
defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and
severally, unto the plaintiff the sum of 400,000,00, representing the total
amount of their liability on Surety Bond No. 4765, and interest at the rate of
6% per annum on the following amounts:
On P14,000.00 from September 27, 1966;

150

On P4,000.00 from November 28, 1966;

On P4,000.00 from January 19, 1967;

Page

On P4,000.00 from December 14, 1966;

On P8,000.00 from February 13, 1967;

On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and severally,
unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety
Bond No. 4765, with legal interest thereon from the filing of plaintiff's
complaint on August 1, 1968 until fully paid, and the further sum of
P4,000.00 as and for attorney's fees and expenses of litigation which this
Court deems just and equitable.
There being no showing the summons was duly served upon the defendant
Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is
hereby dismissed as against defendant Liu Tua Ben without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this
appeal to the Court of Appeals which, as already noted, certified the case to
us as one raising only questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the
obligation of R & B Surety to the PNB under the Surety Bond which, in turn,
extinguished the obligations of the petitioners under the Indemnity
Agreements;

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2. whether the Trust Agreement extended the term of the Surety Bond so as
to release petitioners from their obligation as indemnitors thereof as they
did not give their consent to the execution of the Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB
had not yet filed a suit against R & B Surety for the forfeiture of its Surety
Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate
briefs, was executed on 28 December 1965 (two years after the Surety Bond
and the Indemnity Agreements were executed) between: (1) Jose and
Susana Cochingyan, Sr., doing business under the name and style of the
Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s];
(2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary.
The Trust Agreement provided, in pertinent part, as follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of
P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the
instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21,
1963, in favor of the BENEFICIARY in connection with the application of
PAGRICO for an advance line of P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the
Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of
P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities
extended by the BENEFICIARY to the Pacific Copra Export Co., Inc.
(PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of
their respective obligations in favor of the BENEFICIARY guaranteed by the
bonds issued by the R & B and the CONSOLACION, respectively, and by
reason of said default, the BENEFICIARY has demanded compliance by the R
& B and the CONSOLACION of their respective obligations under the
aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation
under the indemnity agreements aforementioned executed by him in favor

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of R & B and the CONSOLACION, respectively and in order to forestall

impending suits by the BENEFICIARY against said companies, he is willing as
he hereby agrees to pay the obligations of said companies in favor of the
BENEFICIARY in the total amount of P1,300,000 without interest from the
net profits arising from the procurement of reparations consumer goods
made thru the allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE
for the purpose of paying to the BENEFICIARY Philippine National Bank in the
manner stated hereunder, the obligations of the R & B under the R & B Bond
No. G-4765 for P400,000.00 dated December 23, 1963, and of the
CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for
P900,000.00 or the total amount of P1,300,000.00 without interest from the
net profits arising from the procurement of reparations consumer goods
under the Memorandum of Settlement and Deeds of Assignment of February
2, 1959 through the allocation of WARVETS;
xxx

xxx

xxx

6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its

claims against R & B and CONSOLACION, subject of the bond mentioned
above. In the meantime that this TRUST AGREEMENT is being implemented,
the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the
CONSOLACION as among the companies duly accredited to do business with
the BENEFICIARY and its branches, unless said companies have been
blacklisted for reasons other than those relating to the obligations subject of
the herein TRUST AGREEMENT;
xxx

xxx

xxx

9. This agreement shall not in any manner release the R & B and
CONSOLACION from their respective liabilities under the bonds mentioned
above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully
discharged 2 by payment of the Principal Obligation. Unless, therefore, the
Surety Bond has been extinguished by another means, it must still subsist.
And so must the supporting Indemnity Agreements. 3

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We are unable to sustain petitioners' claim that the Surety Bond and their
respective obligations under the Indemnity Agreements were extinguished
by novation brought about by the subsequent execution of the Trust
Agreement.
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, or by substituting a new debtor
in place of the old one, or by subrogating a third person to the rights of the
creditor. 4 Novation through a change of the object or principal conditions of
an existing obligation is referred to as objective (or real) novation. Novation
by the change of either the person of the debtor or of the creditor is
described as subjective (or personal) novation. Novation may also be both
objective and subjective (mixed) at the same time. In both objective and
subjective novation, a dual purpose is achieved-an obligation is
extinguished and a new one is created in lieu thereof.5
If objective novation is to take place, it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished, or that the
new obligation be on every point incompatible with the old one. 6 Novation
is never presumed: it must be established either by the discharge of the old
debt by the express terms of the new agreement, or by the acts of the
parties whose intention to dissolve the old obligation as a consideration of
the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to
occur, it is not enough that the juridical relation between the parties to the
original contract is extended to a third person. It is essential that the old
debtor be released from the obligation, and the third person or new debtor
take his place in the new relation. If the old debtor is not released, no
novation occurs and the third person who has assumed the obligation of the
debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that
the Trust Agreement does not expressly terminate the obligation of R & B
Surety under the Surety Bond. On the contrary, the Trust Agreement
expressly provides for the continuing subsistence of that obligation by

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stipulating that "[the Trust Agreement] shall not in any manner release" R &
B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation.
Absent an unequivocal declaration of extinguishment of a pre-existing
obligation, a showing of complete incompatibility between the old and the
new obligation (and nothing else) would sustain a finding of novation by
implication. 9 But where, as in this case, the parties to the new obligation
expressly recognize the continuing existence and validity of the old one,
where, in other words, the parties expressly negated the lapsing of the old
obligation, there can be no novation. The issue of implied novation is not
reached at all.
What the trust agreement did was, at most, merely to bring in another
person or persons-the Trustor[s]-to assume the same obligation that R & B
Surety was bound to perform under the Surety Bond. It is not unusual in
business for a stranger to a contract to assume obligations thereunder; a
contract of suretyship or guarantee is the classical example. The precise
legal effect is the increase of the number of persons liable to the obligee,
and not the extinguishment of the liability of the first debtor. 10 Thus, in
Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation, when there is
no agreement that the first debtor shall be released from responsibility,
does not constitute a novation, and the creditor can still enforce the
obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the
CCM, was already previously bound to R & B Surety under its Indemnity
Agreement. Under the Trust Agreement, the Trustor also became directly
liable to the PNB. So far as the PNB was concerned, the effect of the Trust
Agreement was that where there had been only two, there would now be
three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R
& B Surety and the Trustor. And the PNB could proceed against any of the
three, in any order or sequence. Clearly, PNB never intended to release, and
never did release, R & B Surety. Thus, R & B Surety, which was not a party
to the Trust Agreement, could not have intended to release any of its own

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indemnitors simply because one of those indemnitors, the Trustor under the
Trust Agreement, became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his
obligation as indemnitor under the 24 December 1963 Indemnity
Agreement with R & B Surety was extinguished when the PNB agreed in the
Trust Agreement "to hold in abeyance any action to enforce its claims
against R & B Surety .
The Indemnity Agreement speaks of the several indemnitors "apply[ing]
jointly and severally (in solidum) to the R & B Surety] to become SURETY
upon a SURETY BOND demanded by and in favor of [PNB] in the sum of
[P400,000.00] for the faithful compliance of the terms and conditions set
forth in said SURETY BOND ." This part of the Agreement suggests that
the indemnitors (including the petitioners) would become co-sureties on the
Security Bond in favor of PNB. The record, however, is bereft of any
indication that the petitioners-indemnitors ever in fact became co-sureties
of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but not to PNB, such
that PNB could not have directly demanded payment of the Principal
Obligation from the petitioners. Thus, we do not see how Article 2079 of the
Civil Code-which provides in part that "[a]n extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the
guaranty" could apply in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the
PNB was concerned and any extension of time granted by PNB to any of the
first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not
prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail.
PNB's undertaking under the Trust Agreement "to hold in abeyance any
action to enforce its claims" against R & B Surety did not extend the
maturity of R & B Surety's obligation under the Surety Bond. The Principal
Obligation had in fact already matured, along with that of R &B Surety, by
the time the Trust Agreement was entered into. Petitioner's Obligation had
in fact already matured, for those obligations were to amture "as soon as [R
& B Surety] became liable to make payment of any sum under the terms of

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the [Surety Bond] whether the said sum or sums or part thereof have
been actually paid or not." Thus, the situation was that precisely envisaged
in Article 2079:
[t]he mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension of the
referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the surety of his right to pay the
creditor and to be immediately subrogated to the creditor's remedies
against the principal debtor upon the original maturity date. The surety is
said to be entitled to protect himself against the principal debtor upon the
orginal maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period. The underlying rationale is not
present in the instant case. As this Court has held,
merely delay or negligence in proceeding against the principal will not
discharge a surety unless there is between the creditor and the principal
debtor a valid and binding agreement therefor, one which tends to prejudice
[the surety] or to deprive it of the power of obtaining indemnity by
presenting a legal objection for the time, to the prosecution of an action on
the original security.12
In the instant case, there was nothing to prevent the petitioners from
tendering payment, if they were so minded, to PNB of the matured
obligation on behalf of R & B Surety and thereupon becoming subrogated to
such remedies as R & B Surety may have against PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the
Indemnity Agreements (quoted above) allow R & B Surety to recover from
petitioners even before R & B Surety shall have paid the PNB. We have
previously held similar indemnity clauses to be enforceable and not violative
of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are
contracts of indemnification not only against actual loss but against liability
as well. 14 While in a contract of indemnity against loss as indemnitor will

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not be liable until the person to be indemnified makes payment or sustains

loss, in a contract of indemnity against liability, as in this case, the
indemnitor's liability arises as soon as the liability of the person to be
indemnified has arisen without regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was entitled to proceed against
petitioners not only for the partial payments already made but for the full
amount owed by PAGRICO to the PNB.
Summarizing, we hold that :
(1) The Surety Bond was not novated by the Trust Agreement. Both
agreements can co-exist. The Trust Agreement merely furnished to PNB
another party obligor to the Principal Obligation in addition to PAGRICO and
R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its
claim" against R & B Surety did not amount to an "extension granted to the
debtor" without petitioner's consent so as to release petitioner's from their
undertaking as indemnitors of R & B Surety under the INdemnity
Agreements; and
(3) Petitioner's are indemnitors of R & B Surety against both payments to
and liability for payments to the PNB. The present suit is therefore not
premature despite the fact that the PNB has not instituted any action
against R & B Surety for the collection of its matured obligation under the
Surety Bond.
WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the
decision of the trial court is AFFIRMED in toto. Costs against the petitioners.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and Sarmiento,
JJ., concur.

