SECURITY TRANSACTIONS
DISTINGUISHED FROM SECURITIZATION
I. The Concept of Security
A. GENERAL CONCEPTS
CONTRACT OF SECURITY (Security Transaction)
The means by which the parties to a principal obligation
ensure its enforcement, protect an interest in property, or
ensure that the person to be made secure (secured
creditor) can be compensated for loss
It is an accessory obligation that mitigates the risk that
the debtor will default on a principal obligation
If the principal obligation is ensured by a contract of
security = secured obligation
If the principal obligation is NOT ensured by a contract of
security = unsecured obligation
1. DISTINGUISHED FROM SECURITIES
RA 8799, Sec. 3 Definition of Terms - 3.1. "Securities"
are shares, participation or interests in a corporation or in
a commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instruments, whether
written or electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes evidences
of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certifies of
deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other
mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates or
similar instruments
(f) Proprietary or nonproprietary membership certificates
in corporations; and
(g) Other instruments as may in the future be determined
by the Commission.
SECURITIES
From the Securities Regulation Code (SRC) (RA 8799)
Sec. 3.1 Securities are shares, participation or interests
in a corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character
It includes bonds, debentures, notes, evidences
indebtedness, asset-backed securities
Bonds, notes, and debentures are evidences of
indebtedness and are the common commercial forms that
contracts of loan take BUT in the SRC, these contracts of
simple loan or mutuum are securities, whether secured or
unsecured
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
2.
SECURITIZATION
Process by which loans and other debts with an expected
cash payment stream (interest on simple loans) are sold on
a without recourse basis by a seller to a special purpose
entity (the issuer) which in turn issues securities (bond or
other instrument) that depend, for their repayment, on the
expected cash payment stream
To securitize is to convert assets into securities for resale
in the financial market
It is a process of distributing the risk of default or non-
payment of loans and other debts by aggregating these
debts and then issuing new securities backed by the
aggregated debt
Securities issued by the special purpose entity (issuer) are
called asset-backed securities
Contracts of loan and expected principal and interest
payments, sold by the original creditors to a special purpose
entity, are aggregated into tranches based on risk and
packaged as new securities
Securities with higher risks provide higher yields
Unlike a security transaction that mitigates risk,
securitization distributes the risk of default or non-
payment to those willing to assume it
B. EVENTS OF DEFAULT
Essential condition of a security transaction: if the
principal obligation is duly complied with, then, proceeding
from its accessory character, the security is automatically
extinguished
Once the principal obligation is complied with, the security
transaction becomes, ipso facto, null and void
If the principal obligation becomes due and the debtor
defaults, the creditor may elect:
To bring an ordinary action for specific
performance of the principal obligation; or
As a secured creditor, elect to enforce the
security
Enforcement of the security is proper in case of mora
solvendi (debtors default) or in case of delay in the
fulfillment of the principal obligation by a cause imputable
to the debtor
REQUISITES FOR DEFAULT:
1. Principal obligation is demandable and liquidated
Demandable enforceable in Court
Liquidated existence and amount are
determined or determinable
2. Debtor delays performance
of 3. Creditor judicially or extrajudicially requires the debtors
performance
In credit transactions, it is customary for parties to define
other events of default (for the principal obligation) such
as, but not limited to, failure to submit required reports,
maintain and file appropriate tax returns, and maintain and
preserve the security
In the event of a default that occurs and is continuing, then
the creditor is given the right to declare, or accelerate, all
outstanding obligations as immediately due and payable
1
Acceleration clause is valid and binding on the parties
and the creditor is justified in invoking it to declare the
entire principal obligation immediately due and payable,
and to enforce the security
C. KINDS OF SECURITY TRANSACTIONS
1. PERSONAL SECURITY TRANSACTIONS
Contractual obligation for the repayment of a debt binding a
person, as distinguished from property
It is an obligation of a person, natural or juridical, other than
the principal debtor to ensure the fulfillment of a principal
obligation
Example: guaranty, where the faithful performance of the
obligation by the principal debtor is secured by the personal
commitment of another
2. REAL SECURITY TRANSACTIONS
Encumbrance of property (collateral) given to guarantee
the fulfillment of an obligation, especially the assurance that
a creditor will be repaid with money or credit extended to a
debtor, usually with interest
Example: mortgage (Latin: dead security), where the
creditor acquires a security interest in the collateral for
purposes of securing the fulfillment of the principal
obligation
FINANCIAL REHABILITATION AND INSOLVENCY ACT (FRIA)
OF 2010
Sec. 4(p): Condition of being INSOLVENT is the financial
condition of a debtor that is generally unable to pay its or
his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his
assets
Liabilities refers to monetary claims against the debtor
SEC. 4(LL) CLASSIFIES CREDITORS:
o Secured party: secured creditor or agent or
representative of such secured creditor
o Secured creditor: creditor with a secured claim
o Secured claim: claim that is secured by a lien
o Unsecured creditor: creditor with an unsecured
claim
o Unsecured claim: claim that is not secured by a
lien
o Lien: statutory or contractual claim or judicial
charge on real or personal property that legally
entitles a creditor to resort to said property for
payment of the claim or debt secured
IN THE CONTEXT OF INSOLVENCY:
A secured creditor is a creditor that has in its favor a real
security transaction, that is, a claim secured by a
statutory, contractual or judicial charge on real or personal
property (collateral) that legally entitles a creditor to resort
to the property for payment of its claim

Security interest is a property interest created by An unsecured creditor is a creditor who only has in its
agreement or by operation of law to secure the performance favor a personal security transaction
of an obligation

According to PD 115, Sec. 3(h): it is a property interest in

goods, documents or instruments to secure performance of
an obligation and includes title, whether or not expressed to
be absolute, whenever such title is in substance taken or
retained for security only

3. IN THE CONTEXT OF INSOLVENCY

RA 10142, Sec. 4 Definition of Terms - As used in this

Act, the term:

(p) Insolvent shall refer to the financial condition of a

debtor that is generally unable to pay its or his liabilities
as they fall due in the ordinary course of business or has
liabilities that are greater than its or his assets.