158
Page

G.R. No. L-43862 January 13, 1989

MERCANTILE INSURANCE CO., INC., plaintiff-appellee,
vs.
FELIPE YSMAEL, JR., & CO., INC., defendants-appellants.

159

Beltran, Evangelista & Cuasay for plaintiff-appellee.

Page

Abraham F. Sarmiento Law Office for defendants-appellants.

BIDIN, J.:
This is an appeal from the decision** dated October 30, 1971 of the Court of
First Instance of Manila (now Regional Trial Court) in Civil Case No. 82168
entitled "Mercantile Insurance Co., Inc. (herein referred to as the plaintiffappellee) vs. Felipe Ysmael, Jr. &. Co., Inc., et al (hereinafter referred to as
the defendant-appellant) ordering defendants-appellants Felipe Ysmael, Jr. &
Co., Inc. and Felipe Ysmael, Jr., to pay jointly and severally to the plaintiff the
sum of P100,000.00 plus 15% thereof as attorney's fees, and costs. On
appeal to the Court of Appeals, this case which involves only a question of
law, was certified to this Court.
The factual milieu of this case as found by the trial court is as follows:
Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed an
application for an overdraft line of Pl,000,000.00 and credit line of
Pl,000,000.00 with the Philippine National Bank. The latter was willing to
grant credit accommodation of P2,000,000.00 applied for provided that the
applicant shall have filed a bond in the sum of P140,000.00 to guarantee
the payment of the said amount. Accordingly, on March 6, 1967, Felipe
Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed surety bond No.
G(16) 007 of Mercantile Insurance Co., Inc. in the sum of P100,000.00 (Exh.
A). On December 4, 1967, Felipe Ysmael Jr. & Co., Inc. as principal and the
Mercantile Insurance Co., Inc. executed another surety bond MERICO Bond
No. G (16) 0030 in the sum of P40,000.00. It is the condition in both bonds
that if the principal Felipe Ysmael, Jr. & Co., Inc. shall perform and fulfill its
undertakings with the Philippine National Bank, then these surety bonds
shall be null and void (Exh. B).
As security and in consideration of the execution of the surety bonds,
exhibits A and B, Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, lnc.
represented by Felipe Ysmael, Jr. as president and in his personal capacity
executed with the plaintiff Mercantile Insurance Co., Inc. an indemnity

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agreement (Exh. D) wherein the defendants Felipe Ysmael, Jr. & Co., Inc. and
Felipe Ysmael, Jr. bound themselves jointly and severally to indemnify the
plaintiff, hold save it harmless from and against any and all payments,
damages, costs, losses, penalties, charges and expenses which said
company as surety (relative to MERICO Bond No. 0007) shall incur or
become liable to pay plus an additional amount as attorney's fees equal to
20% of the amount due to the company, Paragraph 3 of the indemnity
agreement expressly provides:
3) ACCRUAL OF ACTION: Notwithstanding the provisions of the next
preceding paragraph, where the obligation involves a liquidated amount for
the payment of which the company has become legally liable under the
terms of the obligation and its suretyship undertaking or by the demand of
the obligee or otherwise and the latter has merely allowed the COMPANY a
term or extension for payment of the latter's demand the full amount
necessary to discharge the COMPANY's aforesaid liability irrespective of
whether or not payment has actually been made by the COMPANY, the
COMPANY for the protection of its interest may forthwith proceed against
the undersigned or either of them by court action or otherwise to enforce
payment even prior to making payment to the obligee which may hereafter
be done by the COMPANY.
On September 6, 1967, Gabriel Daza, Jr., Edgardo L. Tordesillas and Augusta
Torres in their official capacities and the defendants executed another
indemnity agreement (Exh. E) with the plaintiff in consideration of the
surety bond (referring to MERICO Bond No. G (16) 0030. In the indemnity
agreement (Exh. E) the same provisions of paragraph 3 found in exhibit D is
provided for.
By agreement dated September 5, 1967 (Exh. C), the amount of the Bond
was reduced by P40,000.00 so that the total liability of the plaintiff to the
Philippine National Bank in view of the aforesaid reduction is P100,000.00
(Exh. C), P60,000.00 on Surety Bond No. 0007 plus P40,000.00 on Surety
Bond No. 0030.
In view of the failure of the defendants to pay the overdraft and credit line
with the Philippine National Bank demanded from the Mercantile Insurance
Co., Inc. settlement of its obligation under surety bonds No. (G-16)-0007 for

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P 60,000.00 which expired on March 6, 1970 and No. G (-16)- 0030 for P
40,000.00 which expired since September 4, 1968 (Exh. P) otherwise drastic
measures for collection to protect the interest of the bank would be taken.
Attached to the demand letter is a statement of account.
By letter of December 17, 1970, the Legal Department of plaintiff company
wrote a letter of demand to the defendants (Exhs. G and H) inviting their
attention to the letter of demand of the Philippine National Bank sent to the
plaintiff and demanding from the defendants the settlement of said account.
These letters were received as shown by the registry return receipts (Exhs.
G-2 and H-2). Since the defendants failed to settle their obligation with the
Philippine National Bank, on February 10, 1971, plaintiff brought the present
action.
Instead of filing their answer, the defendants (appellants herein) filed a
motion to DISMISS, which motion was subsequently denied. Thereafter, the
defendants filed their answer and the case was set for pre-trial. On the date
scheduled for pre-trial, the defendants and their counsel failed to appear,
thus on motion of the plaintiff, they were declared in default and plaintiff
was allowed to present its evidence ex-parte. Upon motion for
reconsideration filed by the defendants, the case was ordered re-opened
and the case was scheduled for reception of defendant's evidence.
Thereafter, the parties were required to submit their respective memoranda
and the case was submitted for decision. On October 30, 1971, the trial
court rendered its decision, the dispositive part of which reads:
WHEREFORE, in view of the foregoing considerations, judgment is rendered
for the plaintiff and the defendants are ordered to pay jointly and severally
the plaintiff the sum of P100,000.00 plus the further sum of 15% thereof in
the concept of reasonable attorney's fees and the costs.
Plaintiff upon payment of this judgment, shall deliver the sum of
P100,000.00 to the Philippine National Bank in partial satisfaction of the
obligation of the defendants to said Bank.
SO ORDERED. (Record on Appeal, p. 96)
Said decision was appealed to the Court of Appeals on questions of facts
and law. Acting on the appeal and finding that the only question raised

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therein involves a question of law, the Court of Appeals by resolution ***

dated April 29, 1976, certified the same to this Court, for proper disposition
(Rollo, pp. 62-63).
This Court, thru its First Division by Resolution dated May 31, 1978, resolved
to have the case docketed and declared the same submitted for decision
(Rollo, p. 65).
The defendants-appellants raised the following assignments of errors in the
Court of Appeals:
I
THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR LACK OF
CAUSE OF ACTION, THE COMPLAINT BEING PREMATURE BECAUSE THE
PLAINTIFF HAS PAID NOTHING ON THE SURETY BONDS AND HAS SUFFERED
NO ACTUAL DAMAGE.
II
THE LOWER COURT ERRED IN NOT DECLARING THAT PARAGRAPH 3 OF THE
INDEMNITY AGREEMENTS IS VOID.
III
CONSEQUENTLY, THE TRIAL COURT ERRED IN ORDERING THE DEFENDANTSAPPELLANT'S TO PAY JOINTLY AND SEVERALLY TO THE PLAINTIFF THE SUM
OF P100,000.00 PLUS THE FURTHER SUM OF 15% THEREOF IN THE
CONCEPT OF REASONABLE ATTORNEY'S FEES AND THE COSTS. (Brief for
Defendants-Appellants, CA, pp. 1-2).
The crux of the controversy is whether or not the surety can be allowed
indemnification from the defendants-appellants, upon the latter's default
even before the former has paid to the creditor.
There is no dispute that the overdraft line of P1,000,000.00 and the credit
line of Pl,000,000.00 applied for by the defendant was granted by the
Philippine National Bank on the strength of the two surety bonds
denominated as MERICO Bond No. G(16) 0007 for one hundred thousand
pesos (Exh. A) and MERICO Bond No. G(16) 0030 for forty thousand pesos

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(Exh. B), later reduced as above stated on September 5, 1967 (Exh. C) by

P40,000.00 or a total amount of P100,000.00. As security and in
consideration of the execution of the surety bonds, the defendants executed
with the plaintiff identical indemnity agreements (Exhs. D and E) which
provide, among others that payment of indemnity or compensation may be
claimed irrespective of whether or not plaintiff company has actually paid
the same.
Defendants-appellants maintain that the complaint is premature and that
paragraph 3 of the indemnity agreements is void for being contrary to law,
public policy and good morals. They argued that to allow plaintiff surety
(appellee herein) to receive indemnity or compensation for something it has
not paid in its capacity as surety would constitute unjust enrichment at the
expense of another. (Brief for Defendants-Appellants, CA, p.6).
To bolster their contention, defendants-appellants argue that it is an
indispensable requisite for an action to prosper, that the party bringing the
action must have a cause of action against the other party; and that for a
cause of action to be ripe for litigation, there must be both wrongful
violation and damages; all of which are not present in the case at bar
because plaintiff-appellee has not suffered any injury whatsoever,
notwithstanding the demand sent to it by the Philippine National Bank, nor
has plaintiff-appellee made a single actual payment to said bank. Hence, to
allow plaintiff-appellee to recover from them something which it has not
paid in its capacity as surety would violate the fundamental principle which
states NEMOCUM ALTERIUS DETRIMENTO LOCOPLETARI POTEST (No person
should unjustly enrich himself at the expense of another). [DefendantsAppellants' Brief, pp. 7-8; 49].
The question as to whether or not under the Indemnity Agreement of the
parties, the Surety can demand indemnification from the principal, upon the
latter's default, even before the former has paid to the creditor, has long
been settled by this Court in the affirmative.
It has been held that:
The stipulation in the indemnity agreement allowing the surety to recover
even before it paid the creditor is enforceable. In accordance therewith, the
surety may demand from the indemnitors even before paying the creditors.

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(Cosmopolitan Ins. Co., Inc. v. Reyes, 15 SCRA 528 [1965] citing; Security
Bank v. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; Alto Surety and
Ins. Co., v. Aguilar, et al., G.R. No. L-5625, March 16, 1954).
Hence, appellants contention that the action of the appellee (surety
company) is premature or that the complaint fails to state a cause of action
because the surety has not paid anything to the bank, cannot be sustained
(Cosmopolitan Ins. Co., Inc. v. Reyes, supra). In fact, such contention is
belied not only by the allegations in the complaint but also by the
agreement entered into between the appellants and the appellee in favor of
the bank.
The records show that the cause of action is distinctly set forth in the
complaint, the pertinent portion of which states:
6. That defendants, by virtue of the two Surety Bonds (Annexes "A" and "B")
were extended by the Philippine National Bank, a credit accommodation in
the sum of TWO MILLION (P2,000,000.00) PESOS;
7. That the Philippine National Bank is demanding and collecting from the
plaintiff the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS which
is the defendants' account with the said bank that is secured and covered
by the above-mentioned bonds (Annexes "A" and "B");
8. That under the terms of the Indemnity Agreements (Annexes "D" and "E")
more particularly paragraph 3, plaintiff may forthwith proceed against the
defendants to impose payment, even prior to making payment to the
Philippine National Bank;
9. That notwithstanding series of demands made by plaintiff, the defendants
failed and refused to pay the Philippine National Bank the sum of ONE
HUNDRED THOUSAND (P l00,000.00) PESOS;
10. That on account of defendants' default, plaintiff becomes liable to the
Philippine National Bank in the sum of ONE HUNDRED THOUSAND
(P100,000.00) PESOS;' (Record on Appeal, p. 2.)
Correspondingly, it is readily apparent that said cause of action was derived
from the terms of the Indemnity Agreement, paragraph 3 thereof, as above

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quoted. By virtue of the provisions of the Indemnity Agreement, defendantsappellants have undertaken to hold plaintiff-appellee free and harmless
from any suit, damage or liability which may be incurred by reason of nonperformance by the defendants-appellants of their obligation with the
Philippine National Bank. The Indemnity Agreement is principally entered
into as security of plaintiff-appellee in case of default of defendantsappellants; and the liability of the parties under the surety bonds is joint and
several, so that the obligee PNB may proceed against either of them for the
satisfaction of the obligation. (Brief for Plaintiff-Appellee, p. 7).
II
Defendants-appellants have, by virtue of the Indemnity Agreement, given
the plaintiff-appellee the prerogative of filing an action even prior to the
latter's making any payment to the Philippine National Bank.
Contracts are respected as the law between the contracting parties (Henson
v. IAC, 148 SCRA 11 [1987], citing Castro v. CA, 99 SCRA 722 [1980] and
Escano v. CA, 100 SCRA 197 [1980]) It is settled that the parties may
establish such stipulations, clauses, terms and conditions as they may want
to include, and as long as such agreements are not contrary to law, morals,
good customs, public policy or public order, they shall have the force of law
between them (Herrera v. Petrophil Corp., 146 SCRA [1986].
Contracts should be interpreted according to their literal meaning
should not be interpreted beyond their obvious intentment (Ibid.). It
basic and fundamental rule in the interpretation of contracts that if
terms thereof are clear and leave no doubt as to the intention of
contracting parties, the literal meaning of the stipulation shall control.

and
is a
the
the

In the case at bar, there is no dispute as to meaning of the terms of the

Indemnity Agreement. The only bone of contention is whether or not such
terms are null and void as defendants-appellants would have this Court
declare.
A careful analysis of the contract in question will show that the provisions
therein do not contravene any law or public policy much less do they
militate against the public good. In fact, as shown above, they are fully
sanctioned by well-established jurisprudence. Having voluntarily entered

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into such contract, the appellants cannot now be heard to complain. Their
indemnity agreement have the force and effect of law.
Elucidating further on the obligations of the parties in agreements of this
nature, this Court ruled:
...The indemnity agreement was not executed for the benefit of the
creditors; it was rather for the benefit of the surety and if the latter thought
it necessary in its own interest to impose this stipulation, and the
indemnitors voluntarily agreed to the same, the court should respect the
agreement of the parties and require them to abide by their contract.
(Security Bank v. Globe Assurance, 107 Phil. 733 [1960].
III
Finally, the trial court did not err in ordering defendants-appellants to pay
jointly and severally the plaintiff the sum of P100,000.00 plus 15% as
attorney's fees.
It must be stressed that in the case at bar, the principal debtors,
defendants-appellants herein, are simultaneously the same persons who
executed the Indemnity Agreement. Thus, the position occupied by them is
that of a principal debtor and indemnitor at the same time, and their liability
being joint and several with the plaintiff-appellee's, the Philippine National
Bank may proceed against either for fulfillment of the obligation as covered
by the surety bonds. There is, therefore, no principle of guaranty involved
and, therefore, the provision of Article 2071 of the Civil Code does not apply.
Otherwise stated, there is no more need for the plaintiff-appellee to exhaust
all the properties of the principal debtor before it may proceed against
defendants-appellants.
As to the attorney's fees, it has been squarely ruled by this Court that the
award of fifteen (15) per cent for cases of this nature is not unreasonable
(Cosmopolitan Insurance Co., Inc. v. Reyes, supra).
WHEREFORE, the decision appealed from is hereby AFFIRMED.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

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168
Page

G.R. No. L-30937 January 21, 1987

PHLIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and the PHILIPPINE PHOENIX
SURETY AND INSURANCE, INC., respondents.
Conrado E. Medina, Edgardo M Magtalas, Andres L. Africa & Pablito D.
Reynaldo for petitioner.
Manuel O. Chan for private respondent.
RESOLUTION

169
Page

Marino P. Rubin obtained from the Binalbagan Branch of petitioner Philippine

National Bank (Bank, for short) a 1954- 1955 sugar crop loan in the amount
of P40,200.00, secured by a chattel mortgage executed by Rubin as debtormortgagor and Jose A. Campos as mortgagor. As additional security, private
respondent Philippine Phoenix Surety and Insurance, Inc, (Phoenix for short)
issued Surety Bond No. 88 for P10,000.00 in favor of petitioner Bank.
Liability under said bond was to expire one (1) year from the date thereof,
unless within ten (10) days from its expiration, the surety is notified of any
existing obligations thereunder,
Three months later, petitioner Bank increased the loan from P40,200.00 to
P56,800,00, without the knowledge and consent of private respondent
Phoenix.
When Rubin failed to liquidate said loan, petitioner Bank demanded of
private respondent Phoenix that it make good its undertaking as surety for
Rubin up to the stated amount of P10,000.00. Private respondent Phoenix
denied liability, resulting in petitioner instituting a collection case against
Rubin, his guarantors and sureties, including private respondent Phoenix.
The trial court ruled in favor of petitioner Bank, ordering, among others,
private respondent Phoenix to pay petitioner the sum of P10,000 upon
failure of the principal debtor Rubin and his guarantors to pay the judgment
amount. On appeal, the Court of Appeals modified the trial court's decision
by exonerating private respondent Phoenix from liability under its surety
bond. Hence, the instant petition for review.
The discharge of private respondent Phoenix from liability under Surety
Bond No. 88 is correct. Contrary to petitioner's thinking, the contract in
question is not a continuing chattel mortgage for which consent and
knowledge of the surety is unnecessary for an increase in the amount of the
principal obligation. The contract of chattel mortgage itself fixed the credits,
loans, overdrafts, etc. and other valuable consideration received thereunder
at Forty Thousand Two Hundred Pesos [P40,200,00]. The undertaking under
said contract was "for the purpose of securing their payment including the
interest thereon, the cost of collection and other obligations owing by the
Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or

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secondary as appears in the accounts, books and records of the

mortgagee ... . " [p. 179, Record on Appeal]. Applying the principle of
ejusdem generis, the term "other obligations" must be limited to such as are
of the same nature as interest and costs of collection. The term cannot be
enlarged to include future additional advances to debtor-mortgagor, much
less be interpreted as a previous authorization from the surety to increase
the principal amount fixed in the contract.
The increase in the indebtedness from P40,200.00 to P56,800.00 is material
and prejudicial to private respondent Phoenix. While the liability of private
respondent under the bond is limited to P10,000.00, the increase in the
amount of the debt proportionally decreased the probability of the principal
debtor being able to liquidate the debt; thus, increasing the risk undertaken
by the surety to answer for the failure of the debtor to pay. "A material
alteration of the principal contract, effected by the creditor and principal
debtor without the knowledge and consent of the surety, completely
discharges the surety from all liability in the contract of suretyship." [Asiatic
Petroleum Co. vs. Hizon and David, 45 Phil. 532; Phil. National Bank vs.
Veraguth, 50 Phil. 253].
ACCORDINGLY, the decision of the Court of Appeals under review is hereby
affirmed. Costs against petitioner.