(jj) Secured claim shall refer to a claim that is secured by

a lien.

(kk) Secured creditor shall refer to a creditor with a

secured claim.

(ll) Secured party shall refer to a secured creditor or the

agent or representative of such secured creditor.

(pp) Unsecured claim shall refer to a claim that is not

secured by a lien.

(qq) Unsecured creditor shall refer to a creditor with an

unsecured claim.

(t) Lien shall refer to a statutory or contractual claim or

judicial charge on real or personal property that legality
entities a creditor to resort to said property for payment
of the claim or debt secured by such lien.

TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 2

II. Letters of Credit
A. GENERAL CONCEPTS
CoC, Art. 567 Letters of credit are those issued by one
merchant to another, or for purpose of attending to a
commercial transaction.
CoC, Art. 568 The essential conditions of letters of credit
shall be:
1. To be issued in favor of a determined person and not to
order.
2. To be limited to a fixed and specified amount, or to one
or more indeterminate amounts, but all included in a
maximum sum the limit of which must be exactly stated.
Letters of credit which do not have one of these
conditions shall be considered simply as letters of
recommendation.
CoC, Art. 2 Commercial transactions, be they performed
by merchants or not, whether they are specified in this
Code or not, shall be governed by the provisions
contained in the same; in the absence of such provisions,
by the commercial customs generally observed in each
place; and in the absence of both, by those of the
common law. LET05cd
Commercial transactions shall be considered those
enumerated in this Code and any others of a similar
character.
A letter of credit is an instrument that involves three
parties: the issuer (usually a bank), the applicant, and the
beneficiary
Under this instrument, the issuer, at the applicants
request, agrees to honor a draft or other demand for
payment made by the beneficiary, provided that the
draft or demand by the beneficiary complies with the
specified conditions under the letter.
The issuer shall honor the draft or demand regardless of
whether any underlying obligation between the applicant
and beneficiary is satisfied.
Our Code of Commerce, under Art. 567, further defines it as
an instrument issued by one merchant to another, or
for attending to a commercial transaction.
Its effect, as a security transaction, is to substitute the
financial strength of the issuer (usually a bank) for that of
the applicant, in order to convince the beneficiary to
transact with the latter.
Having such letter of credit, the beneficiary is assured
that he/she may call upon such instrument as security,
in case the applicant fails to perform his obligation.
Transfield Phils. v. Luzon Hydro Corp., et al (2004) Tinga, J.
Petitioner: Transfield Philippines, Inc. (TPI)
Respondent: Luzon Hydro Corp (LHC), Australia & New
Zealand Banking Grp. Ltd. (ANZ), and Security Bank Corp.
(SBC)
Concept: Security Transactions; Letters of Credit; General
Concepts
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
Brief Facts: TPI and LHC entered into a turnkey contract
wherein TPI is obligated to build a power plant. To secure
the obligation, TPI executed two letters of credit in favor of
LHC, which the former opened in two banks (one letter
each). When TPI failed to complete the project on the target
date, LHC attempted to draw upon the funds under the
letter of credit. There still being ongoing proceedings on the
issue of whether TPI was in delay, TPI sought to retrain LHC
from drawing upon the letters of credit.
Doctrine: The independence principle of letters of credit
means that (1) assures the beneficiary of prompt payment,
notwithstanding any breach of the main contract and (2)
precludes the bank from determining whether the main
contract (sales or non-sale) is actually accomplished or not.
Both the bank and beneficiary may invoke this principle to
their benefit.
B. KINDS OF LETTERS OF CREDIT
1. COMMERCIAL LETTERS OF CREDIT
This kind of letter of credit, also known as a commercial
letter of credit or, simply, commercial credit, is utilized
in a contract of sale of goods between the applicant
(buyer) and the beneficiary (seller).
The Court, in Transfield Phils v. Luzon Hydro, explained that
this kind of letter of credit was developed by merchants as a
convenient and relatively safe mode of dealing with the
sale of goods to satisfy the seemingly irreconcilable
interests of a seller-beneficiary who refuses to part
with its goods before it is paid, and that of a buyer-
applicant who wants to have control of the goods
before paying.
Commercial credits, being involved in a contract of sale of
goods, becomes payable only upon the presentation by
the seller-beneficiary of documents that show it has
taken affirmative steps to comply with the contract
of sale.
2. STANDBY LETTERS OF CREDIT
This kind of letter of credit, also known as a standby letter
of credit, or, simply, standby credit, is used as a
guarantee or security for either a monetary or non-
monetary obligation.
In a standby credit arrangement, the issuer agrees to
pay the creditor-beneficiary if the debtor-applicant
defaults or fails to perform the obligation.
The standby credit becomes payable upon certification
of the debtor-applicants default or failure to perform
the obligation.
C. RULE OF STRICT COMPLIANCE
Under this rule, the documents tendered by the
beneficiary must strictly conform to the terms of the
letter of credit.
The tender of documents must include all the documents
required by the letter.
Should the honoring entity accept the tender by the
beneficiary, but such tender does not comply with what is
required (i.e., a faulty tender), then the issuer acts on its
own risk and may not thereafter recover from the applicant
or the issuer, as the case may be, the money it paid to the
beneficiary.
3
An honoring entity deals only with the documents; it is not
in a position to determine whether the documents required
by the letter of credit is important or superfluous to the
applicant.

As a rule, the honoring entity should assume that the

document is of vital importance to the applicant by the
mere fact that it was specified as a required document
under the letter of credit.

D. INDEPENDENCE PRINCIPLE
The independence principle is a rule on letters of credit
that:
o Assures the beneficiary of prompt payment,
independent of any breach of the principal
obligation, the reason by which the letter of credit
was procured
o Precludes the issuer from making a determination
whether the principal obligation is actually
accomplished or not.

Under this principle, the letter of credit is a separate and

distinct obligation with respect to the principal obligation
for which the letter of credit was constituted.

The settlement of a dispute between the parties is not a

pre-requisite for the release of funds under a letter of credit.

The independence principle only admits of one exception:

the fraud exception rule.