171
Page

G.R. No. L-29666 October 29, 1971

PFOPLES BANK AND TRUST COMPANY, plaintiff-appellee,

vs.
JOSE MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and
FRANCISCO D. SANTANA, defendants. FRANCISCO D. SANTANA,
defendant-appellant.
Araneta, Mendoza & Papa for plaintiff-appellee.
Paredes, Poblador, Nazareno, Asada & Tomacruz for defendant-appellant.

FERNANDO, J.:
Appellant Francisco D. Santana was sued by plaintiff, now appellee, Peoples
Bank & Trust Company, along with the other defendants, Jose Maria
Tambunting and Maria Paz Tambunting, his son-in-law and his daughter, for
the recovery of the sum of money due in an overdraft agreement, with the
Tambunting couple as principal debtors and appellant as surety. The
judgment went against him notwithstanding his plea based on Article 2080
of the Civil Code, releasing guarantors, even if they be solidary, if by some
act of the creditor subrogation is thereby precluded. 1 The lower court,
presided by the then Judge, now Justice of the Court of Appeals, Jose N.
Leuterio, in a well-written decision, found such a defense untenable as in
what was characterized by the lower courts as the "contract of absolute
guaranty", appellant had waived his rights to the benefit conferred by such
a provision. In this appeal, would vigorously contend that what was thus
agreed to by him was bereft of a binding force. The law in its wisdom does
not lend its approval to such an ill-disguised attempt for turn one's back to
all obligation arising from a valid contract. We have to affirm.
The decision, now on appeal, after stating the nature of the action which as
noted is for the recovery of a sum of money due on an overdraft agreement
set forth the undisputed facts thus: "On September 9, 1968, plaintiff and

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defendants executed a contract denominated 'overdraft agreement and

pledge' wherein the plaintiff granted to the spouses Jose Maria Tambunting
and Maria Paz Tambunting an overdraft from time to time on their current
account with the plaintiff bank not to exceed P200,000.00 with interest at
the rate of 9% per annum until September 10, 1964, ..., the proceeds of
which were to be used by the Tambuntings in their logging operations.
Defendant Francisco D. Santana, as guarantor, and the spouses
Tambuntings, conveyed to the bank shares of capital stock of the
International Sports Development Corporation collateral security for the
payment of any and all indebtedness incurred or arising from the overdraft,
and all extensions, renewals, amendments or applications thereof. On the
same day, defendant Francisco D. Santana executed a document
denominated as absolute guaranty in which, in consideration of the
'overdraft agreement and pledge,' he bound himself to the bank, jointly and
severally, with the Tambunting spouses for the full and prompt payment of
all the indebtedness incurred or to be incurred by said spouses on account
of the overdraft line. On July 24, 1964, Jose Maria Tambunting wrote to the
plaintiff bank [a] latter, ..., requesting renewal of the overdraft agreement.
Plaintiff bank, in a letter dated September 21, 1964, ..., granted the
Tambunting spouses an extension of the overdraft line for six (6) months
from September 10, 1964, but reducing the overdraft line to P185,000.00
with the understanding that other terms and conditions of the overdraft
agreement would be in full force and effect. Before the expiration of the six
(6) months period, or on March 5, 1965, Jose Maria Tambunting asked for
another renewal of the overdraft line for another year, ... . Apparently, this
letter was granted by the plaintiff on March 15, 1965, for in another letter of
Jose Maria Tambunting to the bank, ... the defendant, on March 29, 1965,
assured the bank that he would comply with the requirements of the
plaintiff. In a letter dated May 11, 1965, ... of the bank to Tambunting, the
Manager of the Credit Department advised Jose Maria Tambunting that the
Board of Directors of the plaintiff bank approved his request for an
extension of the overdraft line in the amount of P185,000.00 for another
year, or until March 10, 1966, but with interest at the rate of 10% per
annum; that in the same meeting, the Board also approved the release of
the pledge of 135 shares of stocks of the International Sports Development
Corporation. The defendants failed to pay the indebtedness on the date due
and demand for payment was made upon Francisco Santana and

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Tambunting as per letters dated December 14, 1965, January 24, 1966 and
March 4, 1966, ... . As of December 27, 1966, the total amount due from the
defendants, including interests, was P219,165.18, ... ." 2 The decision went
on to state: "The Tambunting spouses failed to answer the complaint and
were declared in default. The defendant Santana does not dispute the
indebtedness. However, it is the contention that he had been released from
the guaranty for several reasons. Defendant Santana contends that he was
released from his obligation on the overdraft line because the plaintiff had
extended the time of payment and released to the Tambuntings without his
consent, the 135 shares of stocks of the International Sports Development
Corporation which had been pledged to the bank to secure the overdraft
line. It is argued that, in accordance with Article 2080 of the New Civil Code,
'The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot be subrogated
to the rights, mortgages, and preferences of the latter.' " 3
Why such a contention was held devoid of merit was explained in such
decision thus: "The contract of absolute guaranty, ..., expressly authorized
the plaintiff bank to extend the time of payment and to release or surrender
any security or part thereof held by it without notice to, the consent of,
Santana. He had consented in advance the release of the guaranty which
the bank might make, Santana cannot now complain that the release of the
pledge was without his consent, and that it deprived him of the right to be
subrogated to the rights of the creditor. The waiver is not contrary to law,
nor is it contrary to public policy. The law does not prohibit the debtorguarantor from agreeing in advance and without notice to the release of any
security which had been given to assure payment of the obligation. The
waiver is not contrary to public policy, because the right is purely personal,
and does not affect public interest nor does it violate any public policy.
Neither does the return of the shares of stocks novate the original contract
for the obligation remains the same; and if it is a novation, it is a novation
made with the consent of Santana. Moreover, the pledge is merely an
accessory obligation, and its release does not vary the terms of the principal
obligation." 4
The appealed decision speaks for itself. It cannot, as was made plain in the
opening paragraph of this opinion be overturned.

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1. It is thus obvious that the contract of absolute guaranty executed by

appellant Santana is the measure of rights and duties. As it is with him, so it
is with the plaintiff bank. What was therein stipulated had to be complied
with by both parties. Nor could appellant have any valid cause for
complaint. He had given his word; he must live up to it. Once the validity of
its terms is conceded, he cannot be indulged in his unilateral determination
to disregard his commitment. A promise to which the law accords binding
force must be fulfilled. It is as simple as that. So the Civil Code explicitly
requires: "Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith." 5
2. It could have been different if there were no such contract of absolute
guaranty to which appellant was a party under the aforesaid Article 2080.
He would have been freed from the obligation as a result of plaintiff
releasing to the Tambuntings without his consent the 135 shares of the
International Sports Development Corporation pledged to plaintiff bank to
secure the overdraft line. For thereby subrogation became meaningless.
Such a provision is intended for the benefit of a surety. That was a right he
could avail of. He is not precluded however from waiving it. That was what
appellant did precisely when he agreed to the contract of absolute guaranty.
Again the law is clear. A right may be waived unless it would be contrary to
law, public order, public policy, morals or good customs. 6 There is no
occasion here for the exceptions coming into play. It has been traditional in
the Philippine for parents to extend all available aid and assistance to their
children. That is a custom of long standing. Nor is there anything offensive
to morals by an assumption of contingent liability as thus worded. The law
has not been thwarted. Neither is public order nor public policy disregarded.
The lower court was right thereto in yielding full assent to the waiver in
question. 7 The vigor with which counsel for appellant impugned the lower
decision cannot therefore be attended with success. It can stand its ground
notwithstanding such a sustained and spirited attack.
WHEREFORE, the decision of October 30, 1967, as modified on January 8,
1969, is affirmed. With costs against appellant Francisco D. Santana.
Concepcion C.J., Reyes, J.B.L., Makalintal, Zaldivar, Castro, Teehankee,
Barredo, Villamor and Makasiar, JJ., concur.

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176
Page

G.R. No. L-20567

July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner,

vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF
APPEALS (Second Division), respondents.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.
REYES, J.B.L., J.:
The Philippine National Bank petitions for the review and reversal of the
decision rendered by the Court of Appeals (Second Division), in its case CAG.R. No. 24232-R, dismissing the Bank's complaint against respondent
Manila Surety & Fidelity Co., Inc., and modifying the judgment of the Court
of First Instance of Manila in its Civil Case No. 11263.
The material facts of the case, as found by the appellate Court, are as
follows:
The Philippine National Bank had opened a letter of credit and advanced
thereon $120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt.
Of this amount, 2,000 tons worth P279,000.00 were released and delivered
to Adams & Taguba Corporation (known as ATACO) under a trust receipt
guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00.
To pay for the asphalt, ATACO constituted the Bank its assignee and
attorney-in-fact to receive and collect from the Bureau of Public Works the

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amount aforesaid out of funds payable to the assignor under Purchase Order
No. 71947. This assignment (Exhibit "A") stipulated that:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit accomodation is
fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-inFact for us and in our name, place and stead, to collect and to receive the
payments to be made by virtue of the aforesaid Purchase Order, with full
power and authority to execute and deliver on our behalf, receipt for all
payments made to it; to endorse for deposit or encashment checks, money
order and treasury warrants which said Bank may receive, and to apply said
payments to the settlement of said credit accommodation.
This power of attorney shall also remain irrevocable until our total
indebtedness to the said Bank have been fully liquidated. (Exhibit E)
ATACO delivered to the Bureau of Public Works, and the latter accepted,
asphalt to the total value of P431,466.52. Of this amount the Bank regularly
collected, from April 21, 1948 to November 18, 1948, P106,382.01.
Thereafter, for unexplained reasons, the Bank ceased to collect, until in
1952 its investigators found that more moneys were payable to ATACO from
the Public Works office, because the latter had allowed mother creditor to
collect funds due to ATACO under the same purchase order to a total of
P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the
Bank sued both in the Court of First Instance of Manila to recover the
balance of P158,563.18 as of February 15, 1950, plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and Manila Surety &
Fidelity Co., Inc., to pay plaintiff, Philippines National Bank, the sum of
P174,462.34 as of February 24, 1956, minus the amount of P8,000 which

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defendant, Manila Surety Co., Inc. paid from March, 1956 to October, 1956
with interest at the rate of 5% per annum from February 25, 1956, until fully
paid provided that the total amount that should be paid by defendant Manila
Surety Co., Inc., on account of this case shall not exceed P75,000.00, and to
pay the costs;
2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party
defendant, Pedro A. Taguba, jointly and severally, to pay cross and thirdparty plaintiff, Manila Surety & Fidelity Co., Inc., whatever amount the latter
has paid or shall pay under this judgment;
3. Dismissing the complaint insofar as the claim for 17% special tax is
concerned; and
4. Dismissing the counterclaim of defendants Adams & Taguba Corporation
and Manila Surety & Fidelity Co., Inc.
From said decision, only the defendant Surety Company has duly perfected
its appeal. The Central Bank of the Philippines did not appeal, while
defendant ATACO failed to perfect its appeal.
The Bank recoursed to the Court of Appeals, which rendered an adverse
decision and modified the judgment of the court of origin as to the surety's
liability. Its motions for reconsideration having proved unavailing, the Bank
appealed to this Court.
The Court of Appeals found the Bank to have been negligent in having
stopped collecting from the Bureau of Public Works the moneys falling due
in favor of the principal debtor, ATACO, from and after November 18, 1948,
before the debt was fully collected, thereby allowing such funds to be taken
and exhausted by other creditors to the prejudice of the surety, and held
that the Bank's negligence resulted in exoneration of respondent Manila
Surety & Fidelity Company.
This holding is now assailed by the Bank. It contends the power of attorney
obtained from ATACO was merely in additional security in its favor, and that
it was the duty of the surety, and not that of the creditor, owed see to it that
the obligor fulfills his obligation, and that the creditor owed the surety no
duty of active diligence to collect any, sum from the principal debtor, citing

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Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23,
1958.
This argument of appellant Bank misses the point. The Court of Appeals did
not hold the Bank answerable for negligence in failing to collect from the
principal debtor but for its neglect in collecting the sums due to the debtor
from the Bureau of Public Works, contrary to its duty as holder of an
exclusive and irrevocable power of attorney to make such collections, since
an agent is required to act with the care of a good father of a family (Civ.
Code, Art. 1887) and becomes liable for the damages which the principal
may suffer through his non-performance (Civ. Code, Art. 1884). Certainly,
the Bank could not expect that the Bank would diligently perform its duty
under its power of attorney, but because they could not have collected from
the Bureau even if they had attempted to do so. It must not be forgotten
that the Bank's power to collect was expressly made irrevocable, so that the
Bureau of Public Works could very well refuse to make payments to the
principal debtor itself, and a fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the principal debtor
were considered as mere additional security still, by allowing the assigned
funds to be exhausted without notifying the surety, the Bank deprived the
former of any possibility of recoursing against that security. The Bank
thereby exonerated the surety, pursuant to Article 2080 of the Civil Code:
ART. 2080. The guarantors, even though they be solidary, are released
from their obligation whenever by come act of the creditor they cannot be
subrogated to the rights, mortgages and preferences of the latter.
(Emphasis supplied.)
The appellant points out to its letter of demand, Exhibit "K", addressed to
the Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit
"G", informing the debtor that as of its date, October 31, 1949, its
outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on
the issue whether the Bank has exercised due diligence in collecting from
the Bureau of Public Works, since the letter was addressed to ATACO, and
the funds were to come from elsewhere. As to the letter of demand on the
Public Works office, it does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the surety were ever

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apprised that payment was not being made. The fact remains that because
of the Bank's inactivity the other creditors were enabled to collect
P173,870.31, when the balance due to appellant Bank was only
P158,563.18. The finding of negligence made by the Court of Appeals is
thus not only conclusive on us but fully supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in
support of the decision now under appeal, because the rules on application
of payments, giving preference to secured obligations are only operative in
cases where there are several distinct debts, and not where there is only
one that is partially secured, the error is of no importance, since the
principal reason based on the Bank's negligence furnishes adequate support
to the decision of the Court of Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against appellant
Philippine National Bank.
Bengzon, C.J., Concepcion, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P.,
and Zaldivar, JJ., concur.
Bautista Angelo and Barerra, JJ., took no part.

181
Page

G.R. No. L-34539 July 14, 1986

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL
BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO, partners of
the defunct partnership Concepcion & Tamayo Construction
Company, JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo
Construction Company, and THE DISTRICT ENGINEER, Puerto
Princesa, Palawan, respondents.
Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.:

This is a petition for review seeking to annul and set aside the decision of
the Court of Appeals, now the Intermediate Appellate Court, affirming the
order of the trial court which dismissed the petitioners' complaint for
cancellation of their real estate mortgage and held them jointly and
severally liable with the principal debtors on a promissory note which they
signed as accommodation makers.
The factual background of this case is stated in the decision of the appellate
court:

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182

Appellants are the registered owners of a parcel of land located in

Sampaloc, Manila, and covered by T.C.T. 35161 of the Register of Deeds of
Manila. On October 7, 1954, this property was mortgaged by the appellants
to the Philippine National Bank, hereinafter called PNB, to guarantee a loan
of P1,000.00 extended to one Domingo Prudencio.
Sometime in 1955, the Concepcion & Tamayo Construction Company,
hereinafter called Company, had a pending contract with the Bureau of
Public Works, hereinafter called the Bureau, for the construction of the
municipal building in Puerto Princess, Palawan, in the amount of P36,800.00
and, as said Company needed funds for said construction, Jose Toribio,
appellants' relative, and attorney-in-fact of the Company, approached the
appellants asking them to mortgage their property to secure the loan of
P10,000.00 which the Company was negotiating with the PNB.
After some persuasion appellants signed on December 23, 1955 the
'Amendment of Real Estate Mortgage', mortgaging their said property to the
PNB to guaranty the loan of P10,000.00 extended to the Company. The
terms and conditions of the original mortgage for Pl,000.00 were made
integral part of the new mortgage for P10,000.00 and both documents were
registered with the Register of Deeds of Manila. The promissory note
covering the loan of P10,000.00 dated December 29, 1955, maturing on
April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the
Company, and by the appellants. Appellants also signed the portion of the
promissory note indicating that they are requesting the PNB to issue the
Check covering the loan to the Company. On the same date (December 23,
1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in the
same capacity as attorney-in- fact of the Company, executed also the 'Deed
of Assignment' assigning all payments to be made by the Bureau to the
Company on account of the contract for the construction of the Puerto
Princesa building in favor of the PNB.
This assignment of credit to the contrary notwithstanding, the Bureau; with
approval, of the PNB, conditioned, however that they should be for labor
and materials, made three payments to the Company on account of the
contract price totalling P11,234.40. The Bureau's last request for P5,000.00
on June 20, 1956, however, was denied by the PNB for the reason that since

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the loan was already overdue as of April 28, 1956, the remaining balance of
the contract price should be applied to the loan.
The Company abandoned the work, as a consequence of which on June 30,
1956, the Bureau rescinded the construction contract and assumed the
work of completing the building. On November 14, 1958, appellants wrote
the PNB contending that since the PNB authorized payments to the
Company instead of on account of the loan guaranteed by the mortgage
there was a change in the conditions of the contract without the knowledge
of appellants, which entitled the latter to a cancellation of their mortgage
contract.
Failing in their bid to have the real estate mortgage cancelled, appellants
filed on June 27, 1959 this action against the PNB, the Company, the latter's
attorney-in-fact Jose Toribio, and the District Engineer of Puerto Princesa,
Palawan, seeking the cancellation of their real estate mortgage. The
complaint was amended to exclude the Company as defendant, it having
been shown that its life as a partnership had already expired and, in lieu
thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct
Company, were impleaded in their private capacity as defendants.
After hearing, the trial court rendered judgment, denying the prayer in the
complaint that the petitioners be absolved from their obligation under the
mortgage contract and that the said mortgage be released or cancelled. The
petitioners were ordered to pay jointly and severally with their co-makers
Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with
interest at the rate of 6% per annum from the date of the filing of the
complaint on June 27, 1959 until fully paid and Pl,000.00 attorney's fees.
The decision also provided that if the judgment was not satisfied within 90
days from its receipt, the mortgaged properties together with all the
improvements thereon belonging to the petitioners would be sold at public
auction and applied to the judgment debt.
The Court of Appeals affirmed the trial court's decision in toto stating that,
as accommodation makers, the petitioners' liability is that of solidary comakers and that since "the amounts released to the construction company
were used therein and, therefore, were spent for the successful
accomplishment of the work constructed for, the authorization made by the

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Philippine National Bank of partial payments to the construction company

which was also one of the solidary debtors cannot constitute a valid defense
on the part of the other solidary debtors. Moreover, those who rendered
services and furnished materials in the construction are preferred creditors
and have a lien on the price of the contract." The appellate court further
held that PNB had no obligation whatsoever to notify the petitioners of its
authorizing the three payments in the total amount of Pll,234.00 in favor of
the Company because aside from the fact that the petitioners were not
parties to the deed of assignment, there was no stipulation in said deed
making it obligatory on the part of the PNB to notify the petitioners
everytime it authorizes payment to the Company. It ruled that the
petitioners cannot ask to be released from the real estate mortgage.
In this petition, the petitioners raise the following issues which they present
in the form of errors:
I. First Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN
PETITIONERS WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES:
II. Second Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE NOT RELEASED FROM THEIR OBLIGATION TO THE
RESPONDENT PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE AND
CONSENT OF PETITIONERS, CHANGED THE TENOR AND CONDITION OF THE
ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR; CONCEPCION
& TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH PRINCIPAL
DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE
MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.
The petitioners contend that as accommodation makers, the nature of their
liability is only that of mere sureties instead of solidary co-debtors such that
"a material alteration in the principal contract, effected by the creditor
without the knowledge and consent of the sureties, completely discharges
the sureties from all liability on the contract of suretyship. " They state that
when respondent PNB did not apply the initial and subsequent payments to
the petitioners' debt as provided for in the deed of assignment, they were