Under this exception, the falsity of a certificate

accompanying the demand for payment under a letter of
credit may qualify as fraud, sufficient to support an
injunction against the payment, upon showing of three
requisites.

GR: The issuer of the letter of credit shall make payment

upon the tender of documents required by the beneficiary,
and it shall assume NO liability or responsibility:
o For the form, sufficiency, accuracy, genuineness,
falsification, or legal effect of any documents, or for
the general or particular conditions stipulated in the
documents or superimposed thereon
o For the description, quantity, weight, quality,
condition, packing, delivery, value, or existence of
the goods represented by any documents
o For the food faith, or acts, or omission, solvency,
performance, or standing of the consignor, the
carriers, or the insurers of the goods, or any other
persons.

EX: Fraud Exception Rule; an injunction against the

payment will be granted upon the showing of all of the
following requisites:
o Clear proof of fraud
o Such fraud constitutes a fraudulent abuse of the
independent purpose of the letter of credit, and not
only fraud under the principal obligation
o A showing that irreparable injury might follow if
injunction is not granted, or that recovery of
damages would be seriously affected.

TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 4

III. Guaranty within a year from the making thereof;

A. GENERAL CONCEPTS
Art. 2047 By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor 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 is
called a suretyship.
Art. 2048 A guaranty is gratuitous, unless there is a
stipulation to the contrary.
Art. 2051 A guaranty may be conventional, legal or
judicial, gratuitous, or by onerous title.
(b) A special promise to answer for the debt, default, or
miscarriage of another;
(c) An agreement made in consideration of marriage,
other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things
in action, at a price not less than five hundred pesos,
unless the buyer accept and receive part of such goods
and chattels, or the evidences, or some of them, of such
things in action or pay at the time some part of the
purchase money; but when a sale is made by auction and
entry is made by the auctioneer in his sales book, at the
time of the sale, of the amount and kind of property sold,
terms of sale, price, names of the purchasers and person
on whose account the sale is made, it is a sufficient
memorandum;

It may also be constituted, not only in favor of the (e) An agreement of the leasing for a longer period than
principal debtor, but also in favor of the other guarantor, one year, or for the sale of real property or of an interest
with the latter's consent, or without his knowledge, or therein;
even over his objection.
(f) A representation as to the credit of a third person.
GUARANTY (3) Those where both parties are incapable of giving
A promise to answer for the payment of some debt or the consent to a contract.
performance of some duty, in case of the failure of another
who is liable in the first instance.
Guaranty: a special promise to answer for debt, default, or
miscarriage of another.
A personal security transaction that involves the conditional
obligation of a person (guarantor) to fulfill a principal
It is covered by the Statute of Frauds.
obligation in favor of a creditor, in case the debtor fails to do
so.
It is an accessory contract.
Obligation of the guarantor always a rise as a consequence
The obligation of the guarantor must be express and not
of a contract
presumed and it cannot extend to more than what is
stipulated.
It may be conventional, legal, or judicial.
Simple or indefinite guaranty: that which extends to the
principal obligation as well as accessories and judicial costs.
B. FORM OF GUARANTY
Definite guaranty: that which extends only to a specified
Art. 2055 A guaranty is not presumed; it must be amount.
express and cannot extend to more than what is If the guaranty specifies a fixed amount but nevertheless
stipulated therein. also provides for liability for interest and expenses, the
guarantor will be liable for the latter amounts even if these
If it be simple or indefinite, it shall compromise not only exceed the specified fixed amount.
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.

Art. 1403 The following contracts are unenforceable,

unless they are ratified:

(1) Those entered into in the name of another person by

one who has been given no authority or legal
representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds

as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by
action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a
secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed

TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 5
C. OBLIGATIONS SECURED
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 guarantee a natural
obligation.
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.
Art. 2054 A guarantor may bind himself for less, but not
for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor.
Guaranty cannot exist if the principal obligation is void, but
it can exist even if the contract is voidable or unenforceable.
It can also secure future debt, even if the amount due is not
yet known. In this case, the guarantor will not be liable until
the amount is known. It can also secure a future obligation.
Article 2053 is the basis for continuing guaranty, i.e., one
which governs a course of dealing for an indefinite time or
by a succession of credits. It is not limited to a single
transaction but contemplates a prospective or future course
of dealing, covering a series of transactions, which are
within the stipulations of the contract of guaranty, until the
expiration or termination thereof.
The object of a continuing guaranty is to grant to the
principal debtor a standing credit to be used from time to
time either indefinitely or until a certain period.
Terms used for continuing guaranty: any debt, any
indebtedness, any sum, any transaction, money to be
furnished the principal debtor from time to time, at any
time, on such time
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
D. PARTIES TO A GUARANTY
Art. 2056 One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to
bind himself, and sufficient property to answer for the
obligation which he guarantees. The guarantor shall be
subject to the jurisdiction of the court of the place where
this obligation is to be complied with.
Art. 2057 If the guarantor should be convicted in first
instance of a crime involving dishonesty or should
become insolvent, the creditor may demand another who
has all the qualifications required in the preceding article.
The case is excepted where the creditor has required and
stipulated that a specified person should be the
guarantor.
Art. 2049 A married woman may guarantee an
obligation without the husband's consent, but shall not
thereby bind the conjugal partnership, except in cases
provided by law.
Art. 2064 The guarantor of a guarantor shall enjoy the
benefit of excussion, both with respect to the guarantor
and to the principal debtor.
Art. 2065 Should there be several guarantors of only
one debtor and for the same debt, the obligation to
answer for the same is divided among all. The creditor
cannot claim from the guarantors except the shares
which they are respectively bound to pay, unless
solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases
in the same cases and for the same reasons as the
benefit of excussion against the principal debtor.
THERE ARE AT LEAST THREE PARTIES TO A GUARANTY
o The creditor
o The debtor of the principal obligation
o The guarantor
A sub-guarantor is a guarantor of a guarantor
A co-guarantor is one of several guarantors of only one
debtor for the same debt
QUALIFICATIONS OF A GUARANTOR
A guarantor must possess integrity, capacity to contract and
sufficient property for the guaranteed obligation. Loss of
these qualifications gives the creditor the right to demand a
new guarantor unless the creditor had stipulated a specified
person to act as guarantor.
A married woman requires the consent of her husband to
bind conjugal property.
6
E. BENEFIT OF EXCUSSION
Art. 2058 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.
Art. 2059 The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the
property of the principal debtor would not result in the
satisfaction of the obligation.
Art. 2060 In order that the guarantor may make use of
the benefit of exclusion, 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.
Art. 2061 The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is
negligent in exhausting the property pointed out shall
suffer the loss, to the extent of said property, for the
insolvency of the debtor resulting from such negligence.
Art. 2062 In every action by the creditor, which must be
against the principal debtor alone, except in the cases
mentioned in Article 2059, the former shall ask the court
to notify the guarantor of the action. The guarantor may
appear so that he may, if he so desire, set up such
defenses as are granted him by law. The benefit of
excussion mentioned in Article 2058 shall always be
unimpaired, even if judgment should be rendered against
the principal debtor and the guarantor in case of
appearance by the latter.
2. The creditor shall ask the court to notify the guarantor
of the action.
3. The guarantor may appear so that it may, if it so
desires, set up such defenses as are granted by law.
The benefit of excussion shall always be unimpaired,
even if judgment should be rendered against the
principal debtor and the guarantor in case of
appearance by the latter.
4. In order that the guarantor may make use of the benefit
of excussion, it must:
o Set it up against the creditor upon demand for
payment, AND
o Point out to the creditor available property of the
debtor within Philippine territory, sufficient to cover
the amount of the debt.
Tupaz IV & Tupaz v. CA and BPI (2005)
Petitioners: Jose C. Tupaz IV and Petronila C. Tupax
Respondents: CA and Bank of the Philippine Islands
Concept: Security Transactions; Guaranty
Brief Facts: Jose and Petronila, corporate officers of El Oro
Corporation, obtained letters of credit from BPI to finance
the purchase of raw materials for the manufacture of
survival bolos. To secure the debt, two trust receipts were
signed. The first was signed by Jose alone, in his personal
capacity. The second was signed by Jose and Petronila, in
their capacity as corporate officers. In the trust receipts, the
signatories bound themselves jointly and severally to pay
the debt of El Oro Corporation. El Oro defaulted in its
obligation, prompting BPI to file a case for estafa against
Jose and Petronila. The two were acquitted of the criminal
charge but were ordered to pay the corresponding amounts
due under their obligation as sureties of El Oro.
Doctrine: A corporate officer who signs a trust receipt
containing a solidary guaranty clause merely binds himself
as a guarantor and not a surety. The solidary liability is not
with the principal debtor, but with other guarantors who
sign the trust receipt. Nonetheless, when the trust receipt
contains a waiver of excussion, the guarantor can no longer
demand for the assets of the principal debtor to be
exhausted before payment by the former can be had.

Art. 2063 A compromise between the creditor and the

principal debtor benefits the guarantor but does not
prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not prejudice
the principal debtor.

Art. 2064 The guarantor of a guarantor shall enjoy the

benefit of excussion, both with respect to the guarantor
and to the principal debtor.

The benefit of excussion (or exhaustion or exclusion) is the

right of the guarantor to demand that the creditor first:
1. Exhaust all of the properties of the principal debtor,
AND
2. Resort to all legal remedies against the principal
debtorbefore the guarantor is liable to fulfill the
obligation of the principal debtor. It is the
distinguishing mark of guaranty.

For the creditor to enforce the guaranty:

1. The creditor must bring an action against the principal
debtor alone, except in the cases mentioned in Art.
2059.

TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 7

F. RIGHT TO PROTECTION
Art. 2071 The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of
the expiration of the period for payment;
(5) After the lapse of ten years, when the principal
obligation has no fixed period for its maturity, unless it be
of such nature that it cannot be extinguished except
within a period longer than ten years;
(6) If there are reasonable grounds to fear that the
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of
becoming insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and
from the danger of insolvency of the debtor.
Right to Protection: right of the guarantor as against the
principal debtor to:
1. Obtain release from guaranty, or
2. Demand security
Purpose: for guarantor to protect itself from
1. Any proceeding by the creditor
2. The danger of insolvency of the debtor
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
G. RIGHT TO INDEMNIFICATION
Art. 2066 The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the
payment was made known to the debtor, even
though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after
having notified the debtor that payment had been
demanded of him;
(4) Damages, if they are due.
Art. 2050 If a guaranty is entered into without the
knowledge or consent, or against the will of the principal
debtor, the provisions of Articles 1236 and 1237 shall
apply.
Art. 1236 The creditor is not bound to accept payment or
performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to
the contrary.
Whoever pays for another may demand from the debtor
what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the
debtor.
Art. 2069 If the debt was for a period and the guarantor
paid it before it became due, he cannot demand
reimbursement of the debtor until the expiration of the
period unless the payment has been ratified by the debtor.
Art. 2070 If the guarantor has paid without notifying the
debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatever
against the debtor, but only against the creditor.
Nevertheless, in case of a gratuitous guaranty, if the
guarantor was prevented by a fortuitous event from
advising the debtor of the payment, and the creditor
becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid.
Art. 2072 If one, at the request of another, becomes a
guarantor for the debt of a third person who is not
present, the guarantor who satisfies the debt may sue
either the person so requesting or the debtor for
reimbursement.
In guaranty, there is also a legal tie created between the
guarantor and principal debtor to which the principal
creditor is not privy
Right to indemnification is the substantive right of action of
the guarantor, after it has paid the principal debt, as against
the principal debtor, to recover:
1. the totality of the debt
2. the legal interests thereon from the time the
payment was made known to the debtor, even
though it did not earn interest from the creditor
3. the expenses incurred by the guarantor after
having notified the debtor that payment had been
demanded of it, and
4. damages, if they are due
the right to indemnification is more than a real right to
reimbursement of what was paid
8
but for the right to exist in favor of the guarantor, contract
of guaranty must have been entered into with the
knowledge and consent of the principal debtor
H. RIGHT TO SUBROGATION
Art. 2067 The guarantor who pays is subrogated by
virtue thereof to all the rights which the creditor had
against the debtor.
If the guarantor has compromised with the creditor, he
cannot demand of the debtor more than what he has
really paid.
Art. 2050 If a guaranty is entered into without the
knowledge or consent, or against the will of the principal
debtor, the provisions of Articles 1236 and 1237 shall
apply.
Art. 1237 Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as
those arising from a mortgage, guaranty, or penalty.
Art. 2068 If the guarantor should pay without notifying
the debtor, the latter may enforce against him all the
defenses which he could have set up against the creditor
at the time the payment was made.
Art. 2080 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 preference of the latter.
Right of subrogation is the right of the guarantor who pays,
as against the principal debtor, to be substituted to all the
rights and remedies and securities that the creditor had
against the principal debtor
Contract of guaranty must have been entered into with the
knowledge and consent of the principal debtor
The benefit of division against the co-guarantors ceases in
the same cases and for the same reasons as the benefit of
excussion against the principal debtor.
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
I. RIGHTS OF CO-GUARANTORS
1. BENEFIT OF DIVISION
Art. 2065 Should there be several guarantors of only one
debtor and for the same debt, the obligation to answer for
the same is divided among all. The creditor cannot claim
from the guarantors except the shares which they are
respectively bound to pay, unless solidarity has been
expressly stipulated.
The benefit of division against the co-guarantors ceases in
the same cases and for the same reasons as the benefit of
excussion against the principal debtor.
Art. 2078 A release made by the creditor in favor of one
of the guarantors, without the consent of the others,
benefits all to the extent of the share of the guarantor to
whom it has been granted.
There is co-guaranty when two or more persons answer for
the same debt of the same debtor
Among co-guarantors, the benefit of division is the right of a
co-guarantor, as against a creditor, to pay only the divided
share that it is bound to pay
The benefit of division will cease and the creditor may claim
the entire amount from the co-guarantor if:
a. The co-guarantor against whom the creditor is
making the claim has expressly renounced the
benefit of division
b. The co-guarantor has bound itself solidarily with the
co-guarantor
c. In case of insolvency of the co-guarantor
d. When a co-guarantor has absconded, or cannot be
sued within the Philippines unless it has left a
manager or representative
e. If it may be presumed that an execution on the
property of the co-guarantor would not result in the
satisfaction of the obligation
2. RIGHT TO REIMBURSEMENT
Art. 2073 When there are two or more guarantors of the
same debtor and for the same debt, the one among them
who has paid may demand of each of the others the share
which is proportionally owing from him.
If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the
same proportion.
The provisions of this article shall not be applicable, unless
the payment has been made by virtue of a judicial
demand or unless the principal debtor is insolvent.
Art. 2074 In the case of the preceding article, the co-
guarantors may set up against the one who paid, the
same defenses which would have pertained to the
principal debtor against the creditor, and which are not
purely personal to the debtor.
Art. 2075 A sub-guarantor, in case of the insolvency of
the guarantor for whom he bound himself, is responsible
to the co-guarantors in the same terms as the guarantor.
9
The right to reimbursement is the right of the co-guarantor
who pays as against the other co-guarantors to recover the K. LEGAL AND JUDICIAL BONDS
shares due from the co-guarantors, but only if the following
conditions concur: Art. 2082 The bondsman who is to be offered in virtue of
a. There are 2 or more guarantors of the same debtor a provision of law or a judicial order shall have the
and fro the same debt qualifications prescribed in Article 2056 and in special
b. One of the co-guarantors has paid laws.
c. Payment is made by virtue of a judicial demand or
the principal debtor is insolvent
Art. 2083 If the person bound to give a bond in the cases
If any of the co-guarantors is insolvent, the share of the of the preceding article, should not be able to do so, a
insolvent co-guarantor shall be born by the other co- pledge or mortgage considered sufficient to cover his
guarantors, including the co-guarantor paying, in the same obligation shall be admitted in lieu thereof.
proportion as that established in the co-guaranty
Art. 2084 A judicial bondsman cannot demand the
exhaustion of the property of the principal debtor.
J. EXTINGUISHMENT AND RIGHT OF RELEASE
A sub-surety in the same case, cannot demand the
exhaustion of the property of the debtor of the surety.
Art. 2076 The obligation of the guarantor is extinguished
at the same time as that of the debtor, and for the same
causes as all other obligations.

Art. 2077 If the creditor voluntarily accepts immovable or

other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor
is released.

Art. 2079 An extension granted to the debtor by the

creditor without the consent of the guarantor extinguishes
the guaranty. The mere failure on the part of the creditor
to demand payment after the debt has become due does
not of itself constitute any extention of time referred to
herein.

Art. 2080 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 preference of the latter.

Art. 2081 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 that are personal to
the debtor.

TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 10

IV. SURETY
A. GENERAL CONCEPTS
Art. 2047 By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor 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 is called a
suretyship. (1822a)
Art. 1211 Solidarity may exist although the creditors and
the debtors may not be bound in the same manner and by
the same periods and conditions. (1140)
Art. 1216 Novation, compensation, confusion or remission
of the debt, made by any of the solidary creditors or with
any of the solidary debtors, shall extinguish the obligation,
without prejudice to the provisions of article 1219.
The creditor who may have executed any of these acts, as
well as he who collects the debt, shall be liable to the others
for the share in the obligation corresponding to them.
(1143)
Art. 2082 The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the
qualifications prescribed in article 2056 and in special laws.
(1854a)
Art. 2056 One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where this obligation is
to be complied with. (1828a)
Art. 2083 If the person bound to give a bond in the cases
of the preceding article, should not be able to do so, a
pledge or mortgage considered sufficient to cover his
obligation shall be admitted in lieu thereof. (1855)
Art. 2084 A judicial bondsman cannot demand the
exhaustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the
exhaustion of the property of the debtor or of the surety.
Sec. 177 amended Insurance Code A contract of
suretyship is an agreement whereby a party called the
surety guarantees the performance by another party called
the principal or obligor of an obligation or undertaking in
favor of a third party called the oblige. It includes official
recognizances, stipulations, bonds or undertakings issued
by any company by virtue of and under the provisions of
Act. No. 536, as amended by Act No. 2206.
Sec. 178 amended Insurance Code The liability of the
surety or sureties shall be joint and several with the obligor
and shall be limited to the amount of the bond. It is
determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the
obligor and obligee.
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
SURETYSHIP
Legal relation that arises when one party assumes liability
for a debt, default or other failing of a second party
A contractual relation
Results from an agreement whereby one person (surety)
engages to be answerable for the debt, default or
miscarriage of another (principal or principal debtor)
A personal security transaction that involves the
obligation of the surety to fulfill a principal obligation in
case the principal debtor, to whom the surety is solidarily
bound, does not do so
SURETYSHIP AS AN ACCESSORY, ANCILLARY OR
COLLATERAL OBLIGATION
Obligation is not an original and direct one, but merely
accessory or collateral to the obligation contracted by the
principal debtor
Surety is solidarily bound, but the liability is consequent
upon the liability of the principal debtor and is so dependent
on that of the principal debtor (considered in law as the
same party)
If principal debtor is liable, liability of the surety would be
solidary
Nature of suretys undertaking: no liability unless the
principal debtor is liable
SURETYS LIABILITY
To the creditor is direct, primary and absolute
Surety is directly and equally bound with the principal
Surety becomes LIABLE for the debt or duty of another
although it possesses no direct or personal interest over
the obligations nor does it receive benefit therefrom
OBLIGATIONS OF SURETY
The obligations always arise as a consequence of a
contract, whether it is legal or judicial
o Legal: offered in virtue of a provision of law
o Judicial: offered in virtue of a judicial order
In a legal and judicial suretyship, the surety (bondsman)
must possess the qualifications required of a guarantor:
o Integrity
o Capacity to bind itself
o Sufficient property to answer for the obligation
which it guarantees
11
B. JOINT AND SOLIDARY OBLIGATIONS (OBLICON)
Art. 1207 The concurrence of two or more creditors or of
two or more debtors or of two or more debtors in one and
the same obligation does not imply that each one of the
former has a right to demand, or that each one of the latter
is bound to render, entire compliance with the prestation.
There is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the
obligation requires solidarity.
When one of the solidary debtors cannot, because of his
insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors,
in proportion to the debt of each.
Art. 1218 Payment by a solidary debtor shall not entitle
him to reimbursement from his co-debtors if such payment
is made after the obligation has prescribed or become
illegal.

Art. 1208 If from the law, or the nature of the wording of
the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be
presumed to be divided into as many shares as there are
creditors or debtors, the credits or debts being considered
distinct from one another, subject to the Rules of Court
governing the multiplicity of suits.
Art. 1209 If the division is impossible, the right of the
creditors may be prejudiced obly by their collective acts,
and the debt can be enforced obly by proceeding against all
the debtors. If one of the latter should be insolvent, the
others shall not be liable for his share.
Art. 12!9 The remission made by the creditor of the share
which affects one of the solidary debtors does not release
the latter from his responsibility towards the co-debtors, in
case the debt had been totally paid by anyone of them
before the remission was effected.
Art. 1220 The remission of the whole obligation, obtained
by one of the solidary debtors, does not entitle him to
reimbursement from his co-debtors.
Art. 1221 If the thing has been lost or if the prestation has
become impossible without the fault of the solidary debtors,
the obligation shall be extinguished.

Art. 1210 The indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility.
Art. 1211 Solidarity may exist although the creditors and
the debtors may not be bound in the same manner and by
the same periods and conditions. (1140)
Art. 1212 Each one of the solidary creditors may do
whatever may be useful to the others, but not anything
which may be prejudicial to the latter.
Art. 1213 A solidary creditor cannot assign his rights
without the consent of the others
Art. 1214 The debtor may pay any one of the solidary
creditors; but if any demand, judicial or extrajudicial, has
been made by one of them, payment should be made to
him.
If there was fault on the part of any one of them, all shall be
responsible to the creditor, for the price and the payment of
damages and interest, without prejudice to their action
against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the
performance has become impossible after one of the
solidary debtors has incurred in delay through the judicial or
extrajudicial demand upon him by the creditor, the
provisions of the preceding paragraph shall apply.
Art. 1222 A solidary debtor may, in actions filed by the
creditor, avail himself of all defenses, which are derived
from the nature of the obligation and of those, which are
personal to him, or pertain to his own share. With respect to
those, which personally belong to the others, he may avail
himself thereof only as regards the part of the debt for
which the latter are responsible.

Art. 1215 Novation, compensation, confusion or remission

of the debt, made by any of the solidary creditors or with
any of the solidary debtors, shall extinguish the obligation,
without prejudice to the provisions of article 1219.

The creditor who may have executed any of these acts, as

well as he who collects the debt, shall be liable to the others
for the share in the obligation corresponding to them.
(1143)

Art. 1216 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.

Art. 1217 Payment made by one of the solidary debtors

extinguishes the obligation. If two or more solidary debtors
offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors