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released from their obligation as sureties and, therefore, the real estate
mortgage executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:
Liability of accommodation party. An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some
other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew him
to be only an accommodation party.
In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539),
we held that "... in lending his name to the accommodated party, the
accommodation party is in effect a surety. ... . " However, unlike in a
contract of suretyship, the liability of the accommodation party remains not
only primary but also unconditional to a holder for value such that even if
the accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as
far as a holder for value is concerned, he is a solidary co- debtor.
Expounding on the nature of the liability of an accommodation petition party
under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713,
716):
3. That the appellant, again assuming him to be an accommodation
indorser, may obtain security from the maker to protect himself against the
danger of insolvency of the latter, cannot in any manner affect his liability to
the appellee, as the said remedy is a matter of concern exclusively between
accommodation indorser and accommodated party. So that the appellant
stands only as a surety in relation to the maker, granting this to be true for
the sake of argument, is immaterial to the claim of the appellee, and does
not a whit diminish nor defeat the rights of the latter who is a holder for
value. The liability of the appellant remains primary and unconditional. To
sanction the appellant's theory is to give unwarranted legal recognition to
the patent absurdity of a situation where an indorser, when sued on an
instrument by a holder in due course and for value, can escape liability on

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his indorsement by the convenient expedient of interposing the defense

that he is a mere accommodation indorser.
There is, therefore, no question that as accommodation makers, petitioners
would be primarily and unconditionally liable on the promissory note to a
holder for value, regardless of whether they stand as sureties or solidary codebtors since such distinction would be entirely immaterial and
inconsequential as far as a holder for value is concerned. Consequently, the
petitioners cannot claim to have been released from their obligation simply
because the time of payment of such obligation was temporarily deferred by
PNB without their knowledge and consent. There has to be another basis for
their claim of having been freed from their obligation. The question which
should be resolved in this instant petition, therefore, is whether or not PNB
can be considered a holder for value under Section 29 of the Negotiable
Instruments Law such that the petitioners must be necessarily barred from
setting up the defense of want of consideration or some other personal
defenses which may be set up against a party who is not a holder in due
course.
A holder for value under Section 29 of the Negotiable Instruments Law is
one who must meet all the requirements of a holder in due course under
Section 52 of the same law except notice of want of consideration.
(Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he does not
qualify as a holder in due course then he holds the instrument subject to the
same defenses as if it were non-negotiable (Section 58, Negotiable
Instruments Law).
In the case at bar, can PNB, the payee of the promissory note be considered
a holder in due course?
Petitioners contend that the payee PNB is an immediate party and,
therefore, is not a holder in due course and stands on no better footing than
a mere assignee.
In those cases where a payee was considered a holder in due course, such
payee either acquired the note from another holder or has not directly dealt
with the maker thereof. As was held in the case of Bank of Commerce and
Savings v. Randell (186 NorthWestern Reporter 71):

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We conclude, therefore, that a payee who receives a negotiable promissory

note, in good faith, for value, before maturity, and without any notice of any
infirmity, from a holder, not the maker. to whom it was negotiated as a
completed instrument, is a holder in due course within the purview of a
Negotiable Instruments law, so as to preclude the defense of fraud and
failure of consideration between the maker and the holder to whom the
instrument, was delivered.
Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter
748) on rehearing and quoting Daniel on Negotiable Instruments, it was
held:
It is a general principle of the law merchant that, as between the immediate
parties to a negotiable instrument-the parties between whom there is a
privity-the consideration may be inquired into; and as to them the only
superiority of a bill or note over other unsealed evidence of debt is that it
prima facie imports a consideration.
Although as a general rule, a payee may be considered a holder in due
course we think that such a rule cannot apply with respect to the
respondent PNB. Not only was PNB an immediate party or in privy to the
promissory note, that is, it had dealt directly with the petitioners knowing
fully well that the latter only signed as accommodation makers but more
important, it was the Deed of Assignment executed by the Construction
Company in favor of PNB which principally moved the petitioners to sign the
promissory note also in favor of PNB. Petitioners were made to believe and
on that belief entered into the agreement that no other conditions would
alter the terms thereof and yet, PNB altered the same. The Deed of
Assignment specifically provided that Jose F. Toribio, on behalf of the
Company, "have assigned, transferred and conveyed and by these presents,
do assign, transfer and convey unto the said Philippine National Bank, its
successors and assigns all payments to be received from the Bureau of
Public Works on account of contract for the construction of the Puerto
Princesa Municipal Building in Palawan, involving the total amount of P
36,000.00" and that "This assignment shall be irrevocable and subject to
the terms and conditions of the promissory note and or any other kind of
documents which the Philippine National Bank have required or may require
the assignor to execute to evidence the above-mentioned obligation."

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Under the terms of the above Deed, it is clear that there are no further
conditions which could possibly alter the agreement without the consent of
the petitioners such as the grant of greater priority to obligations other than
the payment of the loan due to the PNB and part of which loan was
guaranteed by the petitioners in the amount of P10,000.00.
This, notwithstanding, PNB approved the Bureau's release of three
payments directly to the Company instead of paying the same to the Bank.
This approval was in violation of the Deed of Assignment and without any
notice to the petitioners who stood to lose their property once the
promissory note falls due without the same having been paid because the
PNB, in effect, waived payments of the first three releases. From the
foregoing circumstances, PNB can not be regarded as having acted in good
faith which is also one of the requisites of a holder in due course under
Section 52 of the Negotiable Instruments Law. The PNB knew that the
promissory note which it took from the accommodation makers was signed
by the latter because of full reliance on the Deed of Assignment, which, PNB
had no intention to comply with strictly. Worse, the third payment to the
Company in the amount of P4,293.60 was approved by PNB although the
promissory note was almost a month overdue, an act which is clearly
detrimental to the petitioners.
We, therefore, hold that respondent PNB is not a holder in due course. Thus,
the petitioners can validly set up their personal defense of release from the
real estate mortgage against PNB. The latter, in authorizing the third
payment to the Company after the promissory note became due, in effect,
extended the term of the payment of the note without the consent of the
accommodation makers who stand as sureties to the accommodated party
and to all other parties who are not holders in due course or who do not
derive their right from the same, including PNB.
It may be argued that the Prudencios could have mortgaged their property
even without the promissory note. The records show, however, that they
would not have mortgaged the lot were it not for the sake of the Company
whose attorney-in-fact was their relative. The spouses did not need the
money for themselves.

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The attorney-in-fact tried twice to convince the Prudencios to mortgage

their property in order to secure a loan in favor of the Company but the
Prudencios refused. It was only when the deed of assignment was shown to
the spouses that they consented to the mortgage and signed the
promissory note in the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage
contract. Petitioners do not dispute the validity of the mortgage. They only
want to have it cancelled because the Bank violated the deed of assignment
and extended the period of time of payment of the promissory note without
the petitioners' consent and to the latter's detriment.
The mortgage cannot be separated from the promissory note for it is the
latter which is the basis of determining whether the mortgage should be
foreclosed or cancelled. Without the promissory note which determines the
amount of indebtedness there would have been no basis for the mortgage.
True, if the Bank had not been the assignee, then the petition petitioners
would be obliged to pay the Bank as their creditor on the promissory note,
irrespective of whether or not the deed of assignment had been violated.
However, the assignee and the creditor in this case are one and the same
the Bank itself. When the Bank violated the deed of assignment, it
prejudiced itself because its very violation was the reason why it was not
paid on time in its capacity as creditor in the promissory note. It would be
unfair to make the petitioners now answer for the debt or to foreclose on
their property.
Neither can PNB justify its acts on the ground that the Bureau of Public
Works approved the deed of assignment with the condition that the wages
of laborers and materials needed in the construction work must take
precedence over the payment of the promissory note. In the first place, PNB
did not need the approval of the Bureau. But even if it did, it should have
informed the petitioners about the amendment of the deed of assignment.
Secondly, the wages and materials have already been paid. That issue is
academic. What is in dispute is who should bear the loss in this case. As
between the petitioners and the Bank, the law and the equities of the case
favor the petitioners, And thirdly, the wages and materials constitute a lien
only on the constructed building but do not enjoy preference over the loan

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unless there is a liquidation proceeding such as in insolvency or settlement

of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were
remedies available at the time if the laborers and the creditors had not been
paid. The fact is, they have been paid. Hence, when the PNB accepted the
condition imposed by the Bureau without the knowledge or consent of the
petitioners, it amended the deed of assignment which, as stated earlier, was
the principal reason why the petitioners consented to become
accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals
affirming the decision of the trial court is hereby REVERSED and SET ASIDE
and a new one entered absolving the petitioners from liability on the
promissory note and under the mortgage contract. The Philippine National
Bank is ordered to release the real estate mortgage constituted on the
property of the petitioners and to pay the amount of THREE THOUSAND
PESOS (P3,000.00) as attorney's fees.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.

191
Page

G.R. No. 138544

October 3, 2000

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192

SECURITY BANK AND TRUST COMPANY, Inc., petitioner,

vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed
against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the
consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot
hold herein respondent liable for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent any clear
stipulation showing that the latter waived his right to be notified thereof, or
to give consent thereto. This is especially true where, as in this case,
respondent was no longer the principal officer or major stockholder of the
corporate debtor at the time the later obligations were incurred. He was
thus no longer in a position to compel the debtor to pay the creditor and
had no more reason to bind himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review
under Rule 45 of the Rules of Court. Petitioner assails the December 22,
1998 Decision1 of the Court of Appeals (CA) in CA-GR CV No. 56203, the
dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense
that defendant-appellant Rodolfo M. Cuenca [herein respondent] is
RELEASED from liability to pay any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby
DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution, 3 which denied
petitioners Motion for Reconsideration.

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Modified by the CA was the March 6, 1997 Decision 4 of the Regional Trial
Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which
disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines
Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally,
plaintiff Security Bank & Trust Company the sum of P39,129,124.73
representing the balance of the loan as of May 10, 1994 plus 12% interest
per annum until fully paid, and the sum of P100,000.00 as attorneys fees
and litigation expenses and to pay the costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows: 5
"The antecedent material and relevant facts are that defendant-appellant
Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations.
It was a holder of a Timber License Agreement issued by the Department of
Environment and Natural Resources (DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted
appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of
[e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the
additional capitalization requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that the P8M Credit
Loan Facility shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except
logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the
borrowings, indicating therein the companys duly authorized signatory/ies;

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3. Reasonable/compensating deposit balances in current account shall be

maintained at all times; in this connection, a Makati account shall be
opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms
and conditions upon written notice to the Borrower. (Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from the
above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23
December 1980 (Exhibit A) over some of its machinery and equipment in
favor of [Petitioner] SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated
17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he
solidarily bound himself with SIMC as follows:
xxx

xxx

xxx

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally

with the client (SIMC) in favor of the bank for the payment, upon demand
and without the benefit of excussion of whatever amount x x x the client
may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x . (Emphasis supplied).
"On 26 November 1981, four (4) days prior to the expiration of the period of
effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first
drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said
drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for
said amount (Exhibit C).
"Sometime in 1985, [Respondent] Cuenca resigned as President and
Chairman of the Board of Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of [Respondent] Cuenca in defendantappellant Sta. Ines were sold at a public auction relative to Civil Case No.
18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M.

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Cuenca. Said shares were bought by Adolfo Angala who was the highest
bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and
obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate
amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand
[n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed
Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85,
DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the
abovementioned additional loans against the credit line.
"Appellant SIMC, however, encountered difficulty 6 in making the
amortization payments on its loans and requested [Petitioner] SBTC for a
complete restructuring of its indebtedness. SBTC accommodated appellant
SIMCs request and signified its approval in a letter dated 18 February 1988
(Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice
to or the prior consent of [Respondent] Cuenca, agreed to restructure the
past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security
Bank agreed to extend to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand
[p]esos (P8,800,000.00), to be applied to liquidate the principal portion of
defendant-appellant Sta. Ines[] total outstanding indebtedness to
[Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p.
336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand
[p]esos (P3,400,000.00), to be applied to liquidate the past due interest and
penalty portion of the indebtedness of defendant-appellant Sta. Ines to
[Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336;
Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
"It should be pointed out that in restructuring defendant-appellant Sta. Ines
obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-359981 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00), which was the only loan incurred prior to the expiration of
the P8M-Credit Loan Facility on 30 November 1981 and the only one covered
by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca,
Expediente, at Vol. II, p. 331), was not segregated from, but was instead

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lumped together with, the other loans, i.e., Promissory Notes Nos.
DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F,
Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta.
Ines which were not secured by said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to
[Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the
following promissory notes, both dated 09 March 1988 in favor of
[Petitioner] Security Bank:
PROMISSORY
AMOUNT
NOTE NO.
RL/74/596/88

P8,800,00
0.00

P3,400,00
RL/74/597/88 0.00

TOTAL

P12,200,0
00.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

"To formalize their agreement to restructure the loan obligations of
defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendantappellant Sta. Ines executed a Loan Agreement dated 31 October 1989
(Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the
said Loan Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the
aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS
(P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be
released in two (2) tranches of P8,800,000.00 for the first tranche (the First
Loan) and P3,400,000.00 for the second tranche (the Second Loan) to be
applied in the manner and for the purpose stipulated hereinbelow.

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1.02. Purpose - The First Loan shall be applied to liquidate the principal
portion of the Borrowers present total outstanding indebtedness to the
Lender (the indebtedness) while the Second Loan shall be applied to
liquidate the past due interest and penalty portion of the Indebtedness.
(Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I,
p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines
made further payments to [Petitioner] Security Bank in the amount of [o]ne
[m]illion
[s]even
[h]undred
[f]ifty-[s]even
[t]housand
[p]esos
(P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at
Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan
obligations to [Petitioner] SBTC despite demands made upon appellant SIMC
and CUENCA, the last of which were made through separate letters dated 5
June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC.
Thus, SBTC filed a complaint for collection of sum of money on 14 June
1993, resulting after trial on the merits in a decision by the court a quo, x x
x from which [Respondent] Cuenca appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989
Loan Agreement had novated the 1980 credit accommodation earlier
granted by the bank to Sta. Ines. Accordingly, such novation extinguished
the Indemnity Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself solidarily liable for
the payment of the loans secured by that credit accommodation. It noted
that the 1989 Loan Agreement had been executed without notice to, much
less consent from, Cuenca who at the time was no longer a stockholder of
the corporation.
The appellate court also noted that the Credit Approval Memorandum had
specified that the credit accommodation was for a total amount of P8
million, and that its expiry date was November 30, 1981. Hence, it ruled

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that Cuenca was liable only for loans obtained prior to November 30, 1981,
and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989
Loan Agreement was tantamount to a grant of an extension of time to the
debtor without the consent of the surety. Under Article 2079 of the Civil
Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank
and Sta. Ines decided to materially alter or modify the principal obligation
after the expiry date of the credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our consideration: 8
"A. Whether or not the Honorable Court of Appeals erred in
releasing Respondent Cuenca from liability as surety under the
Indemnity Agreement for the payment of the principal amount of
twelve million two hundred thousand pesos (P12,200,000.00)
under Promissory Note No. RL/74/596/88 dated 9 March 1988 and
Promissory Note No. RL/74/597/88 dated 9 March 1988, plus
stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling
that Respondent Cuencas liability under the Indemnity
Agreement covered only availments on SIMCs credit line to the
extent of eight million pesos (P8,000,000.00) and made on or
before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling
that the restructuring of SIMCs indebtedness under the P8 million
credit accommodation was tantamount to an extension granted to
SIMC without Respondent Cuencas consent, thus extinguishing
his liability under the Indemnity Agreement pursuant to Article
2079 of the Civil Code;

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iii. Whether or not the Honorable Court of appeals erred in ruling

that the restructuring of SIMCs indebtedness under the P8 million
credit accommodation constituted a novation of the principal
obligation, thus extinguishing Respondent Cuencas liability under
the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the
Indemnity Agreement was extinguished by the payments made
by SIMC;
C. Whether or not petitioners Motion for Reconsideration was proforma;
D. Whether or not service of the Petition by registered mail
sufficiently complied with Section 11, Rule 13 of the 1997 Rules of
Civil Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a)
whether the 1989 Loan Agreement novated the original credit
accommodation and Cuencas liability under the Indemnity Agreement; and
(b) whether Cuenca waived his right to be notified of and to give consent to
any substitution, renewal, extension, increase, amendment, conversion or
revival of the said credit accommodation. As preliminary matters, the
procedural questions raised by respondent will also be addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA
Decision, in merely rehashing the arguments already passed upon by the
appellate court, was pro forma; that as such, it did not toll the period for
filing the present Petition for Review. 9 Consequently, the Petition was filed
out of time.10

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We disagree. A motion for reconsideration is not pro forma just because it

reiterated the arguments earlier passed upon and rejected by the appellate
court. The Court has explained that a movant may raise the same
arguments, precisely to convince the court that its ruling was erroneous. 11
Moreover, there is no clear showing of intent on the part of petitioner to
delay the proceedings. In Marikina Valley Development Corporation v.
Flojo,12 the Court explained that a pro forma motion had no other purpose
than to gain time and to delay or impede the proceedings. Hence, "where
the circumstances of a case do not show an intent on the part of the movant
merely to delay the proceedings, our Court has refused to characterize the
motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory
right of appeal, that doctrine should be applied reasonably, rather than
literally. The right to appeal, where it exists, is an important and valuable
right. Public policy would be better served by according the appellate court
an effective opportunity to review the decision of the trial court on the
merits, rather than by aborting the right to appeal by a literal application of
the procedural rules relating to pro forma motions for reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable,
the service and filing of pleadings and other papers shall be done
personally. Except with respect to papers emanating from the court, a resort
to other modes must be accompanied by a written explanation why the
service or filing was not done personally. A violation of this Rule may be
cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review does not contain
a sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort13 that
the aforecited rule was mandatory, and that "only when personal service or
filing is not practicable may resort to other modes be had, which must then

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be accompanied by a written explanation as to why personal service or

filing was not practicable to begin with."
In this case, the Petition does state that it was served on the respective
counsels of Sta. Ines and Cuenca "by registered mail in lieu of personal
service due to limitations in time and distance." 14 This explanation
sufficiently shows that personal service was not practicable. In any event,
we find no adequate reason to reject the contention of petitioner and
thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of
the Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the
absence of an express agreement, novation takes place only when the old
and the new obligations are incompatible on every point." 15 Indeed, the
following requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract; (3) the old
contract is extinguished; and (4) there is a valid new contract. 16
Petitioner contends that there was no absolute incompatibility between the
old and the new obligations, and that the latter did not extinguish the earlier
one. It further argues that the 1989 Agreement did not change the original
loan in respect to the parties involved or the obligations incurred. It adds
that the terms of the 1989 Contract were "not more onerous." 17 Since the
original credit accomodation was not extinguished, it concludes that Cuenca
is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present
in this case. The 1989 Loan Agreement extinguished the obligation 18
obtained under the 1980 credit accomodation. This is evident from its