only the share which corresponds to each, with the interest
for the payment alredy made. If the payment is made
before the debt is due, no interest for the intervening period
may be demanded.
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 12
C. FORM OF SURETY
Art. 1403 The following contracts are unenforceable,
unless they are ratified:
(1) Those entered into in the name of another person by
one who has been given no authority or legal
representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as
set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by
action, unless the same, or some note or memorandum,
thereof, be in writing, and subscribed by the party charged,
or by his agent; evidence, therefore, of the agreement
cannot be received without the writing, or a secondary
evidence of its contents:
(a) An agreement that by its terms is not to be performed
within a year from the making thereof;
(b) A special promise to answer for the debt, default,
or miscarriage of another;
(c) An agreement made in consideration of marriage, other
than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in
action, at a price not less than five hundred pesos, unless
the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things
in action or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold, terms of sale,
price, names of the purchasers and person on whose
account the sale is made, it is a sufficient memorandum;
(e) An agreement for the leasing for a longer period than
one year, or for the sale of real property or of an interest
therein;
( f ) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving
consent to a contract.
SURETY
Constitutes a special promise to answer for the debt,
default, or miscarriage of another
Under the Statute of Frauds, the agreement, note, or
memorandum must be:
In writing; and
Subscribed by the party charged or by his agent
If it does not comply with the above requisites, it shall be
unenforceable
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
D. OBLIGATIONS SECURED
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.
(1825a)
ON THE CONSIDERATION IN A CONTRACT OF SURETYSHIP
Peculiar nature of a suretyship: it is valid despite the
absence of any direct consideration received by the surety
either from the principal debtor or the creditor
Generally, it must be supported by a sufficient consideration
Consideration need not pass directly to the surety
If it goes to the principal debtor alone, this will
suffice
ON THE EXTEND OF THE OBLIGATION OF THE SURETY
Obligation of the surety cannot be extended by implication
beyond its specified limits (terms of the contract)
To the extent, and in the manner, and under the
circumstances pointed out in the obligation, the surety is
bound, and no farther
GR: Contracts are strictissimi juris (Law Dictionary: of the
strictest right or law)
XPN: Compensated sureties
Why the XPN? Formerly, parties became sureties, not for
hire but as a matter of accommodation
Strictissimi juris has no application to sureties organized for
the purpose of conducting an indemnity business at
established rates of compensation
Aside from the contract of suretyship being the law between
the parties and confining the obligations of the surety to
what is stipulated, Art. 2053 applies to suretyships as well
APPLIES TO A CONTINUING SURETY
CONTINUING SURETY: not limited to a single transaction
but contemplates a prospective or future course of dealing,
covering a series of transactions, which are within the
stipulations of the contract of surety, until the expiration or
termination thereof
Applies to a succession of liabilities for which the surety
becomes liable as they accrue
Security Bank and Trust Company, Inc. vs. Cuenca (2000)
Panganiban, J.
Petitioner: SBTC
Respondents: Rodolfo M. Cuenca
Concept: Surety Obligations Secured
Brief Facts: SBTC granted a credit line to SIMC for P8M,
secured by an Indemnity Agreement wherein Cuenca, as
President, held himself solidarily liable. After Cuenca sold his
shares, SIMC and SBTC agreed to restructure its obligations,
to allow the former to make several more loans. When SIMC
defaulted, SBTC filed suit against both SIMC and Cuenca
pursuant to the Indemnity Agreement.
Doctrine: Suretyship Agreements, being accessory
obligations, shall also be extinguished when the principal
obligation is also extinguished.
13
E. DISTINGUISHED FROM STANDBY LETTER OF
CREDIT F. DISTINGUISHED FROM GUARANTY

Suretyship Standby Letter of Art. 2047 By guaranty a person, called the guarantor,
Credit binds himself to the creditor to fulfill the obligation of the
Both ensure against the debtors principal debtor in case the latter should fail to do so.
Purpose
nonperformance
Obligation is to Obligation is to pay If a person binds himself solidarily with the principal debtor,
Obligatio the provisions of Section 4, Chapter 3, Title I of this Book
complete debtors in the event of
n shall be observed. In such case the contract is called a
performance nonperformance
Fact of debtors suretyship. (1822a)
Submission of the
Requisite non-performance
required Suretyship Guaranty
s for must first be
documents as
obligation established, Insure the payment
stated in the letter of
to arise usually through of the Insure the
credit
litigation Purpose debt/performance of solvency of the
Benefit to the the obligation of the principal debtor
creditor is that he principal debtor
Benefit to creditor is
will receive Guarantor will pay if
Benefit to that surety will Obligatio Surety will pay if the
payment in the debtor is unable to
Creditor perform if the n debtor does not pay
event of non- pay
debtor does not
performance, ahead Enjoys the benefit
of any litigation of excussion;
Financial burden is creditor must first
on the creditor exhaust all
Financial burden is
Who while there is properties of the
reversed since the Nature Direct, primary,
bears litigation to principal debtor and
creditor is assured of of and absolute
financial determine if the resort to all
payment ahead of Liability liability to the creditor
burden debtor really is in remedies against
any litigation.
default and if so, the the principal
costs of performance debtor before going
after the guarantor.
SURETYSHIP
Legal relation that arises when one party assumes liability Obligated to pay
for a debt, default or other failing of a second party regardless of
solvency or Debtor must be
A contractual relation Debtors insolvency of the insolvent before
Solvency debtor;. The only guarantor can be
Results from an agreement whereby one person (surety) determining factor is obligated to pay
engages to be answerable for the debt, default or debtors
miscarriage of another (principal or principal debtor) nonperformance
Obligation to pay
A personal security transaction that involves the arises once creditor
obligation of the surety to fulfill a principal obligation in Obligation to pay has exhausted all
case the principal debtor, to whom the surety is solidarily When arises when the of principal
bound, does not do so obligatio principal debtor debtors property
n arises defaults in his and after all
STANDBY LETTER OF CREDIT (AN INSTRUMENT) performance remedies against
This kind of letter of credit, also known as a standby letter the latter has
of credit, or, simply, standby credit, is used as a been resorted to.
guarantee or security for either a monetary or non-
monetary obligation.
Palmares v. CA and MB Lending Corp.
In a standby credit arrangement, the issuer agrees to -When party binds himself/herself to be jointly and severally
pay the creditor-beneficiary if the debtor-applicant (or solidarily) liable with the principal maker of a note,
defaults or fails to perform the obligation. the law considers him to be a surety.
-The rule that ignorance of the contents of an instrument
The standby credit becomes payable upon certification does not alter the liability of the signatories thereto also
of the debtor-applicants default or failure to perform applies to contracts of suretyship.
the obligation. -The rule of strictissimi juris (i.e., strict
construction/interpretation) does NOT apply in the issue
of determining whether one is a guarantor or surety.
o It only applies once a party has been identified as a
surety; the rule guarantees that liability of the surety
is not extended beyond the strict meaning of the
terms of the contract of suretyship.