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explicit provision to "liquidate" the principal and the interest of the earlier
indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal
portion of the Borrowers present total outstanding Indebtedness to the
Lender (the "Indebtedness") while the Second Loan shall be applied to
liquidate the past due interest and penalty portion of the Indebtedness." 19
(Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan
Agreement were used "to pay-off" the original indebtedness serves to
strengthen this ruling.21
Furthermore, several incompatibilities between the 1989 Agreement and the
1980 original obligation demonstrate that the two cannot coexist. While the
1980 credit accommodation had stipulated that the amount of loan was not
to exceed P8 million,22 the 1989 Agreement provided that the loan was
P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, "positive covenants" and
"negative covenants" not found in the earlier obligation. As an example of a
positive covenant, Sta. Ines undertook "from time to time and upon request
by the Lender, [to] perform such further acts and/or execute and deliver
such additional documents and writings as may be necessary or proper to
effectively carry out the provisions and purposes of this Loan Agreement." 23
Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it
participate in any merger or consolidation. 24
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code,
which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of
a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent."
Alleged Extension

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Petitioner insists that the 1989 Loan Agreement was a mere renewal or
extension of the P8 million original accommodation; it was not a novation. 25
This argument must be rejected. To begin with, the 1989 Loan Agreement
expressly stipulated that its purpose was to "liquidate," not to renew or
extend, the outstanding indebtedness. Moreover, respondent did not sign or
consent to the 1989 Loan Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety should be
deemed extinguished, pursuant to Article 2079 of the Civil Code, which
specifically states that "[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. x x x." In an
earlier case,26 the Court explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the suretys consent would deprive
the surety of his right to pay the creditor and to be immediately subrogated
to the creditors remedies against the principal debtor upon the maturity
date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent
during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit
Approval Memorandum in holding that the credit accommodation was only
for P8 million, and that it was for a period of one year ending on November
30, 1981. Petitioner objects to the appellate courts reliance on that
document, contending that it was not a binding agreement because it was
not signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to
prove the accommodation. Attached to the Complaint as Annex A was a
copy thereof "evidencing the accommodation." 27 Moreover, in its Petition
before this Court, it alluded to the Credit Approval Memorandum in this
wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was
granted by the Bank a credit line in the aggregate amount of Eight Million
Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization

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requirements for its logging operations. For this purpose, the Bank issued a
Credit Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of
the P8 million credit accommodation as contained in the very document it
presented to the courts. Indeed, it cannot take advantage of that document
by agreeing to be bound only by those portions that are favorable to it,
while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca
"impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to give
consent to, the same."28 Respondents consent or waiver thereof is allegedly
found in the Indemnity Agreement, in which he held himself liable for the
"credit accommodation including [its] substitutions, renewals, extensions,
increases, amendments, conversions and revival." It explains that the
novation of the original credit accommodation by the 1989 Loan Agreement
is merely its "renewal," which "connotes cessation of an old contract and
birth of another one x x x."29
At the outset, we should emphasize that an essential alteration in the terms
of the Loan Agreement without the consent of the surety extinguishes the
latters obligation. As the Court held in National Bank v. Veraguth,30 "[i]t is
fundamental in the law of suretyship that any agreement between the
creditor and the principal debtor which essentially varies the terms of the
principal contract, without the consent of the surety, will release the surety
from liability."
In this case, petitioners assertion - that respondent consented to the
alterations in the credit accommodation -- finds no support in the text of the
Indemnity Agreement, which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale
Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro
Manila for and in consideration of the credit accommodation in the total
amount of eight million pesos (P8,000,000.00) granted by the SECURITY
BANK AND TRUST COMPANY, a commercial bank duly organized and existing

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under and by virtue of the laws of the Philippine, 6778 Ayala Avenue,
Makati, Metro Manila hereinafter referred to as the BANK in favor of STA.
INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as
the CLIENT, with the stipulated interests and charges thereon, evidenced by
that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by
the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly
and severally with the CLIENT in favor of the BANK for the payment , upon
demand and without benefit of excussion of whatever amount or amounts
the CLIENT may be indebted to the BANK under and by virtue of aforesaid
credit accommodation(s) including the substitutions, renewals, extensions,
increases, amendment, conversions and revivals of the aforesaid credit
accommodation(s), as well as of the amount or amounts of such other
obligations that the CLIENT may owe the BANK, whether direct or indirect,
principal or secondary, as appears in the accounts, books and records of the
BANK, plus interest and expenses arising from any agreement or
agreements that may have heretofore been made, or may hereafter be
executed by and between the parties thereto, including the substitutions,
renewals, extensions, increases, amendments, conversions and revivals of
the
aforesaid
credit
accommodation(s),
and
further
bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful
compliance of all the terms and conditions contained in the aforesaid credit
accommodation(s), all of which are incorporated herein and made part
hereof by reference."
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the
P8 million limit and the November 30, 1981 term. It did not give the bank or
Sta. Ines any license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of respondent
who was solidarily liable. Taking the banks submission to the extreme,
respondent (or his successors) would be liable for loans even amounting to,
say, P100 billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations and
extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to more
than what is stipulated. It is strictly construed against the creditor, every
doubt being resolved against enlarging the liability of the surety." 31 Likewise,

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the Court has ruled that "it is a well-settled legal principle that if there is any
doubt on the terms and conditions of the surety agreement, the doubt
should be resolved in favor of the surety x x x. Ambiguous contracts are
construed against the party who caused the ambiguity." 32 In the absence of
an unequivocal provision that respondent waived his right to be notified of
or to give consent to any alteration of the credit accommodation, we cannot
sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly
shows that the bank did not have absolute authority to unilaterally change
the terms of the loan accommodation. Indeed, it may do so only upon notice
to the borrower, pursuant to this condition:
"5. The Bank reserves the right to amend any of the aforementioned terms
and conditions upon written notice to the Borrower." 33
We reject petitioners submission that only Sta. Ines as the borrower, not
respondent, was entitled to be notified of any modification in the original
loan accommodation.34 Following the banks reasoning, such modification
would not be valid as to Sta. Ines if no notice were given; but would still be
valid as to respondent to whom no notice need be given. The latters liability
would thus be more burdensome than that of the former. Such untenable
theory is contrary to the principle that a surety cannot assume an obligation
more onerous than that of the principal. 35
The present controversy must be distinguished from Philamgen v. Mutuc,36
in which the Court sustained a stipulation whereby the surety consented to
be bound not only for the specified period, "but to any extension thereafter
made, an extension x x x that could be had without his having to be
notified."
In that case, the surety agreement contained this unequivocal stipulation:
"It is hereby further agreed that in case of any extension of renewal of the
bond, we equally bind ourselves to the Company under the same terms and
conditions as herein provided without the necessity of executing another
indemnity agreement for the purpose and that we hereby equally waive our
right to be notified of any renewal or extension of the bond which may be
granted under this indemnity agreement."

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In the present case, there is no such express stipulation.1wphi1 At most,

the alleged basis of respondents waiver is vague and uncertain. It confers
no clear authorization on the bank or Sta. Ines to modify or extend the
original obligation without the consent of the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing
surety, petitioner maintains that there was no need for respondent to
execute another surety contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing
surety does not authorize the bank to extend the scope of the principal
obligation inordinately.37 In Dino v. CA,38 the Court held that "a continuing
guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the
two limitations of the credit accommodation: (1) that the obligation should
not exceed P8 million, and (2) that the accommodation should expire not
later than November 30, 1981. Hence, it was a continuing surety only in
regard to loans obtained on or before the aforementioned expiry date and
not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans,
purportedly under the 1980 credit accommodation, that were obtained in
1986. Certainly, he could not have guaranteed the 1989 Loan Agreement,
which was executed after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety
liable for the loan obtained after the payment of the original one, which was
covered by a continuing surety agreement. At the risk of being repetitious,
we hold that in Dino, the surety Agreement specifically provided that "each
suretyship is a continuing one which shall remain in full force and effect
until this bank is notified of its revocation." Since the bank had not been

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notified of such revocation, the surety was held liable even for the
subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary,
respondents liability was confined to the 1980 credit accommodation, the
amount and the expiry date of which were set down in the Credit Approval
Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary
signature") of a major stockholder or corporate officer, as an additional
security for loans granted to corporations. There are at least two reasons for
this. First, in case of default, the creditors recourse, which is normally
limited to the corporate properties under the veil of separate corporate
personality, would extend to the personal assets of the surety. Second, such
surety would be compelled to ensure that the loan would be used for the
purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank
to have required the JSS of respondent, who was the chairman and
president of Sta. Ines in 1980 when the credit accommodation was granted.
There was no reason or logic, however, for the bank or Sta. Ines to assume
that he would still agree to act as surety in the 1989 Loan Agreement,
because at that time, he was no longer an officer or a stockholder of the
debtor-corporation. Verily, he was not in a position then to ensure the
payment of the obligation. Neither did he have any reason to bind himself
further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety
of respondent, without even informing him, smacks of negligence on the
part of the bank and bad faith on that of the principal debtor. Since that
Loan Agreement constituted a new indebtedness, the old loan having been
already liquidated, the spirit of fair play should have impelled Sta. Ines to
ask somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist
on the JSS of one who was in a position to ensure the payment of the loan.
Even a perfunctory attempt at credit investigation would have revealed that

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respondent was no longer connected with the corporation at the time. As it

is, the bank is now relying on an unclear Indemnity Agreement in order to
collect an obligation that could have been secured by a fairly obtained
surety. For its defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation
the obligation under the 1980 P8 million credit accommodation. Hence, the
Indemnity Agreement, which had been an accessory to the 1980 credit
accommodation, was also extinguished. Furthermore, we reject petitioners
submission that respondent waived his right to be notified of, or to give
consent to, any modification or extension of the 1980 credit
accommodation.
In this light, we find no more need to resolve the issue of whether the loan
obtained before the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
SO ORDERED.
Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.