Estrella Palmares vs. Court of Appeals and M.B. Lending

CorporationRegalado, J.
Petitioner: Estrella Palmares

TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 14

Respondent: Court of Appeals (CA) and M.B. Lending
Corporation (MB)
Concept: Surety Distinguished from Guaranty
Brief Facts: Palmares signed as co-maker of a promissory
note with Osmea and Azarraga. She bound herself to pay
the obligation jointly and severally. She also bound herself
to pay in case Osmea and Azarraga defaulted.
Doctrine: In a guaranty, a person called the guarantor
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. If a
person binds himself solidarily with the principal debtor, the
contract is called a suretyship. See also the text in italics
below.
E. Zobel, Inc. v. CA
-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.
-A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter
is unable to pay the debt.
o It is a separate undertaking of a guarantor, in which
the principal debtor does not join.
o It is usually entered into before or after that of the
principal and is often supported on a separate
consideration from that of the consideration of the
principal debtors contract with the creditor
-Use of the term guarantee does not ipso facto make the
contract one of guarantee. It is frequently employed in
business transactions not to describe the security of the
debt but an intention to be bound by a primary or
independent obligation.
E. Zobel v CA (1998) Martinez, J.
Petitioner: E. Zobel
Respondents: SOLIDBANK
Concept: Surety Distinguished from Guaranty
Brief Facts: Respondent spouses applied for a loan with
respondent SOLIDBANK. The loan was granted subject to
the condition that spouses execute a chattel mortgage over
the 3 vessels to be acquired by them, and that a continuing
guarantee be executed by petitioner EZ, Inc. in favor of
Solid Bank. The spouses defaulted in payment of the entire
obligation upon maturity. SolidBank filed a complaint for the
sum of money against EZ Zobel. Zobel moved to dismiss the
complaint on the ground that its liability as guarantor of the
loan was extinguished pursuant to Article 2080.
Doctrine: The use of the term "guarantee" does not ipso
facto mean that the contract is one of guaranty.
International Finance Corp. v. Imperial Textile Mills
-The use of the terms guarantee and guarantors do not Art. 1217 Payment made by one of the solidary debtors
make it exclusively a contract of guaranty.
-When qualified by the term jointly and severally, the use
of the word guarantor to refer to a surety does not
violate the law.
International Finance Corporation v. Imperial Textile Mills,
Inc. (2005) Panganiban
Petitioner: International Finance Corporation (IFC)
Respondent: Imperial Textile Mills, Inc. (ITM)
Concept: Surety: Distinguished from Guaranty
Brief Facts: IFC granted a loan to PPIC in the amount of
US$7-M. IFC contracted with ITM and Grandtex to secure the
loan granted to PPIC, denominating it as a Guarantee
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
Agreement and using the words guarantor and
guarantee. When PPIC defaulted and an extrajudicial
foreclosure of the mortgage was unable to satisfy the
outstanding obligation, IFC filed a complaint against PPIC
and ITM for the balance.
Doctrine: Although denominated as a Guarantee
Agreement, ITM has bound itself solidarily with PPIC. Under
Art. 2047, when the guarantor binds itself solidarily, it
becomes a suretyship and the provisions on Joint and
Solidary Obligations will apply. The creditor may then
proceed against any of the solidary debtors or some or all of
them simultaneously for so long as the debt has not been
fulfilled. A suretyship, as compared to a guaranty involves a
situation where the guarantor is solidarily liable to the
creditor.
G. DISTINGUISHED FROM JOINT AND SOLIDARY
OBLIGATIONS
Art. 2047 By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor 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 is called a
suretyship. (1822a)
Art. 2066 The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment
was made known to the debtor, even though it did not earn
interest for the creditor;
(3) The expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of
him;
(4) Damages, if they are due. (1838a)
Art. 2067 The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.
If the guarantor has compromised with the creditor, he
cannot demand of the debtor more than what he has really
paid. (1839)
extinguishes the obligation. If two or more solidary debtors
offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors
only the share which corresponds to each, with the interest
for the payment already made. If the payment is made
before the debt is due, no interest for the intervening period
may be demanded.
When one of the solidary debtors cannot, because of his
insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors,
in proportion to the debt of each. (1145a)
15
 Surety
Has a right to indemnification
and subrogation as against the
principal debtor
Entitled to the total amount of
the debt he has paid and to be
subrogated to all the rights that
the creditor had against the
principal debtor
Suretyship is an accessory,
ancillary or collateral obligation
TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS
Joint and Solidary Escano & Silos v. Ortigas Jr. (2007) Tinga, J.
Debtor Petitioners: Salvador P. Escao and Mario M. Silos
Has a right to Respondent: Rafael Ortigas
reimbursement as Concept: Surety; distinguished from joint and solidary
against his co-debtors obligations
Entitled to be
reimbursed for the Brief Facts: Escao, Silos, and Matti, executed an
share that Undertaking whereby they designated themselves as
corresponds to each sureties of Ortigas et al. who in turn guaranteed the loan
co-debtor obligation of Falcon from PDCP. Falcon defaulted in the
payment of its obligation prompting PDCP to file a complaint
for collection of a sum of money against Escao et al.
(sureties) and Ortigas et al. (principal obligors). Ortigas
amicably settled with PDCP, paying P1.3M as his share in
the obligation. He now files a complaint against Escao et
al. to reimburse him of what he paid.
Doctrine: In cases where there are several obligors, in the
absence of an express stipulation that liability is solidary, it
is presumed the liability is merely joint, unless the nature of
the obligation requires solidarity.
Art. 1217 makes plain that the solidary debtor who
effected the payment to the creditor may claim from his co-
debtors only the share which corresponds to each with
the interest for the payment already made. Such solidary
debtor will not be able to recover from the co-debtors the
full amount already paid to the creditor, because the right to
recovery extends only to the proportional share of the other
co-debtors, and not as to the particular proportional share of
the solidary debtor who already paid. In contrast, even as
the surety is solidarily bound with the principal debtor to the
creditor, the surety who does pay the creditor has the right
to recover the full amount paid, and not just any
proportional share, from the principal debtor. Such right to
full reimbursement falls within the other rights, actions and
benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.
16